A decade ago, before the term was captured for the most successful type of entrepreneurs, academic Jeannie Parker’s book The Mythic Chinese Unicorn explained “how the myth of the unicorn began in China then gradually spread into other parts of Asia and Europe”.
Aileen Lee, a venture capitalist and American daughter of Chinese immigrants, captured the term unicorn in a November 2013 TechCrunch article – Welcome to the unicorn club: learning from billion-dollar startups.
Among venture capitalists at least, a unicorn is a privately-held startup that has at least a $1bn valuation. But while the idea has taken off in the US, which remains home to most such unicorns, perhaps the fastest-growing region for them is China, and the implications of how quickly and by whom they have been funded carries increasing weight in the innovation capital ecosystem.
In August, Baidu, Alibaba, Tencent and JD.com were among the investors committing to invest $10bn in a China-based telecoms company.
This was no startup but the state-owned China Unicom worth about $30bn.
Also that month, however, these same four companies (often referred to by their collective acronym, BATJ,) backed far more, younger, more entrepreneurial companies.
- Tencent and Alibaba CEO and founder Jack Ma’s family office Yunfeng Capital were part of the consortium for VIPKid’s $200m round at a reported valuation of more than $1.5bn.
- Deep learning chipset developer Cambricon secured $100m in a series A round that included subsidiaries of Alibaba and reportedly valued the company, which was founded only last year, at more than $1bn.
- Huochebang, a logistics platform that has partnered Alibaba Cloud to develop big data tools that can help make vehicles and goods distribution more efficient, has secured $56m in a series B-3 round, adding to more than $270m raised from investors including Baidu Capital and Tencent since December.
In deals outside of China in August, JD added $100m to Indonesia’s Go-Jek, Alibaba was set to lead a $1.1bn round for south-east Asian e-commerce marketplace Tokopedia, while Tencent was part of Essential Products, the US-based smartphone startup founded by Android creator Andy Rubin’s, $300m funding round.
This was just a handful of the larger deals that month, with Baidu also closing a $1bn later-stage venture fund in partnership with China Life.
It would seem unsurprising, therefore, that these four corporations have backed the majority of China’s unicorns – private companies worth at least $1bn.
Taking as a starting point probably the most comprehensive list of such unicorns in China – the 108 tracked by China Money Network (CMN) as at 28 August – and more than 90% of them appeared from public records to have at least one corporate venturing investor in the syndicate, according to GCV Analytics.
For context, data provider Pitchbook’s list of 345 unicorns in countries other than China shows fewer corporate-backed ones in all the other main regions. Only a third (11, as matched in GCV Analytics’ database,) of the 34 unicorns in Asia-Pacific ex-China have corporate backing, a similar proportion to Europe’s 17 out of 50 and the Middle East’s three out of nine.
The US and Canada come closest to China, with 103 out of 240 unicorns backed by corporations. And, just as in China, a handful of corporations dominate Pitchbook’s list of North American unicorns. Alphabet, primarily through its GV and CapitalG units (formerly Google Ventures and Google Capital, respectively,) have backed 20 unicorns in North America, while other notable corporate venture capital (CVC) investors include Goldman Sachs, which has 17, while there are 11 for Salesforce, 10 for SAP’s US-based Sapphire unit, seven for Intel Capital and five for Qualcomm.
In China, however, the concentration of a handful of sophisticated CVCs in the most successful deals is more extreme. Nearly half of CMN’s list of Chinese unicorns, 46, had at least one of the BATJs as an investor, GCV Analytics found. Even adding in another 15 or so reported or estimated unicorns by 28 August, such as VIPKid and Cambricon, yet to be tracked by CMN at that time and the pattern continues to play out that the largest private sector companies are driving the entrepreneurial ecosystem.
Tencent has backed 24 unicorns in the CMN list, plus another handful (four) of others in China from the broader list tracked by GCV Analytics, and Alibaba’s 18 unicorns in its portfolio indicate how dominate the two are, even excluding their track records outside of the country. Baidu’s seven would have been better but for the fallen unicorn status of Baidu Waimai, which had seen its valuation cut from $2.5bn to $600m in its latest round, according to CMN.
