While the US awaits its next wave of $1bn flotations after ride-hailing platform Lyft’s filing for an initial public offering (IPO) at between $20bn to $30bn in market capitalisation this month, its 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‘s analysis have floated on public markets over the past year and a half. And while the public scrutiny at IPO has revealed some reported private valuations and funding levels were allegedly exaggerated (as the GCV editorial, Caveat emptor for buyers of IPOs, warned) the country has continued to apparently replace the unicorns at the private level.
China’s unique concentration in the new economy through the first generation of private, internet companies, led by Baidu, Alibaba, Tencent and JD (known collectively as BATJ), which all floated in the decade leading up to end-2014, has been followed by the growth of the next generation, lead by Toutiao (Bytedance), Meituan-Dianping, Didi Chuxing and Xiaomi (collectively known as TMDX), as well as subsidiaries formed by BATJ, including IQiyi, Ant Financial, Tencent Music and JD Finance.
Meituan-Dianping and Xiaomi floated last year, to collectively raise almost $9bn in the world’s biggest internet-focused IPOs in four years and for both to be then worth more than $50bn. Bytedance and Didi Chuxing’s reported $75bn and $56bn private valuations, respectively, mean their expected IPOs are also eagerly anticipated.
The success, however, of spin-outs from the BATJ also points to their ability to bring value-added services to startups from capital to customers, product development and hiring, as well as the chance for success 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.
The power of these corporate venturing offerings to spinouts and startups has meant most – 110 out 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, or the family offices and personal investments of its senior executives, Jack Ma and Joseph Tsai, such as through Yunfeng Capital. Alibaba has also 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,a well-developed strategy for taking and following on investing in public companies, such as Tesla and Snap.
Tencent 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, reflecting and developing on their own histories with venture investors, it is no surprise to see the TMDX follow suit.
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 Dailyhunt 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 strategic approach to venture investing and acquisitions has seen it invest in mobility peers Careem, Ofo, Ola, Lyft, Renrenche, and buy 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 aim to invest up to $1bn in about 100 India-based startups in partnership with its 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 can become partners as it seeks to develop its internet of things product range.
And beyond 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 the European companies has successfully built a local venturing franchise.
As this slide prepared by Kaloyan Andonov for the GCV Asia Congress in September noted, there were 225 domestic CVCs in China between 2014 and the first half of 2018, compared to 112 overseas ones. Only Japan has a higher domestic:foreign CVC proportion.
This could be seen as effectively a neo-mercantilist policy through the 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 seen in China created products and services, such as WeChat and TikTok, western companies are trying to emulate. It is notable that Fortune’s CEO Daily newsletter’s headline last week 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 the New York Times’s headline asked, How TikTok Is Rewriting the World.
However, just repeating successful strategies runs the risk of missing different opportunities or running into regulatory pushback.
Martin Lau in an investor day quote reported by the Financial Times said the total market capitalisation of companies in which it held stakes in excess of 5% exceeded $500bn, ie 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 at least $50bn to $100bn.
But its dollar value today misses the value the portfolio brings to Tencent’s own strategy. As 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 doesn’t want to miss the clues. It’s so easy to do that and be surprised by something new and radical. TikTok [the Chinese short video app] was a bit of a [wake-up call].”
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. 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 Snippets email: “The key question I guess 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 (where the customers are), 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’re selling on Amazon, then the returns to your creative effort and creative product development will accrue disproportionately to Amazon. But if you’re 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’s not about competition; it’s 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.