Old Version

Nothing Ventured

Big tech companies are reeling in their investment arms to seek new opportunities in the wake of increased oversight of monopolistic practices. What does it mean for startups and unicorns?

By Jiang Zhiyu Updated May.1

After Tencent steadily reduced its stake in JD.com, an e-commerce giant in China, and Sea Limited, an internet company in Singapore, ByteDance, parent of TikTok, caused another uproar in venture capital circles by reportedly disbanding its strategic investment department on January 18. The tech giant said it had decided to strengthen its main business and decrease investment in areas less relevant to that.  

Their moves, together with other internet giants’ setbacks in investment, are interpreted as a signal of big changes among corporate venture capital (CVC) against the backdrop of China’s anti-monopoly efforts, and the shifting of their attention to new investment opportunities.  

In the past 10 years, growth in CVC investment in Chinese enterprises that had started in the late 1990s accelerated. And after 2015, CVC investment accelerated following policies encouraging entrepreneurship, which drove investment and encouraged new startups to form. Many entrepreneurs created startups with a view to being bought out by big tech.  

Internet giants played a major role in this surge. According to ITjuzi, a market data and research provider, the number of CVC investments in China jumped from 134 to 925 between 2011 and 2020. Among these, 58 percent were made by 159 internet companies, accounting for 21 percent of all CVC firms that made investments. Bringing in capital to facilitate mergers and acquisitions (M&A) was the primary way that big tech firms could expand into multiple sectors beyond their core business.  

But in recent months, tech giants such as Tencent, ByteDance and Alibaba have adjusted their investments both in orientation and scale, with an obvious shift away from areas like gaming and education after new regulations severely affected those sectors. Some companies are withdrawing from entities they previously invested in. Now observers are wondering if CVC still has any role to play among these tech giants. 

Big CVCs 
Investment has long been the primary way for internet giants to expand business and get new profit points. According to ITjuzi, Byte-Dance started investing and M&As in 2014. Up to now, it has made 194 investments. In 2021 alone, it made 76, double that of 2020, meaning total investment reached 25 billion yuan (US$4.0b).  

ByteDance at first confined its investments to content creation and communication, its principal business. But then it expanded to other hot fields including corporate services, such as providing communication tools, e-commerce, education, healthcare, real estate, finance and gaming. ByteDance put a lot into strategic investment, which aims for long-term development of a company, between 2014 and 2021. As the company grew fast in revenue and market value, its investments kept rising year-on-year.  

In 2020, it established a financial investment team in the expectation of gaining financial returns in the short to medium term, and increased investment. In 2021, “new consumption” attracted investors, referring to meeting consumption demands for customized high-quality products and daily services, ranging from catering to pet care, based on big data. ByteDance invested in projects that were once regarded as promising, like Shanghai-based coffee chain Manner, hotpot ingredient supermarkets, beverages and oral care products. It invested in robotics companies such as Iplus Mobot and Syrius. In 2019 and 2020 it took a stake in Leading Ideal, a Beijing-based electric vehicle startup.  

Another major player is Tencent, which has made 1,347 investments since 2005. In 2021 alone, it invested in 265 projects, a year-on-year growth of 55 percent, totaling 130.2 billion yuan (US$20.6b), a record high. In 2020, it invested in 31 gaming companies, four times that of the previous year, and in 2021, the number surged to 64, according to ITjuzi.  

Tencent’s investment department has reshaped the landscape of internet sector to a large degree. It took part in the platform mergers of Didi-Kuaidi (ride hailing) and Meituan-Dianping (retail, entertainment, delivery). A report on China’s CVC in 2021 published by ITjuzi shows that among 295 unicorns (startups with a value of over US$1 billion), Tencent invested in 59 and Alibaba in 31.  

To some extent, almost all leading Chinese internet companies have received capital at least once from Tencent or Alibaba. Statistics from ITjuzi reveal that in 2018, Alibaba’s investment reached a peak with 80 investments totaling 81.7 billion yuan (US$12.9b). 

Abrupt Brake 
After years of robust growth, the number of users on ByteDance’s two most popular applications, Douyin (TikTok) and Toutiao, a news aggregator, seem to have reached the ceiling. In an internal meeting on November 18, 2021, the company revealed that its domestic online advertising revenue in the previous six months had plateaued for the first time since 2013, according to a report by Shanghai Securities News.  

As ByteDance needs more investment to boost business, its dissolution of the strategic investment department is probably out of concern over tightened supervision, according to several of its employees. In August 2021, the government released policies cutting the time children are allowed to play online games from 10 to three hours a week and has not issued licenses for new games since then. Starting from the middle of 2021, ByteDance’s investment in gaming plummeted. Tencent’s investment in gaming ground to a halt in the latter half of 2021.  

The same is happening in the education sector. ByteDance started investing in education in 2018, with 14 investments to date. It also established its own education company, Dali Education. After the government introduced new policies limiting extra-curricular education in 2021, ByteDance laid off many staff at its education business. Its purchase of Xuexiaoyi, an app for college students, in May 2021 was the last investment it made in the field.  

Alibaba is also retreating from CVC, reducing the amount of its investments since 2019. In 2021, it only invested 19.4 billion yuan (US$3.1b). On January 21, Alibaba Group reduced its stake in Zhong An Insurance, China’s first online-only insurer that was started in 2013 by Alibaba, Tencent, Ping An Insurance and other big companies, from 13.54 percent to 10.37 percent. Alibaba CEO Zhang Yong also quit the board of directors of Didi Chuxing and Sina Weibo in December 2021 and January 2022.  