JD.com’s five unicorn portfolio companies would be extended by another three if its JD Capital portfolio company’s own investments in other unicorns were included.
Similarly, Alibaba’s affiliate, Ant Financial, has backed a couple of other unicorns, including UrWork and Qufenqi, even outside of those, such as Koubei, Ofo and Ele.me, it has coinvested alongside Alibaba in. The crossholdings become more complicated once affiliated, subsidiary or personal investments are included.
Alibaba founder, Jack Ma’s, personal investment vehicle, Yunfeng Capital, which has also invested in Koubei, Alisports and VIPKid among others, while Xiaomi, another unicorn with an active venture portfolio, has one of its founders, Lei Jun, invest through Shunwei Capital in Iwjw and Huami Technology as well as the company directly in deals such as IQiyi, Ofo, Ninebot, Kingsoft Cloud and Jiangsu Zimi Technology. Yunfeng also backed BGI Genomics, a division of BGI Group, which in mid-July completed a RMB547m ($81m) initial public offering by selling 40.1 million shares at a list price of RMB13.64 each on the Shenzhen Stock Exchange’s ChiNext board. After the first day’s 44% share price pop – or increase – BGI Genomics was worth $1.15bn.
BGI, in turn, has also become a corporate venturing investor, backing UK-based genomics company Congenica, developed at University of Cambridge, while its alumni have also left to set up some of the most exciting unicorns, such as Wang Jun’s departure to create healthcare analytics firm ICarbonX, backed by Tencent and the fastest to reach such a status in the world.
Given there are 609 billionaires in China, many self-made through founding and often still running their companies, or successor ones in the case of the impressive Li Bin who has set up successive unicorns BitAuto, MoBike and Nio in the transport sector, compared with 552 in the US and the close connections between financial and strategic goals in venture are hard to untangle. Succession planning, however, could be an issue as top-down management in China. One source said: “Twenty years in tech in China is like 50 in the US at the speed of change but with all the big corps still founder-led (and moving faster) then succession a potential issue given how top-down most businesses are, although Tencent and Alibaba have done most on this.”
Still, for now the pace remains fast. Beyond the speed and complexity of overlapping shareholdings and competition in widely different sectors between the main corporate venturing units by providing large cheques for portfolio companies has effectively allowed them to also go out and invest in other startups, which might potentially even end up as competitive to some of their own investment syndicate members.
More than three-quarters (16) of the top 20 Chinese unicorns ranked by CMN by valuation, including all of the top 10, have set up corporate venturing units or made investments in entrepreneurial third parties, according to GCV Analytics (see table below).
The highest-valued ones, such as Ant Financial and Didi Chuxing and which have also usually raised the most money or formed out of market consolidation, have been the most active in corporate venturing themselves. As well as backing local bike sharing service Ofo, Didi Chuxing, which saw off US rival Uber in its home market, has over the past year invested in European peer Taxify, the Middle East’s Careem, Brazil-based 99, and Grab to tackle the south-east Asia market, which in turn has last month backed bike-sharing service OBike.
Beyond the local unicorns above and other Chinese startups backed by Ant Financial, such as VFinance in July, the company has also look to invest abroad, including Mynt in the Philippines, Thailand’s Ascend Finance, Singapore’s M-Daq, India’s Paytm, invested $200m in South Korea’s Kakao Pay and, subject to regulatory approval been in the process of acquiring US payments firm MoneyGram for $880m. Such a global investment playbook comes straight out of the approach taken by the established four, BATJ.
Even the one apparently non-CVC-backed Chinese unicorn in the top 20, the Accel-backed drones maker DJI, (although New China Life was reportedly planning to invest a few years back,) set up a $10m corporate venture fund, SkyFund, backed by both DJI and Accel. At the start of the year, DJI acquired one of its portfolio companies, Sweden-based high-end camera manufacturer Hasselblad.
Fast-tracked corporate and strategic returns
The domestic corporate venturing industry in China only took off in 2011 when Tencent set up a RMB10bn corporate venturing programme, three years after it began corporate venture capital investing, and Alibaba’s own blockbuster that raised $25bn — more money than any IPO in history – only came in 2014.
