Jeffrey Li, managing partner of Tencent Investment, said: “If you compare what we have done in the past two years with before, the key difference is that we have started to do more and more gigantic deals.
“Before that, we passed up on several opportunities to make deals above the $500m level, only because they would have a huge impact on our cashflow. But in recent years we are more likely to do multi-$100m deals, and now $1bn and above deals, in a single transaction.”
And while Tencent understandably focused on its massive domestic market in the years immediately after the $1.5bn corporate venturing program was set up in 2011, the business has started to widen its horizons.
“We used to have 90% to 95% of coverage in China, but last year and this we have become more active in the overseas market,” Li said. “We have good coverage in Southeast Asia as well as in the US and Europe.”
Li pointed to the June 2016 purchase of a majority stake in Finland-based games developer Supercell, a deal worth around $8.6bn, as well as more recently Tencent’s backing of Germany-based flying cars developer Lilium’s $90m series B round. “And this year, for example, we have become more active in the artificial intelligence (AI) space in the US market.” In May, Tencent opened an AI research laboratory in Seattle, having established a similar facility in Shenzhen a year earlier.
But while Tencent is increasingly looking for international opportunities, its biggest successes so far have been in China. A report published this summer by China Money Network found that Tencent either has stakes in or directly controls 22 of China’s estimated 108 unicorns – startups currently thought to be worth $1bn or more.
These include ride-hailing firm Didi Chuxing, which was valued at more than $50bn following its latest round of fundraising in April. Tencent played an important role in Didi’s strategically important acquisition of its rival Uber China in August 2016, Li said.
Tencent has worked similarly closely with Mobike, the city-based bicycle rental platform which has so raised more than $1bn in funding since it was set up at the end of 2015, and which has this year expanded out of China into Southeast Asia and Europe.
Li said Tencent Investment’s initial success was down to its willingness to open up its internet platforms to its investee companies. “The businesses we put money into get lots of cooperation, especially in China. Here we have a strong user base and traffic, and many times we structure the investment deal and a business cooperation at the same time.
“For us, by taking in the partners who can get customers and monetise their services through our user base, it does remove our fear of directing our traffic to other companies. And in the end, we benefit not only through the investment valuation increase but also because the user base enriches the experience of our portfolio companies.”
A further advantage is that this approach means Tencent can allow its investee companies to build up businesses in many other verticals – something they are likely to be more agile and efficient at. “We used to do lots of verticals ourselves but today we are focused more on the platform side,” Li explained.
Investees can also benefit from Tencent’s relative longevity in the tech industry. “We are only 18 years old, but in internet terms that is a long time.
We have succeeded in China in many verticals, but at the same time we have also failed with many products in China and other countries as well. So the experience of how to build a product or deliver a service – that is a very valuable asset we can offer to our partners.”
In terms of Tencent’s approach to its investees, Li said a key principle was to respect the autonomy of portfolio companies. “One thing our president Martin Lau said recently is that the investee companies like us and our culture because we allow them to keep their own culture even after investment or acquisition.
“So we completely respect the independence of the entrepreneur and allow them to make their own daily operating decisions.”
Moving into new markets, particularly in the west, has presented new challenges, Li added. “We are moving into different cultures and different countries, with different languages and different industrial verticals: the skills to understand those industries are very difficult to acquire.
“We are setting up new partnerships with other VC firms to try to understand new markets, and also we have fund-of-funds investments to try to get an introduction to these new countries – that can be quite an effective bridge when we enter western markets.”
Li said there were no hard and fast rules for the type of business he and his team were likely to invest in. “We look at the company to understand them and try to make sure they understand us,” he explained. “We fully respect the variety. This is just like how we recruit our own people – the variety of our company is tremendous. We certainly do not have a prototype or a model for how an investee company is going to look.
“Ultimately, we have a preference for companies that respect the facts and the truth, and which are really honest with us. Those are important factors in any business’s success.”