The top 25: Jeffrey Li, Tencent

The headline of the Wall Street Journal’s Business and Finance section at the start of May caught the shift in economic power and financial returns that has been underway for some time: Chinese unicorns rush out IPOs (initial public offerings).

“A handful of Chinese technology offerings expected this year will dwarf the largest on record so far,” The WSJ’s lead story on 3 May summarised.

And behind $165bn of these potential IPOs by Didi Chuxing, Meituan-Dianping and Tencent Music lies Tencent, China’s largest listed tech company and its most active corporate venturer.

Meituan-Dianping, a China-based local services platform, for example, plans to go public was valued at $30bn as of a $4bn funding round led by Tencent that closed last year but could list at $60bn, according to latest reports.

Tencent Music Entertainment (TME), a subsidiary that manages internet group Tencent’s music streaming and karaoke services, that is expected to float with a $25bn valuation also exchanged equity stakes with music streaming platform Spotify, which had its own well-received listing this year.

In addition, Tencent will make its own investment in Spotify by purchasing secondary shares from existing backers, having reportedly been trying to wholly acquire the company earlier this year.

China-based, corporate-backed ride hailing platform Didi Chuxing is considering an initial public offering that could value it at up to $80bn, the Wall Street Journal reported.

The offering could take place before the end of 2018 and the company, whose shareholders include Uber, SoftBank, Tencent, Foxconn, Alibaba, China Life and Apple.

Add in another expected flotation by Ant Financial, an affiliate founded and backed by rival Alibaba, for about $150bn and a potential $100bn valuation for hardware maker Xiaomi, which is closely connected with Tencent, and the $400bn-plus in valuations for these five companies alone are multiples the values of Chinese tech IPOs in any prior year.

If they and another handful of peers do issue the expected $50bn-plus in new shares then these Chinese IPOs will broadly match the proceeds from the 10 largest tech IPOs globally, according to the WSJ using Dealogic data.

Tencent’s sophisticated approach to corporate venturing under Zhaohui (Jeffrey) Li, co-managing partner at Tencent Investment with Forest Lin since September 2015, uses the capital markets as just another stage in building out its ecosystem development for local and global market success and in competition with Alibaba.

Best-known for its flagship social products, WeChat and QQ, Tencent since 2016 has been China’s largest listed company with a total market cap of about $500bn. The company for last year’s Powerlist award said it was “committed to an open platform strategy, through which they aim to provide users one-stop lifestyle services by working with different partners”.

It added: “As part of the efforts in developing such an open platform, Tencent Investment’s team of 40-plus professionals, including a post-investment management team, has built an investment portfolio of hundreds of companies across all stages and in various sectors, including online gaming, social, e-commerce, online-to-offline (O2O) services, content, finance and healthcare, with multiple notable names like Riot Games, Didi, and”

Li and Lin run a venturing and M&A team that draw on exceptional dealmaking experience in two former Goldman Sachs alumni, Martin Lau, Tencent’s president, and James Mitchell, its senior executive vice-president and chief strategy officer. Both Lin and Li report to Mitchell, who spent more than a decade experiencing “frequent jet lag”, as he described in his LinkedIn profile, as Goldman Sachs’s head of communications, media and entertainment research.

Analysing why China-based corporate venturing units had been so quick to develop their activities, Li for last year’s Powerlist said: “The competitive landscape of China internet space, especially the very high iteration speed of the market, forced all major players to capture future innovation. In that case, there might be relatively more minority deals [in China] compared with the US market. And the giants might leverage their market resource to speed up the growth of the investee company.”

The unit’s vision for the future is significant, with its sights set on a huge ecosystem that includes gaming, entertainment, transport, e-commerce and local services and its investments of more than $10bn in at least 300 companies have shown fantastic results already.

Last year, China-based internet company Tencent was involved in another five large IPOs for Asia-based companies that have floated in either Hong Kong and New York.

Tencent’s ownership positions in the five is estimated by Global Corporate Venturing Analytics to be about $14bn. In terms of return size, it is worth looking at some of the most famous wins in venture capital history, such as VC firm Accel’s stake in social network Facebook, which was worth $9bn at the time of its 2012 IPO, and peer Sequoia Capital’s $60m investment in messaging application WhatsApp, which was worth $3bn in its sale to Facebook in 2014, according to data provider CB Insights.

It appears as though the mere presence of Tencent among a company´s shareholders potentially drives its price up, given a user base of nearly one billion for its WeChat app, and strategic positions across the economic landscape in China.