At the time of Tencent’s CVC fund launch, Global Corporate Venturing opened and concluded its analysis: “It seems oxymoronic to describe a company as cautiously aggressive but these two descriptors come up most commonly when people privately discuss Tencent, a China-based, corporate venturing-backed, online media conglomerate that has this year set up the world’s biggest debut corporate venturing fund.
“That, and smart. It is an investment and development strategy that asks to be judged on actions and results rather than hype.”
Given many of the current crop of unicorns have only benefited from the competition between the BATJs since 2011 it is a remarkable development in the ecosystem. Alibaba and Tencent were each understood to have invested in more than 100 deals in 2015 alone, although the pace reportedly dropped slightly last year.
Jeffrey Li, managing partner at Tencent Investment, at the Global Corporate Venturing Asia Congress last month explained why the innovation tool was so important to the company. He said: “For Tencent, CVC is a survival game, as organisation structures mean it is hard for big companies to survive.
“If you do not sit there [as a corporation] and wait for a black swan to come in then your fundamental response has to be CVC [to reinvest profits from the core business].
“We invest now because they are good years for our core business to reinvest profits.”
Olivier Glauser, former China-based corporate venture at Qualcomm and Disney’s Steamboat Ventures and now adviser to Alibaba’s Jack Ma on its sports rights acquisitions through his Shankai business, said: “China’s strength is its speed and execution by corporations interested in working with startups. It is a different culture and pace [than in the west].”
But while backing large rounds grabs the headlines currently, the financial and strategic successes that enables such confidence among the BATJs and other CVCs have been born from finding and building many of these unicorns.
Yao Xia, executive director at Tencent Investments and ranked first in the Global Corporate Venturing Rising Stars Awards 2017, was nominated by his boss, Jeffrey Li, for backing what is now the $35bn-valued Didi Chuxing, retail unicorn Xiaohongshu, which means Little Red Book in Chinese, at a $70m valuation in 2014’s $10m B round and used car auctioneer and another unicorn Youxinpai at its $50m-valued B round in 2013.
And this focus beyond large, later-stage rounds by all the BATJs continues. In August, for example, supply chain finance startup Linklogis raised money in a series B round featuring Bertelsmann Asia Investments and existing investor Tencent.
Steve Allan, head of SVB Analytics, said in its State of the Markets: Third Quarter 2017 report: “China’s internet giants, impressive in their scale and breadth, play a pivotal role in pushing innovation forward in knowledge-intensive industries. Proving out strong revenue and profit growth, Alibaba and Tencent each hit all-time market highs in the first half of 2017. Baidu has struggled to expand beyond its dominance in search [ although its share price is up by about 50% since the start of the summer as the market has rerated its opportunities in deep tech areas, such as artificial intelligence, and giving it a capitalisation of nearly $100bn].
“Many of the private enterprises finding current success have done so by meeting the evolving tastes of the Chinese consumer. Unrealized opportunity lies in China’s budding service-based economy. In contrast, many highly valued US tech giants target enterprise markets.
“China’s homegrown strengths – mobile ubiquity, the emergence of microtransactions and the migration to urban centres – have allowed local consumer companies to scale without relying on advertising. However, as seen with heightened regulatory scrutiny over live-streaming this year, there are limits to the advantages China presents.”
And while the BATJs have focused on a sweep of sectors, they all said in their quarterly results their focus was increasingly on deep, or advanced, technology areas, such as facial or voice recognition, and artificial intelligence.
Management consultants McKinsey Global Institute’s August paper, China’s digital economy: A leading global force, found the country was in the top three in the world for venture capital investment in key types of digital technology, including virtual reality, autonomous vehicles, 3D printing, robotics, drones, and AI. McKinsey added: “China is the world’s largest e-commerce market, accounting for more than 40% of the value of worldwide e-commerce transactions, up from less than 1% about a decade ago. China has also become a major global force in mobile payments with 11 times [$8.6 trillion] the transaction value of the US.
“Baidu, Alibaba, and Tencent have been building dominant positions in the digital world by taking out inefficient, fragmented, and low-quality offline markets, while driving technical performance to set new world-class standards.