Tencent decreased its stake in e-commerce giant JD.com at the end of 2021 and Singapore-based consumer internet company Sea Limited in early 2022. It announced in December that the 460 million shares it held in JD.com would be paid to Tencent’s shareholders as an interim dividend. After that, Tencent’s stake in JD decreased from 17 percent to 2.3 percent, meaning it is no longer the platform’s biggest shareholder. 

Tencent explained in a statement that the change is in line with its strategy of investing in startups and supporting their growth first, then withdrawing at a proper time and sharing the revenue with shareholders.  

Chinese internet giants usually acquire startups that prove successful on the market. The goal of many startups is to be bought by internet giants like Baidu, Tencent and Alibaba from the very beginning.  

In September 2021, the State Administration for Market Regulation mentioned in an anti-monopoly report from 2020 that big internet companies acquired many startup platforms and enterprises that are supplementary or competitive and thus wiped out potential competitors. “Facing the sizable gaps in capital, scale, talent, technology and market share compared to internet giants, startups usually find it hard to refuse the acquisition... This kind of M&A aroused worries about hampering innovation,” said the report.  

Wu Lixian, securities strategist from Ever-bright Sun Hung Kai Securities told media that Tencent’s sale of these companies’ shares will help relieve regulators’ worries. Moreover, as Tencent’s WeChat messaging app builds its own e-commerce platform with mini-programs, it will become a direct competitor of JD.com. 

A boy experiences VR tech at the Light of Internet Expo of the World Internet Conference in Wuzhen, Zhejiang Province, September 25, 2021

New Favor 
While projects involving online consumption are losing their appeal, chips and the industrial internet are the new darlings of the CVC world. On November 3, 2021, Tencent debuted three self-developed chips targeting AI computing, video processing and high-performance networks. Tang Daosheng, executive vice president of Tencent, revealed that the company will make long-term investments in chips for the core infrastructure of the industrial internet.  

On December 31, 2021, Tencent invested in AI semiconductor company Zhiaixin Semiconductor. Before that, it participated in several rounds of early-stage financing of chip manufacturer Enflame and the A-round financing of graphics processor makers Moore Threads.  

ByteDance has made similar investments. In November 2021, it invested in Shenzhenbased Guangzhou Semiconductor that was established in January 2020 with a focus on augmented reality (AR) goggle technology. Since 2021, ByteDance has made investments in technology startups engaged in AI and chips, including Stream Computing, Moore Threads, Runic Technology and RiVAI Technologies.  

Xiaomi, a smart manufacturing company, is marching in the same direction. It became a shareholder in Wuhan Jiachen Electronic Technology, a designer of integrated circuits and sensors. It has also invested in over 50 semiconductor companies via its investment arm Changjiang Industrial Fund and submitted over 730 chip-related patent applications.  

Xu Ke, vice director of the digital economy and law innovation research center of the University of International Business and Economics, told NewsChina that anti-monopoly opposes M&As that snuff out potential competitors. But when internet companies make capital investments, often these are unconnected to their existing business and are solely aimed at business expansion. Xu believes this kind of investment that results in cross-field competition among internet companies encourages competition and serves as a driving force behind Chinese companies.  

A person engaged in venture investment told NewsChina on condition of anonymity that if leading internet companies slow CVC investment, the overall market will become more rational. Startups will no longer have to take sides between Alibaba and Tencent, nor will they be able to use being purchased by internet giants as their end game. An entrepreneur in consumer goods told NewsChina that as the flow of investment into trendy fields is constricted, leading startups can no longer corner capital resources, and this will help the development of smaller companies.  

Meanwhile, more and more companies are establishing independent CVC entities. Huawei, China’s telecommunications giant, for example, established Habo Investments in 2019. Habo registered as a private fund manager on January 14. It will allow the company to roll out private equity products and equity investments in the future. With 3 billion yuan ($470.2m) in registered capital, Habo has already invested in over 60 companies, mainly semiconductor manufacturers.  

In August 2021, ByteDance changed the name of its equity investment arm based in Tianjin from Tianjin ByteDance Equity Investment Management Limited to Tianjin ByteDance Private Equity Management Ltd to emphasize its nature of private fund management. It can still make investments through this company in the future. It is a limited partner (LP, a third-party investor in a private equity fund who only needs to commit to the capital they invest) of venture capital institutions such as BA Capital and XVC. Other internet companies like Meituan, Tencent, Xiaomi and Alibaba are all limited partners of venture capital institutions.  

A person in the strategic investment department in an internet company told NewsChina that she received several inquiries from headhunters as soon as ByteDance confirmed it would halt its investment arm. She also found that some securities companies and private equity companies noted in their recruitment ads that candidates with CVC experience were welcome.  

“The biggest change we can see is that the companies might directly operate equity investment institutions using their own capital or seek investors by applying to be fund managers or limited partners of venture investment institutions,” said a CVC employee from an internet company. He noted that as both CVC and venture capital are in the early stages in China, adjustments are normal. Besides, except for the few internet giants that can realize monopolies through buyouts or investment, most companies will continue making rational investment decisions, and this seems to have good prospects.

Customers shop at Hot Pot Lazy Bear Market with ByteDance's investment in Beijing for hotpot ingredients, October 6, 2020