The positive secondary effect was clearly observed in the stock price of Snap, the owner of messaging app Snapchat, which rose after Tencent revealed its 13.9% stake. Tencent’s purchase of a 5% stake in China International Capital Corp in September 2017sent the investment bank’s shares in Hong Kong to an all-time high.

Yixin Group, a China-based e-commerce marketplace operator spun out of automotive transaction services provider BitAuto, raised HK$6.77bn ($867m) in its IPO last year.

Tencent has a 24.3% shareholding in Yixin, which also counts e-commerce firm (in which Tencent also owns 16.6%) and internet company Baidu as backers. Yixin issued almost 879 million shares on the Hong Kong Stock Exchange priced at the top of the IPO range, giving it a market cap of about $6.54bn and Tencent a stake worth almost $1.6bn.

A week earlier than Yixin’s IPO, Tencent had successfully floated its e-book publishing subsidiary, China Literature, on the Hong Kong Stock Exchange. China Literature raised approximately $1.1bn when it floated near the top of the $6.60 to $7.70 range.

China Literature’s share price soared by almost 100% in the morning session of its first day of trading, reaching HK$105 per share. Tencent owns 63% of the issued shares, worth about $7.1bn of its $11.3bn market cap.

Sogou, a China-based search engine operator backed by internet companies Sohu and Tencent, floated in the US raising $585m in an IPO on the New York Stock Exchange (NYSE), priced at at the top of the range it had set. Tencent’s stake was diluted from 43.7% to 38.7%, worth $2.05bn of Sogou’s $5.3bn market cap.

Singapore-based online services provider Sea raised $884m in an IPO late in October on NYSE with shares priced at $15.00 each, above the $12 to $14 range. Founded in 2009, Sea runs a diversified online business that incorporates a digital media and game offering (Garena), an e-commerce marketplace (Shopee) and a financial services platform (AirPay).

Tencent invested in Sea at an early stage and held a 39.8% stake pre-offering that was diluted to 35.1%. It then purchased additional shares in the offering to take a 37.6% holding as at the end of September, worth $1.88bn of its $5bn market cap.

Tencent recorded another IPO exit in In September 2017, when online insurance platform ZhongAn recorded the largest ever fintech IPO in Hong Kong. The $1.5bn IPO was priced at the top of the IPO’s range.

Tencent and insurer Ping An each owned 12.1% stakes pre-IPO, worth $1.7bn pre-dilution based on ZhongAn’s $14.1bn market cap, while the share held by Ant Financial, e-commerce firm Alibaba’s financial services affiliate, stood at 16%.

These IPOs will not be the last in the streak, as Tencent seems to have backed at least a quarter of the noted unicorns – companies worth at least $1bn – in China, according to GCV’s October issue analysis.

As news provider Fortune noted after Tencent’s recent results, “one investment looks particularly shrewd. Tencent owns 40% of Epic Games, the North Carolina maker of the runaway hit Fortnite. Breakingviews cites analysis from researcher SuperData that Fortnite alone rang up sales of $223m in March.”

Tencent appears to be using IPO less as an exit than an extra funding round for its portfolio companies (with the option to potentially sell shares later). Jeffrey Li, managing partner at Tencent Investment, said at the GCV Asia Congress in September its returns from holdings after they had become unicorns were better than those taken before they reached that status, so the approach makes sense.

Certainly, Tencent’s own history in having South Africa-listed media company Naspers as a long-term shareholder, as its value has risen above $400bn and it continues to deliver quarterly results that surpass expectations, would encourage this thinking.

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.

Overall, Tencent had another bumper year in 2017. Tencent participated in almost 20 nine-figure venture capital rounds over the course of the year, the largest being the $4bn raised by online services provider Meituan-Dianping in October, which was led by Tencent at a $30bn valuation. The corporate had initially invested up to $500m for a 20% stake in Dianping in 2014 prior to its merger with Meituan, and has maintained a substantial position ever since.

Like some of the other biggest spending corporate venturers, Tencent went big on ride hailing in 2017. Already a prominent investor in domestic on-demand ride service Didi Chuxing (though it did not publicly take part in the company’s 10-figure rounds this year), Tencent led a $1.2bn round for Indonesia-based Go-Jek in May at a $3bn valuation, before backing a $1.1bn round for India-based Ola in October.

Tencent’s transport deals weren’t confined to ride hailing however. It led a $600m series E round for bicycle rental service Mobike in June at a reported $3bn post-money valuation, led a $1bn round for electric vehicle (EV) developer Nio and, as the year approached its end, was rumoured to be considering an investment in WM Motor, another EV developer which had raised $1bn from unnamed backers in August.