“In the process, they have developed powerful new capabilities, and a rich digital ecosystem initially centered on the threesome is now spreading. Unicorns and entrepreneurial startups are proliferating. Traditional companies are expanding their platforms, and China’s strength in manufacturing enables unique and rapid combinations of physical and virtual innovation.”
But the track record of investing in and creating unicorns through new business units with outside investors, such as Tencent Music, Koubei, JD Finance, Ant Financial, WeBank, SouGou and BAIC BJEV, has probably already returned more money than invested.
In August, Alibaba and Tencent both reported record quarterly earnings, prompting the New York Times to point out that the two companies now rank alongside Apple, Google, Facebook, Microsoft and Amazon as the world’s most highly valued companies.
Tencent’s “blowout” second quarter revenue climbed 59% and profit to shareholders expanded 70% to RMB18.2bn, according to newswire Bloomberg, which noted RMB5.1bn came from other gains, such as revaluing its stakes in bike rental and fintech startups, and the flotation of South Korea-based games publisher Netmarble Games. The quarter before and such gains from its venture deals had been just more than RMB3bn and in the second quarter of 2016 they had been RMB911m as the fruits of the investments continue to grow.
Alibaba, China’s top e-commerce firm, also beat analyst’s estimates with a 56% rise in first-quarter revenue (its financial calendar runs three months behind Tencent’s) to RMB50.1bn, driven by growth in online sales which make up most of its business and where many of its investments, such as increasing its stakes in Ele.me and Lazada, have been focused. Alibaba added: “Revenue from innovation initiatives and others increased 21% year-over-year to RMB645m.
“In July we launched our first [artificial intelligence] AI-powered voice assistant, Tmall Genie, which was developed by our AI Lab leveraging our group’s proprietary AI technology.”
Baidu posted an 82.9% increase in net income to RMB4.4bn on revenues up 14.3% to RMB20.9bn and pointed to its “two strategic pillars: to strengthen our mobile foundation and lead in AI”.
In August, Baidu and JD launched a strategic partnership leveraging both companies’ data resources, user bases and AI algorithm technology so that Mobile Baidu’s search application will provide JD with level-one access points to the hundreds of millions of mobile Baidu users in China.
China’s second-largest insurer Ping An, also benefited from its venture investments in its latest results. With holdings in five of the top 30 largest Chinese unicorns, Ping An and its ventures unit has holdings in Didi Chuxing, e-Shang Redwood, Meili United Group, Lufax and its healthcare startup Ping An Haoyisheng. Lufax for example uses AI to manage its online marketplace matching 7.4 million buyers with sellers of RMB6 trillion in investment products last year.
In an interview with Institutional Investor last month, Alex Ren, Ping An’s president, said the company had “paid between $5m and $50m for each of the stakes it had purchased in venture capital-backed firms”.
Ren added: “Our performance data is the strongest ever,” with net profit up 6.5% to RMB43.4bn in the first six months of the year.
Both Ping An and Tencent, along with Ant, benefited from last month’s blow-out flotation of China-based insurer Zhong-An at about a $10bn market capitalisation.
Geopolitical considerations loom
Competition between the unicorns and their investors is creating the conditions for a far larger entrepreneurial ecosystem to form in a fraction of the time the US reached and in which Europe, over a far longer period of time, has failed to achieve given its relative paucity of unicorns and far-smaller venture investment totals than China’s or the US’s.
What is notable is how few international corporate venturing units have made the list of backers of Chinese unicorns. There have been notable successes by Yahoo (Alibaba), Expedia (eLong), International Data Group/IDG Capital (Tencent), Nokia Growth Partners (UCWeb), Qualcomm (Xiaomi), Softbank (Alibaba), CyberAgent (iTutorGroup), Naspers (Tencent), Intel (Ninebot) and Bertelsmann (BitAuto) in the early wave of Chinese entrepreneurs.
There has, however, seemed almost a conscious snubbing of the large US tech peers, such as Alphabet’s myriad corporate venturing units, Amazon, Facebook and Apple, by the best entrepreneurs.
