Modern corporate venture capital (CVC) was first established in North America, and in 2014, US corporate investments accounted for 61% of global activity.
In recent years, tech giants such as BAT (Baidu, Alibaba and Tencent) have hyper-charged Asia’s economic growth and have steadily increased their corporate investments in the region. By 2018, North America’s share of global investment activity dropped to 41% and Asia’s share doubled to 38%.
CVC activity in this region is expected to surpass that of North America in the coming years.
Asian CVC is comprised primarily of conglomerates from China, Japan, and India. The first significant CVC investment in China was in June 1998, when Shida Group invested RMB12m in Beijing Mingtai Technology Development Company, establishing Shida Mingtai Company to develop Chinese software.
Two decades later, in 2018, China’s CVC investment output reached RMB20.3bn, or 17% of all venture capital investments domestically.
According to Chinese local VC data platform 36Kr, tech giants Tencent, Alibaba, Baidu, Ant Financial, and Mi were ranked as the “top 10 active CVCs in China in 2018 (by investment frequency)”.
From 2009 to 2018, China’s CVC investment in information software and technology services accounted for 40% of all capital, with the manufacturing industry falling to second place with 13%, according to the Wall Street Journal (WSJ).
China’s CVC investments focus on startups, with almost half of the capital flowing into angel and Series A rounds. Strategic acquisitions and mergers and acquisitions (M&A) also account for a substantial proportion at 27%. The distribution of CVC investment rounds in China shows a barbell investment approach: either very early in a company’s lifecycle, where the corporate investors are looking at accessing frontier technologies, or very late, where investors are looking for strategic tie-ups. An example of the latter is Tencent’s $215m investment in JD.com in 2014, to enhance and improve the e-commerce sector. As part of the agreement, Tencent also gave two of its e-commerce holdings to JD.com and promoted JD.com’s services prominently on its WeChat mobile messaging platform, the WSJ reported.
We will focus on the two most active CVC investors in China: Tencent and Alibaba.
Tencent’s CVC
Over the past decade, Alibaba’s and Tencent’s investments have resulted in an ecosystem worth almost RMB10 trillion in combined market value; Alibaba’s public investment market portfolio is worth RMB4 trillion and Tencent’s is worth RMB5.4 trillion.
Tencent set up its investment and M&A department in 2008, and in 2011 established its industry CVC fund with RMB5bn in assets under management. Tencent CVC’s investment strategy is to strengthen its primary business and to discover potential market disruptors through its investments. Tencent aims to hold controlling stakes in its core gaming and entertainment/communications industries, and minority stakes in non-core sectors, including fintech, enterprise services, e-commerce, artificial intelligence (AI), healthcare and education.
Tencent controls significant consumer traffic through its WeChat ecosystem, which has 1.2 billion monthly active users (MAU) as of Q3 2020, according to China Internet Watch.
It is working actively to monetise that consumer base with 43 of the 90 portfolio companies Tencent has invested in over the past decade in the e-commerce space. Tencent has also focused on social e-commerce and mini e-commerce programmes to leverage its WeChat ecosystem, creating an internal app marketplace. To strengthen its offline retail presence, Tencent invested RMB4.2bn into Yonghui Superstores, the fifth-biggest supermarket in China. This investment has allowed Tencent to direct online traffic to Yonghui’s online to offline retail stores Chaoji Wuzhong (Super Species) to compete with Alibaba’s Hema Xiansheng.
In 2018, Tencent adjusted its organisational structure once again when it added a platform and content business group and a cloud and smart industry business group after the company made investments in business to business (B2B).companies. Tencent believes that the technologies and business models it has developed and utilised in its consumer businesses may have wider applications in B2B sectors including transportation, AI, logistics, and robotics. Compared with other CVCs, Tencent tends to invest in the relatively early stage companies and has close relationships with VC and PE funds including Sequoia China, CMC, and Hillhouse Capital. Tencent also partners JD and Baidu’s CVC programmes closely.
Alibaba’s CVC
Alibaba Group, which was founded in 1999, has grown into a diverse company with business segments spanning e-commerce, cloud computing, media and entertainment. Alibaba’s main products today include Taobao, Tmall, Alicloud, 1688, Alimama,and Cainiao. Alibaba’s strategic investment department was established in 2008 with the mission of creating strategic and long-term financial value through investments, M&A and expansion, and to become a core force in the e- ecosystem. Alibaba aims to make majority or control investments, with the goal of ultimately integrating these portfolio companies into its own core businesses.
Alibaba acts as the sole or lead investor in the vast majority (approximately 70%) of Alibaba’s CVC investments. Many of these companies start out receiving minority equity investments from Alibaba in early financing rounds before eventually being acquired by Alibaba, reflecting its cautious approach to its portfolio investments. Alibaba prefers starting with a minority equity investment to test out the product or service for potential synergies with its platform. When the strategic value of the portfolio company increases, Alibaba will choose whether to invest more capital in the company, acquire the company outright or take no further action. For example, in May 2013, Alibaba bought a 28% stake of map app Gaode for $294m, which made it Gaode’s largest shareholder; in 2015, Alibaba acquired the company for $1.05bn. Another example of this strategy is when Alibaba invested in food delivery platform Ele.me four times, including two separate investments of over $1 billion each, before buying the company outright for $9.5bn in April 2018, according to Forbes.
The investment focus of Alibaba mirrors its core businesses in the e-commerce, logistics, and consumer sectors. It invests in numerous e-commerce platforms to achieve cross-platform cooperation and to further expand its reach. It also invests in logistics platforms to further build upon Alibaba’s logistics network, and utilises IT to support the development of downstream express delivery enterprises around its e-commerce platform. As more enterprises upload their data on the cloud, Alibaba continues to build data centres and invest in cloud computing.
Alibaba also makes timely strategic adjustments to its portfolio companies, with Alibaba’s acquisition of Xiami being a prime example. After acquiring Xiami in 2013, Alibaba made significant changes to the senior management team, which changed the culture and incentives and ultimately led to it being shut down in early 2021, according to Techcrunch. Alibaba once considered merging Xiami and another streaming platform, NetEase Music, to compete with Tencent Music, but the merger ended up not going through. Instead, in 2019, Alibaba led a $700m financing round in NetEase Cloud Music, effectively betting on NetEase as a standalone company and abandoning the Xiami venture. NetEase Cloud Music has seen successful synergies with Alibaba’s other businesses including Youku, Alipay and Alibaba Pictures, while Xiami never successfully integrated with Alibaba’s other businesses. Although the volume of CVC deals for both Alibaba and Tencent is similar, the fate of their respective portfolio companies differs primarily in how the companies channel user traffic. After Alibaba acquires a product, it will channel all the product traffic to its e-commerce platforms, such as Taobao, and attempt to capitalise on the increased traffic; after this initial capitalisation, the product is abandoned in many cases. In contrast, after Tencent acquires a product, it will channel its existing traffic (WeChat, QQ, and so on) into the new product, which drives growth in the product and helps it avoid obsolescence or abandonment. Despite these different methodologies, the two tech titans continue to dominate CVC space in China.