Nio, a China-based smart electric vehicle developer, filed last week to raise up to $1.8bn in an initial public offering in the US but in the details of its offering is an unusual wrinkle for one corporate venturing unit to effectively help control its future strategy through unequal voting rights.
Nio’s F-1 filing said: “Each fully paid preferred shares held by Tencent will be converted into the same number of fully paid ordinary shares to be re-designated as class B ordinary shares.”
Holders of class A ordinary shares are entitled to one vote per share, holders of class B ordinary shares are entitled to four votes per share and holders class C ordinary shares – effectively Bin (William) Li, Nio’s chairman and chief executive officer – are entitled to eight votes per share.
With Li owning 17.2% of the company through various holding entities, Tencent is its largest investor, with a 15.2% stake. Together, therefore, the two groups will have more control through the power of the extra voting rights.
The F-1 filing warned: “Due to the disparate voting powers associated with our triple classes of ordinary shares, Mr Li and Tencent entities will have considerable influence over important corporate matters. After this offering, Mr Li and Tencent entities will continue to have considerable influence over matters requiring shareholder approval, over matters such as electing directors and approving material mergers, acquisitions or other business combination transactions.
“This concentrated control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transaction, which could have the effect of depriving the holders of our Class A ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.”
This type of structure has been tried before but usually only to give the founders and executives greater control. US-listed messaging company Snap floated last year giving new investors in its A shares no voting rights while early investors, such as Tencent with 17.5% after buying stock after the flotation, had one vote per B share and the C stock – held exclusively by Snap’s co-founders, CEO Evan Spiegel and chief technology officer Bobby Murphy – came with 10 votes each so about 88.5% of the voting power, according to analysis by Recode.
Similarly, Facebook CEO Mark Zuckerberg controls 60% of the voting power at the social giant, while, at Alphabet, Google co-founders Sergey Brin and Larry Page control more than 52% of the vote combined, Recode noted.
Li’s decision to grant Tencent greater voting rights reflects the importance the internet conglomerate has on its future and trust this will continue over the longer-term. Tencent has through private investments in public offerings (Pipes) often tried to acquire shares in portfolio and listed companies rather than use stock markets to exit holdings (see table).
This trust has been built over the past decade. Bin Li had worked with Tencent Investment’s managing partner, Zhaohui (Jeffrey) Li at his previous startup, car retailer BitAuto. Bin Li founded BitAuto after the millennium and reportedly raised $12m from Zhaohui Li in 2009 during his time as an investment principal at Germany-based publisher Bertelsmann’s Asian corporate venturing unit. BitAuto then listed in New York in 2010 and Bertelsmann Asia Investments reportedly sold its stake in BitAuto to unidentified buyers for $65m at the start of 2014.
Zhaohui Li this year joined Nio’s board, alongside Tencent colleagues James Mitchell, chief strategy officer, and Xiangping Zhong, a general manager of map platform product.
Nio in its filing said: “Our key partners include Tencent, Baidu, Mobileye and CATL [Contemporary Amperex Technology, a battery maker for electric vehicles].
“We believe their expertise and know-how broaden our service offering and solidify our technological leadership. For example, we are closely collaborating with Mobileye [acquired by data company Intel for $15.3bn last year] to develop next generation autonomous driving technology to be used in our vehicles.
“We have partnered with other strategic partners including Baidu for its online video iQIYI, search engine and map data and mapping technology and Tencent for its Tencent Cloud, QQ music, Keen Lab and for NOMI text to speech function.
“We also plan to establish and develop strategic partnerships with Tencent, JD and other technology leaders in our ecosystem to explore more value-added services empowered by big-data and our cloud architecture, such as ‘mailbox’ service, or last mile express delivery service into the car trunk, and in-car entertainment.”
While Nio also discusses the manufacturing alliance with JAC to make its ES8 and ES6 models, the focus of much of the filing is a pitch to change how people buy and use a car.
Tom Whitehouse, chairman of the London Environmental Investment Forum and contributing editor to Global Corporate Venturing, of Nio said: “The most compelling vision of advanced mobility that I’ve come across, so far. I feel it will be very difficult for Europe and North America to compete.”
News provider Financial Times (FT) in its analysis said: “The promise to its potential investors in its [Nio’s] American depositary shares — who will join early backers such as Tencent, Baidu and Sequoia Capital — is to revolutionise the experience of owning a car.”
Bin Li in its filing said: “Product excellence is just the beginning for Nio. What users want is a holistic experience exceeding expectations.
“We expect that the ownership of cars will be redefined by a new experience with respect to cars, services, digital connections and the experience beyond the car. Technological advances will not only reshape automotive products, but also connect cars, smart devices, infrastructure, service providers and users, making a more efficient and innovative user experience possible.”
The FT noted that while Nio “has only received 17,000 orders for its first car, some 490,000 people have downloaded its social network app, and posted more than a quarter of a million photos”.
In a world driven by Metcalfe’s as well as Moore’s Law, this make sense.
Mike Maples, partner at venture capital firm Floodgate, in a guest comment for Fortune said the power of connections in a world of networked capitalism meant “software-defined networks will be the most valuable businesses, displacing traditional corporations as central actors”.
Effectively, Nio, which also runs a corporate venturing unit in Nio Capital, is trying to leverage network effects (best seen by Tencent on its WeChat messaging and applications platform) and a collaboration and partnering ecosystem to restructure what is meant by a corporation.
Rather than just focus on reducing transaction costs in buying an electric vehicle, Nio is pushing the firm into areas that Julian Birkinshaw, professor of strategy and entrepreneurship at London Business School, in an article for Harvard Business Review (HBR) said will also be important to future success, such as purpose, managing priorities and a long-term approach.
Heady stuff for a startup with $7m in revenues and more than $500m in losses so far this year, but Birkinshaw noted in HBR: “Firms create value by nurturing ‘unreasonable’ behaviour.”
Giving Tencent greater influence over the company is less unreasonable from this perspective of longer-term partnership but whether it will assist the flotation has yet to be tested.
Table: Tencent’s public holdings, as at 30 September 2017