While leading corporate and independent VCs with strong local operations, such as Sequoia Capital China, IDG Capital, GGV, Accel, Lilly Asia Ventures, Intel Capital, Nokia and Softbank, remain active and welcomed (Sequoia has coinvested with Tencent at least 17 times in Asian deals, according to GCV Analytics,) there seems to be far fewer strategic ramifications from the deals struck by them and their importance in the ecosystem has declined.
As one experienced venture investor active in China for nearly two decades said: “To be an outsider in China is getting harder and harder. There is so much money competing for deals.”
Venture capital in China was $16m in 1991, with US-based published International Data Group the first into the country as a corporate venturer, and foreign venture capital firms made up 97% of funds raised for China between 1991 and 1997, according to AVCJ. Even by 2005 and foreign VCs made up eight of the top 10 firms for an industry that raised $1.2bn that year. By 2015, China had more than 10,000 venture capital and private equity firms, according to Beijing-based research and investment firm Zero2IPO, and they raised $50bn last year, according to SVB analysis.
And while there is more interest by non-Asia-based corporations in backing startups in the region, they make up a relatively smaller proportion of CVCs given the number of new local launches in the past few years.
GCV Analytics noted 42 foreign corporate venturers active in the wider Asia-Pacific region in 2014, compared with 118 local CVCs. Last year, the more than 50% increase in overseas interest to 65 had been dwarfed by the near-doubling of local CVCs to 223.
The picture was even more marked in China with 19 foreign CVCs in 2014 increasing to 29 by last year, compared with a domestic increase in active CVCs doing at least one deal increasing from 33 to 83 in this period.
As author Michael Enright noted in his book Developing China: The Remarkable Impact of Foreign Direct Investment: “By the mid-2010s there were hundreds of domestic venture capital companies operating in China. Many Chinese who once worked for the big US VC companies have started their own funds backed by Chinese investors.”
It has been a shift from regulations barring private companies and individuals to a domestic-dominant venture ecosystem inside three decades.
But perhaps the next iteration is how the combination of state and private businesses can work together and the latter potentially improve the efficiency of the former. State-owned enterprises (SOEs) recorded a 2.8% return on assets, while private companies returned 10.6%, according to the Peterson Institute for International Economics. Given McKinsey’s calculation that China’s labour productivity in many sectors is only 15% to 30% of the rich countries’ club Organisation for Economic Cooperation and Development (OECD0 average and there remain plenty of potential inefficiencies to root out.
Chinese insiders said of the government’s $200bn or so in innovation funding, about 80% went to those who know those in the know and pay the 20% to 30% expected commission but this source of inefficiency was a drop in the ocean of its budget and outweighed by any developments leading to new things, especially as the government seemed to deliberately keep regulations blurry in new areas so entrepreneurs can work there and then policy is settled based on what works.
There seem few more important issues within China’s ruling elite and the solution being tried is this so-called “mixed ownership reform” where the leading private companies, including Tencent, Alibaba and Baidu, invest in SOEs, such as China Unicom. The government announced that it completed 48 mixed ownership investment deals in June alone.
China’s President Xi Jinping in outlining his vision for the next five years of development in China at the Communist Party’s congress this month emphasised making state-owned enterprises stronger and bigger, yet more efficient.
Mass privatisation or flotations – the route chosen by the European peninsular of the Asian continent from the 1980s on to reduce government control of their SOEs – has seemingly left many incumbent companies struggling in the global competition for new markets. The Organisation for Economic Cooperation and Development (OECD), the member body for leading countries primarily in Europe and North America, for the peak 20 years for privatisations after Margaret Thatcher and Ronald Reagan became heads of the UK and US, respectively, said: “Public offerings in the equity market have been the preferred method for privatisation in the OECD area.”
More recent analysis, such as the Privatising Industry in Europe report last year, however, has questioned the efficiency or societal gains from such flotations of privatised companies.
Trying to harness the entrepreneurial success of the BATJ and some of their startups, such as three-year old Zhong An Insurance, whose 5.4 billion policies sold is eye-catching and relies on being able to develop new products every few days and create competitive tension among its partners to help do so, seems a potentially plausible approach.
