While the US has started its next wave of $1bn flotations after ride-hailing platform Lyft’s initial public offering at about $23bn in market capitalisation last month, Chinese counterparts have spent the past 18 months taking to the public markets. About a quarter of the estimated 125 Chinese unicorns – private companies worth at least $1bn – in summer 2017 have floated on public markets over the past year and a half, according to analysis by Global Corporate Venturing Analytics.
The first generation of Chinese private internet companies, led by Baidu, Alibaba, Tencent and JD – known collectively as the BATJ – which all floated in the decade leading up to the end of 2014, has been followed by a new generation, led by Toutiao (Bytedance), Meituan-Dianping, Didi Chuxing and Xiaomi – collectively known as the TMDX – as well as subsidiaries formed by BATJ, including iQiyi, Ant Financial, Tencent Music, JD Finance and JD Logistics.
Meituan-Dianping and Xiaomi floated last year, collectively raising almost $9bn in the world’s biggest internet-focused IPOs in four years. Both were valued at more than $50bn. Bytedance and Didi Chuxing’s reported $75bn and $56bn private valuations respectively, mean their IPOs are also eagerly anticipated.
The success, however, of spinouts from the BATJ also points to their ability to bring value-added services to startups – capital, customers, product development and hiring, as well as the chance for successful exits through acquisitions and IPOs.
Baidu’s video content channel, iQiyi, raised $2.25bn in its Nasdaq listing last year at an $18bn market cap, while Tencent Music raised about $1.1bn on the New York Stock Exchange to be valued at $21bn. Ant Financial, an affiliate of Alibaba, and JD Finance both last year pushed back their expected IPOs after raising tens of billions of dollars in private funding at reported valuations of about $150bn and $20bn respectively.
In February, JD Logistics provided 20% of the capital to a RMB4.8bn ($715m) Properties Core Fund to buy RMB10.9bn of its logistics facilities and so “recycle capital for its future growth initiatives”.
Investments surge
As Tencent noted last month in its 2018 annual results: “We have invested in more than 700 companies. More than 100 investees were valued at over $1bn each, among which, over 60 went public.”
Tencent’s investment strategy differs from that of rival Alibaba, China’s largest e-commerce group, which has made significant outright purchases of companies, including Asian e-commerce platform Lazada, logistics platform Cainiao Network and Chinese on-demand services company Ele.me, according to one of Alibaba’s portfolio companies, news service South China Morning Post.
Alibaba also pointed in its results to “cash outflow of RMB22.89bn for investment and acquisition activities, including investments in Focus Media and Tokopedia” in its fourth quarter. JD.com in its annual results for last year noted an “increase in investment in equity investees and investment securities of RMB22bn”.
Baidu in its annual results for last year said its “total other income was RMB11.8bn, increasing 111% from 2017, mainly due to gains from the disposal of Du Xiaoman (financial services), and fair value gains on private company investments”.
A senior director at one of the large China-based corporate venturers said: “The markets were choppy in the fourth quarter of 2018 but private markets have remained fairly stable and companies are increasingly relying on private capital even well beyond the $1bn valuation benchmark.
“The density of unicorns within a given segment or vertical, and the sheer growth in the number of private unicorns in China and globally is also staggering, which begs the question whether the $1bn unicorn threshold is that meaningful a benchmark in differentiating companies in the current environment.”
Data provider CB Insights tracks 326 unicorn companies around the world. The Economist, citing research by CB Insights, noted last month that, in the last three months of 2018, deals to commit venture capital to Chinese startups slumped in number by two-fifths. However, the number was supported by corporate venturers, which increased their activity to 88 deals in the fourth quarter compared with the previous three months’ 83 deals and 78 in the same period of 2017, according to GCV Analytics.
Next generation of unicorns emerge
The power of these corporate venturing offerings to spinouts and startups has meant most – 110 of 130 – of the next generation of unicorns awaiting a flotation or acquisition have local corporate venturing backing, according to research by GCV Analytics using latest valuations data on Chinese unicorns by China Money Network and CB Insights.
Japan-based telecoms and internet group SoftBank has backed Bytedance – developer of the short-form video app TikTok (Douyin) – following its earlier backing of Alibaba after the millennium.
Alibaba, Ant Financial and Tencent have helped ride-hailing platform Didi Chuxing develop, merge and grow with nearly $20bn in private funding. Alibaba and Ant have invested in at least another 20 local unicorns, excluding international deals, such as Paytm in India or Stone in Brazil, and the family offices and personal investments of its senior executives, Jack Ma and Joseph Tsai, such as through Yunfeng Capital, have also been active. Alibaba has had holdings in at least six unicorn IPOs over the past 18 months, based on the original list from summer 2017, and also acquired and merged portfolio companies Cainiao and Ele.me.
Tencent has investments in at least another 30 China-based unicorns – which makes up about 5% of its 400 to 500 Chinese portfolio companies – and, as seen by its support of Meituan’s flotation, it has a well-developed strategy for supporting public companies, such as Tesla and Snap. It has backed nearly a dozen China-based unicorn IPOs in the past 18 months.
Baidu and JD, outside of its subsidiaries’ own corporate venturing deals, have stakes in half a dozen or more unicorns each, but relatively few exits.
Given the success of this corporate venturing strategy by the BATJ, it is no surprise to see the TMDX follow suit, and others that have subsequently floated or remained unicorns).
Bytedance acquired music-based social media app Musical.ly for $800m and in December was also putting together a $1.44bn corporate venturing fund having reaped rewards from backing other startups, such as Daily-hunt and 17zuoye.
