Editor's choice
13 Jun 18

How Alibaba and Tencent redesigned venture capital

For those who know China or like to read about developments in the Chinese NEV and mobility sector, know that only 2 names really matter: Tencent and Alibaba. Both tech giants make the entire start-up scene look like an episode of “The Voice”. Someone yells “I’m the new Tesla”, a seat turns around and 100 million dollar is on the table.

Where does that leave the traditional equity firms? Is it good for the start-up to be backed by Tencent or Alibaba?

Tencent

Tencent Holdings is essentially an online advertiser. They divide their activities into 3 branches:

  • Online and mobile gaming, mobile and internet platforms
  • Online advertising
  • Payment and cloud services

Although Tencent just took a big hit, losing $78 Billion in value in one day, it’s still worth $508, putting it 5th in row in the tech market, behind Apple, Google, Amazon and Microsoft. The value drop came after Tencent reported better-than-expected profit but missed the analysts’ revenue estimate. The reason given for this was the company’s aggressive investment strategy.

Tencent’s CEO is the legendary Ma Huateng, aka Pony Ma (“Ma” means “horse”). He’s a sober man, grown up in Shenzhen out of a very modest family. He graduated in 1993 in computer science. Ma founded Tencent in 1998 and launched an instant messaging application that would become Weixin or “WeChat”, the largest IM app in the world. A quote from pony: “If I have seen further, it is by standing on the shoulders of giants.”

Alibaba

Alibaba is an online retailer (think Amazon), but has diversified drastically:

  • Payment services (Alipay)
  • Logistics and delivery (AliExpress, TMall)
  • Cloud services (Alibaba Cloud Computing)
  • Wholesale and cross-border sale (Alibaba)
  • Philanthropic services, such as Taobao, enhancing rural economies
  • Small business support (OneTouch) allowing smaller entrepreneurs to manage their entire business on one platform

Alibaba is the second Asian tech firm to reach the $500 Billion threshold, now only a couple of Billion behind Tencent. Analysts say that the intrinsic diversification of Alibaba’s core business makes more sense than Tencent’s. Also, Alibaba has been more careful in its investments, only putting money on the table if it serves the core business.

Alibaba’s CEO is the flamboyant Jack Ma, aka “Jack Ma”. Born in 1964 in Shanghai, the young Jack was all but successful. Rumour goes he couldn’t even get a job at KFC and was rejected 10 times from Harvard. When introduced to the internet, he realised its potential and started up the “China Yellow Pages”. In 1999, he started Alibaba - the rest is history. Fun fact: Jack Ma never wrote one line of code in his entire life. A quote from Ma: “If trade stops, war will start”

Investment method

Alibaba will mainly use its own balance sheet or its own venture capital funds. They also outsource venture capital by investing in external funds and privilege local tech entrepreneurs. Tencent acts in a similar way, but Pony Ma will sometimes use his own money (about $60 Billion) in which case the investment will stay off the Tencent balance sheet.

Most of the investments go to tech companies, Tencent spending a bit more on healthcare and banking than Alibaba. Tencent invests about 75% in Asia, about 20% in the US, Alibaba much more in Asia (about 85%). Neither of both spend much money on Europe.

Cash flow

Most of the EV and mobility start-ups need continuous funding and don’t count on generating quickly enough cash flow to survive. In addition, many of the tech start-ups are in China or India, where traditional venture capital is scarce. The combination of these factors have eventually pushed the traditional venture capitalist out of the equation and have allowed 2 companies to account for half of all the venture capital flows in China.

Attractive partners?

Yes, because there’s no one else. Young entrepreneurs will all too quickly use the massive reach of Tencent and Alibaba to source their projects, often not realising what the consequences might be.

For one, these are not philanthropical investments. If Byton has a 49 inch screen in the car, think about the fact that an online advertiser (Tencent) has invested $200 Million in the company. When Alibaba invests in Xiaopeng or in SAIC, all of a sudden these cars will be available for pre-order on an Alibaba platform and once you’ll be using the car’s, you’ll be paying with the built-in AliPay for your fuel, parking or coffee. No surprise either that the car’s system will be updated via cloud services from Alibaba.

And this is the risk for the entrepreneur. Their investors are not interested in cars, but in platforms and data.

For two, no one knows how the ever extending battle between the giants is going to end. Neither of them wants to lose grip on the tech development market, but recently, and probably without noticing it, Alibaba and Tencent are no longer investing in disruptors, but in competition. Both have invested in NEVs, both invest in connected vehicles, both invest in mobility… Market share rather than innovation is the name of the new game.

At some point in time, in order to make this puzzle of investments profitable, both will have to start consolidating and putting aligned products and services against each other. This will have an effect on the entrepreneur who was all too eager to receive working capital from the big guys.

SoftBank

And here’s the third risk. The Japanese SoftBank has $217 Billion available to spend. The perception of having SoftBank behind an investment is better than with Tencent or Alibaba. The Japanese also have the reputation of having a better strategy scheme than the Chinese, for example in ride hailing investments. SoftBank is Uber’s largest shareholder, but has also major stakes in South-East Asia’s Grab, India’s Ola and Chinese Didi. In medium-long term, SoftBank might achieve monopolies easier then Alibaba and Tencent due to its consistent and well-thought investment.

Conclusion

Most of the NEV and mobility start-ups are in reality vulnerable. Depending on 2 fighting dragons and a patient Sumo for their working capital, they will become inherently part of future competition. Take into account that most of start-ups are all but profitable, it will become tough to answer when Tencent, Alibaba or SoftBank start knocking on the door for war funds.

Authored by: Yves Helven