Success would be perhaps more radical for the Chinese economy than even the rapid development of the Tencent and Alibaba, which have combined market caps of about $800bn, with Baidu and JD.com adding more than $100bn combined.
Venture capitalist Mary Meeker’s excellent 2017 Annual Internet Trends report said that, in 2005, private enterprise made up 5% of the MSCI China stock index by weighted market capitalisation. Last year it was 48%, Meeker, a partner at Kleiner Perkins Caufield & Byers, said in collaboration with local investment manager Hillhouse Capital.
But with the other 52% as SOEs, decisions made by China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC) to explore how its $3.5 trillion in corporate assets held through more than 100 companies can be best managed are significant.
In May, SASAC’s Shenzhen subsidiary became a limited and strategic partner for Silk Ventures when it closed a China fund at $500m.
As one market expert warned: “[The] Chinese government is very sensitive on SOE investment into foreign assets. Venture investment into US dollar assets with operation in China is blurry area.”
And another expert added: “Typical venture skill sets would imply a certain degree of risk appetite, yet that is not so much the case of Chinese SOEs who would rather pay a much higher price to acquire the technology/resource directly rather than invest following the traditional VC model.
“They have the money and they are impatient. When an acquisition is not the case, then strategic partnerships are a solution whereby the SOE offers the younger and smaller tech company access to the Chinese market in return for tech IP co-development.”
The combination of potentially long-term patient capital investors in the BATJ and other private investors with a focus on improving SOE performance and helping them develop a global mindset in line with the government’s One Belt One Road initiative to connect up the broader Asian continent could be inspired. It could avoid insularity and domestic tensions forming by maintaining the focus on global competitive positions.
As China investors at the GCV Asia Congress noted: “In China, the government has tremendous power to influence the market for positive change and generate an economic market. The biggest issue over the next five years will be the 19th People’s Congress [this month].”
But with stability and if the government’s plan works as well as unleashing the private entrepreneurial spirits of the founders behind the 125 or so existing unicorns – let alone the BATJ and others that have already floated and are worth hundreds of billions – then there perhaps would be justice in China’s reclamation of its position as the world’s largest and most important economy.
But by one measure at least – the soft power metric of where its international peers look for inspiration – then China is already number one.
Ignacio Estivariz, head of corporate development at Argentina-based MercadoLibre, probably Latin America’s most active corporate venturing unit, said ahead of the Corporate Venture in Brasil conference this month: “We look at what is happening in China first now.”
China’s venture landscape
The number of startups established in China in the first six months fell 74% from the previous year to 230, while investors were more selective about larger funding deals, according to a report by Tencent and internet business research firm ITjuzi.
China’s three leading internet conglomerates Tencent, Alibaba and Baidu (BAT) invested in 38, 23 and six deals, respectively, in this first half of the year, according to the report published by South China Morning Post (SCMP), owned by Alibaba.
The relative slowdown this year came after Chinese venture capital investments hit an all-time high in 2016, with $31bn invested, and in which BAT collectively provided 42% of all venture capital investment, a far more prominent role than Amazon, Facebook, Google and Netflix that together contributed only 5% of US venture capital investment in that year, according to management consultants McKinsey.
About $77bn went into China between 2014 and 2016, compared with $12bn between 2011 and 2013, according to news provider Economist. China’s outbound venture capital totalled $38bn between 2014 and 2016, reaching 14% of global venture-capital investment outside China, McKinsey added.
VC firm Innoangel Fund was the most active Chinese investor, being involved in 54 out of the 1,519 funding deals, followed by IDG Capital with 53 and Matrix Partners China with 39, the report added.
Of the 230 new companies, 48, 21%, were in the corporate services business, mainly artificial intelligence, big data and cloud computing, followed by culture and entertainment firms, which made up 15%, and e-commerce and education companies, which accounted for 8% each.
The transport industry attracted most of the money, raising RMB90.5bn ($13.7bn), 37% of the total.
That was due largely to sharing service providers including bicycle-sharing services Ofo and Mobike, while Didi Chuxing, China’s ride-hailing service, raised $5.5bn in April.