Meituan-Dianping has continued to expand through acquisitions and venture deals, buying bike-sharing service Mobike for $2.7bn in April last year and raising a $435m fund following deals such as Yijiupi.
Didi Chuxing’s has invested in mobility peers Careem, Ofo, Ola, Lyft, Renrenche, and bought Brazilian portfolio company 99 for a reported $600m.
Xiaomi has perhaps been the most expansive of the four, putting up about a third of a $1.7bn venture fund in 2017 and aiming to invest up to $1bn in about 100 India-based startups in partnership with founder Lei Jun’s family office, ShunWei capital, which has separately raised $1.2bn for its latest venture fund. A few years before, Xiaomi had said it would invest in more than 100 Chinese startups, such as Ninebot, to build the ecosystem around its hardware by investing strategically in businesses that could become partners as it seeks to develop its internet-of-things product range.
And beyond the the TMDX generation, other unicorns, including Ele.me-Koubei, Lianjia, Manbang, SenseTime and We Doctor, are following this corporate venturing playbook as part of strategy to develop a supporting ecosystem and understand customers and product development.
The local sourcing of corporate venture capital and market development means only a handful of primarily US corporations, such as Apple and Uber in Didi-Chuxing, Alphabet – through CapitalG – in Manbang, Qualcomm in Unisound or Walmart in Dada-JD Daojia, have invested in these China-based unicorns, while Asian peers, including SoftBank, Rakuten, SK Group and Telstra, have had similar levels of access and only Bertelsmann among European companies has successfully built a local venturing franchise.
By contrast, Chinese corporate venturing investments internationally have continued to climb, having tripled over the five-year period to 2018 to 426 deals worth an aggregate $66.4bn last year from 139 worth $10.4bn in 2014, according to GCV Analytics.
Global focus
This effectively neo-mercantilist policy through China’s internet “great firewall” has protected local markets under state guidance and in the unique combination of scale of market, population demand and competition, creating products and services, such as WeChat and TikTok, that western companies are trying to emulate. It is notable that Fortune’s CEO Daily newsletter’s headline last month was “Mark Zuckerberg Has WeChat Envy – and That’s Terrifying”, after the Facebook co-founder and CEO posted a 3,300 word blog on its privacy strategy, while a New York Times headline blared: “How TikTok Is Rewriting the World”.
However, just repeating successful strategies runs the risk of missing opportunities or running into regulatory pushback. Tencent president Martin Lau was reported by the Financial Times as saying the total market capitalisation of companies in which it held stakes in excess of 5% exceeded $500bn – more than its own $420bn market cap. If an average holding size is about 10% to 20% then Tencent’s 700-strong portfolio could be worth between $50bn and $100bn.
But the dollar value today misses the value the portfolio brings to Tencent’s own strategy. The FT quoted a person close to Tencent saying: “How is the internet developing? How do we develop knowledge of users? What is driving users’ use? What are the common traits? Basically, Tencent does not want to miss the clues. It is so easy to do that and be surprised by something new and radical. TikTok was a bit of a wake-up call.”
Beyond the consumer internet, Tencent’s strategy is focused on so-called Industry 4.0. In its annual report published late last month, Tencent said: “Looking ahead, we will invest in core infrastructure and frontier technologies to embrace the trend of the industrial internet, while continuing to drive the evolution of the consumer internet.
“We will enable our enterprise partners to better connect with our users via an expanding open and connected ecosystem. Utilising our innovation and technology capabilities, we seek to assist a range of industries in undergoing digital upgrades and transformation.”
It is not quite as straightforward as US-listed retailer Amazon seeming to know what to build from the signals it receives from customers because other merchants are selling their own products on Amazon’s third-party marketplace or developing apps on Amazon Web Services, but not far off as Tencent’s Mini Apps platform has been increasingly popular and could eventually hit challenges similar to those of its games division, which faced regulatory headwinds last year forcing renewed focus on diversification and internationalisation.
Amazon’s practices have been a point for potential anti-competition policy, according to Lina Khan in a paper at Yale Law School identified by Alex Danco at venture capital firm Social Capital. Danco added in his weekly email: “The key question is this: is Amazon able to use its huge audience and distribution platform to effectively coerce its third-party merchants into a raw deal? If you want to sell on our platform, you have to give us valuable product development data for free. The more free data we can get, the greater is our ability to build our own cheaper versions of these products and continue to attract customers on our platform, and therefore maintain our coercive power over merchants.
“The charge, then, is that Amazon’s behaviour is something new, which we can think of as anticreative. It means two things. If you are selling on Amazon, then the returns to your creative effort and creative product development will accrue disproportionately to Amazon. But if you are not selling on Amazon, then any creative effort and creative product development will genuinely be harder for you to do because you won’t have access to the customers you need. It is not about competition, it is about creation, and Amazon’s ability to coerce you into developing new products with full knowledge that they will gain most of the benefit – but the alternative is worse.”
Take the idea to Amazon’s Chinese peer, Alibaba, or from Facebook’s messaging and games to China’s Tencent, and the potential for pushback exists. China has in many ways been more effective in pushing regulatory and societal changes on its private companies, such as stopping licensing all new games last summer while, the FT noted in January, Alibaba faces growing regulatory threat as China’s economy falters.
But even in an apparently slowing economy the opportunities enjoyed through successful corporate venturing as part of an innovation toolset remains unprecedented.