Other highlights for Tencent over the course of the year included the $1.4bn round closed by India-based e-commerce company Flipkart at an $11.6bn valuation in April, and which Walmart has just agreed to buy a majority stake at more than $20bn valuation; a series B round for cancer diagnostics startup Grail that closed at $1.2bn in November; and a $150m investment in Maoyan, an online event ticketing spinoff from Meituan-Dianping, the same month, giving it a 5% stake in the company.

An intriguing feature of Tencent’s deals is that it has increasingly begun to partner Japan-based telecoms and internet group SoftBank and domestic ride hailing service Didi Chuxing – one of its portfolio companies – in investments. Flipkart for example received a $2.5bn SoftBank investment four months after it closed the Tencent-backed round.

All three invested in the $1.1bn Ola round and are also among Singapore-based ride hailing platform Grab’s backers; Tencent and Didi Chuxing are both investors in second-hand car trading platform RenRenChe and publicly-listed telecoms firm China Unicom; and Tencent and SoftBank’s joint portfolio companies also include artificial intelligence software developer Petuum and Didi Chuxing itself.

Tencent and Didi Chuxing were two of the five Chinese online-focused corporates that combined to invest $11.7bn in China Unicom in August, and the former backed up its VC investments with a series of large-scale private equity deals this year.

Tencent paid $367m for a 5% share of investment banking firm China International Capital Corp in September and invested $2bn for a 12% stake in Snapchat owner Snap last month before capping the year by buying $604m in shares of e-commerce platform Vipshop this week.

As with Tencent’s CVC investments, transport was a key area. It spent $1.7bn to buy up 5% of EV producer Tesla’s stock in March and followed that by joining and Baidu to provide $1bn for Yixin, a spinoff from automotive data and e-commerce firm Bitauto that went on to raise $867m in a Hong Kong IPO in November.

Tencent looks set to continue its strategic investment approach to expansion in 2018, and will likely continue to invest in ride hailing in tandem with Didi Chuxing and e-commerce in partnership with online retailer, which is also an investor in Vipshop, Go-Jek and Unicom, and perhaps in a range of sectors with SoftBank. If previous years have resembled a land grab for individual CVCs, it now looks as if they’re forming partnerships big enough to go for all the chips.

The domestic corporate venturing industry in China only took off in 2011 when Tencent set up a RMB10bn corporate venturing program, 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 year 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.”

Tencent’s ambitions stretch increasingly into deep tech and other sectors, such as robotics – UBTech Robotics, a China-based developer of intelligent humanoid robots, this month raised $820m in its C round with a market valuation of $5bn, in what it said was the single largest funding round ever for an artificial intelligence company.

The investment was led by Tencent, and also includes funding from ICBC, Haier, Minsheng Securities, Telstra, Easyhome Furnishings, Chia Tai Group, China Minsheng Bank, China Film and TV Capital, CGN, Sichuan Railway Investment Group, Green Pine Capital Partners, Whale Capital, Shenzhen JinFuZi Network Technology and CDH Investments.

As part of its investment, Tencent said it would work closely with UBTech on future product development. Tencent has already worked with UBTech, launching the humanoid robot Qrobot Alpha last December – the first robot to feature the Tencent Cloud Xiaowei service; and the personalised educational robot Alpha Ebot in February which integrates the high-quality, comprehensive, and open AI services and interactivity of the Tencent Dingdang assistant.

Li, who was promoted at the end of 2014 from executive director covering earlier-stage deals to managing partner, and he said helping investee companies was one of his main successes for last year’s award and this approach has been fundamental to its success.

Li joined Tencent in 2011 and launched and led Tencent Investment’s efforts to penetrate key O2O sectors, including automotive, education and healthcare. He was responsible for Tencent’s investments in Huayi brothers, Zhihu, Netmarble Games, Howbuy and many others around the world.

Before joining Tencent, Li worked as an investment principal at Germany-based publisher Bertelsmann’s Asian corporate venturing unit run by Annabelle Long for two years.

He led deals there for Chinese automobile industry content and marketing services firm BitAuto and others, such as Phoenix New Media, in which Bertelsmann invested $2.8m for a 2.9% stake as part of a $25m round. Bertelsmann sold its stake in BitAuto to unidentified buyers for $65m at the start of 2014. Bertelsmann had reportedly invested $12m in BitAuto in 2009 and it floated on the New York Stock Exchange a year later, a year before Phoenix New Media.

Before that, Li worked for Google and Nokia in various product and business roles, where he gained substantial experience in the internet and mobile arenas. He holds a bachelor’s degree from Peking University and an MBA from Duke University’s Fuqua School of Business.