“Entrepreneurial opportunities have been reducing in the transport industry and medical and property services now that these industries have entered a period of rapid development,” said Zheng Kejun, the main author of the report quoted by SCMP.
“Education and agriculture, however, still provide many entrepreneurial opportunities as their development is in a very early stage.”
Overall, investors were cautious about funding deals of more than RMB100m, with 192 such cases in the first half, compared with the same period of 2014 when there had been 390.
However, exits through initial public offerings on China’s main stock exchanges have soared. In the first half of the year there were 247 IPOs, 119 on the Shanghai stock exchange and 128 on Shenzhen’s, raising an aggregate $18.5bn, more than four times the amount in the same period of last year.
China’s faster unicorn development pace
Unicorns, companies that have a market value of at least $1bn, are being developed at a faster pace in China than the US, according to a joint report by Boston Consulting Group (BCG), Alibaba Group, Baidu and Didi Chuxing.
The report, published by South China Morning Post (SCMP), owned by Alibaba, last month examined the development cycles of 175 unicorns from the US and China during the past decade.
The average unicorn in China took four years to develop from scratch, and nearly half (46%) in two years, compared with seven years for one on average in the US, according to BCG.
The contrast can be partly explained by differences in the internet user base of the two countries, according to Li Shu, BCG’s partner and managing director.
Quoted by SCMP, Li said: “[The 710 million] Chinese internet users are more receptive to new applications, but they also cast away applications in a quicker way.”
The average age of web users in China is 28, or about 14 years younger than the US average, according to BCG.
Users in first tier cities download an average of 46 apps per year, and those from remote parts of the country could download as many as 38. In the US users download 33 apps per year on average, BCG added.
However, it also reflects sophisticated investors encouraging mergers and consolidation where required.
Jeffrey Li, managing partner at Tencent Investment, at the Global Corporate Venturing Asia Congress last month said: “In China it has been too easy for venture investors because of economic growth so high returns. In the past five years China has become really competitive in its economy and industries grown from infant to real markets. Many players in the small and early stages need sharper investors, which we understand and provide power to investee companies. VCs deliver high-quality portfolio companies but we do not see enough smart investors with lots of money.
“The impact of Didi Chuxing or Meituan Dianping mergers was prices go up because subsidy by investors’ money was removed but that is the nature of business. In healthy, mature markets there is a high cost to consumers but long-term increased efficiency for society overall.
“VCs help business consolidate as they all learn from each other and so converge.”
Unicorns’ preferences indicate returns
In a recent paper, Squaring Venture Capital Valuations with Reality, academics Will Gornall and Ilya Strebulaev reviewed valuations for a sample of unicorns – companies worth at least $1bn.
They found the valuations were on average 49% above fair value but largely because such analyses assumed all of a company’s shares had the same price as the most recently issued shares.
However, the most recently issued shares have better cashflow and other rights than the prior series of shares, they found.
The study also found 53% of unicorns gave investors a return guarantee in an initial public offering (IPO), the ability to block an IPO that would not return their investment, and seniority over other series.
They concluded in the summary: “Much has been written about unicorns deferring their IPOs because private rounds yield higher valuations, as well as about IPOs coming at a valuation below the immediately preceding private round. The paper reiterates that these observations gloss over the fundamental contractual differences between common stock and preferred stock, which has a liquidation preference and other rights.”
Or as Jeffrey Li, whose team has probably backed more companies worth at least $1bn than any other venture investor over the past five years in China, said at the GCV Asia Congress last month, its analysis indicated the returns on investment were the same or better once a company had become a unicorn.
Martin Haemmig looked at the exit performance of 140 unicorns to the end of June and found they had delivered a 13.5 times multiple ($647bn) on the $50bn invested in them. China lead the way with a 43.9-times return on the 18 unicorn exits identified, compared with 10.4-times for its 107 US-based peers, he added at the GCV Asia Congress. And while the perceived wisdom has been for venture investors to prefer flotations over trade sales as a way of delivering higher returns, Haemmig found comparable multiples (14.7-times for initial public offerings against 13.5-times for acquisitions).
He added that venture capital-backed IPOs in China did better than way they listed abroad.