Huge Rounds, Heated Competition: How Tencent & Alibaba Are Defining VC In China

Tencent Holdings and Alibaba are mammoth Chinese companies that have astounded the business and tech worlds. Not only are the two tech companies representative of the rapid growth that China has experienced over the past ten years, but both entities also serve as prime examples of the extent to which China has become an important and ubiquitous global presence.

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Tencent, with its successful super app WeChat, and Alibaba, with its e-commerce platform, shape the way that people living in China eat, shop, play, and connect. At the time it went public in 2014, Alibaba was named the largest global IPO in history, raising a total of $25 billion. In 2017, Tencent was the first Asia-based company to hit a market cap of $500 billion.

But Tencent and Alibaba have done more than raise ridiculous amounts of money for platforms. Over the past three years, the two companies have upped mutual competition, facing off in proxy wars in growing industries through rival investments. With potential for growth both in China and abroad, the companies investment portfolios have grown significantly.

Inside The Numbers

To understand the investment numbers for Alibaba and Tencent, we gathered Crunchbase data detailing known investments for the firms and their subsidiary groups.

Alibaba subsidiaries in this analysis include the official investment arm of the company, Alibaba Capital Partners. We’ve also included the Alibaba Entrepreneurs Fund which is a not-for-profit fund focused on young graduates and entrepreneurs in Hong Kong and Taiwan, as well as Alibaba Pictures Group, which has focused investments in tv, media, and film production. Others include Alibaba Health Information Technology and Alibaba Innovation Ventures.

Tencent’s subsidiaries included are the Tencent Industry Win-Win Fund, which focuses mostly on online games, internet, and media. The data also includes investments by the Tencent Public Space as well as the Tencent Industry Collaboration Fund.

According to Crunchbase data, Tencent has invested a known 265 times since its inception, leading 123 of those funding rounds. 80 percent of those identified investments were made post-2013.

By comparison, Alibaba has taken part in 147 known investment rounds over its lifetime, with lead investments in 84 of those known funding rounds. 70 percent of the known investments were made after its huge IPO in 2014.

Taking a closer look at 2017, of Tencent’s known 70 investments that year, 36 percent were directed toward early-stage ventures, and 23 percent toward late-stage ventures. Seed-stage funding made up a mere 2.9 percent of the known funding round total.

Of Alibaba’s 40 known investments during the same time period, 42.5 percent of the known rounds were for early-stage ventures. Late-stage ventures took up 30 percent of the total, and seed-stage ventures 7.5 percent of the known total funding rounds.

Alibaba’s investment portfolio shows a slight shift from 2016 to 2017. The number of investments by the company as a whole increased by 74 percent from 23 known investments in 2016 to the 40 known investments in 2017. Furthermore, of those total known funding rounds in 2016, 30.4 percent were for late-stage rounds, while 13 percent went to early-stage ventures.

However, on the whole, the company has invested in more early-stage ventures (31.4 percent) than late-stage ventures since 2014.

The data suggest that Alibaba and Tencent do not usually invest in seed-stage ventures. Of the only six seed-stage investments carried out by Alibaba since 2014, four were made by the Alibaba Entrepreneur Fund. This decision could be strategic, as the giants could be waiting for investment firms to identify promising young companies in growing industries before jumping in to invest.

Competitive Industries

Increased focus on investing in companies in multiple growing industries in order to push strategic initiatives, such as payment services, has shaped the way that startups and VCs have begun to look at the investment climate in China.

On a panel at the Fortune Brainstorm Tech International Conference in Guangzhou, managing partner at GGV Capital, Hans Tung, said that startups founded in China have three years of operation before winners are declared.

“The battle is on beginning from the team, to the shareholders, to getting Alibaba and Tencent involved,” he explained. “Everybody knows what their role is, and every time a new category comes up, boom, you see that happen.”

He went on to note that what venture capitalists and entrepreneurs outside of China see this as a bubble making system; however, those inside China see it as a normal competitive process in a capital-heavy region.

Crunchbase News has covered this phenomenon in its multiple rundowns of the dockless bike-sharing industry. This increasingly popular, capital-intensive industry has grown up in just three years. In June 2017, Tencent participated in Mobike’s $600 million Series E funding round. Just a month later, Alibaba upped the stakes by leading a Series E investment round that brought in $700 million for Mobike’s main competitor, Ofo, further intensifying the competition between the two startups while effectively knocking out all other small competitors.

In the growing Chinese movie entertainment industry, Tencent and Alibaba have also come head to head. Tencent, along with WANDA Group, led a Series B funding round that brought in $105 million to China-based online movie ticketing platform, Beijing Weiying Technology. In early November 2015, Alibaba Pictures acquired Weiying competitor, Taobao Movie (Taopiaopiao), which was followed by a Tencent-led $235 million Series C round for Weiying.

The competition continued in April 2016, when Tencent participated in another Series C round for the company which raised $462 million. In May 2016, Taobao Movie raised $260 million through a Series A funding round led by Alibaba-affiliated Ant Financial (Alibaba is entitled to 37.5 percent of Ant Financial’s total equity value). Beijing Weiying, Taobao Movie, and a third player, Maoyan, which was backed by Meituan Dianping, were in a tight competition for control of the movie ticket market. In a strategic move, Tencent (along with Enlight Media) and Meituan-Dianping merged their two companies, creating a giant movie ticketing conglomerate. The new Maoyan would then be bolstered even more by a Tencent-led funding round which brought in $151 million, with its eyes rumored to be set on an IPO later this year.

These rounds are taking place in other growing industries as well.

2018 Investments

Both Tencent and Alibaba wasted no time getting into the 2018 investment game.

Tencent has already participated in five funding rounds since January 1st. One of these rounds included a lead investment in an unheard of Series A funding round for rental services company, Ziroom that brought in 4 billion yuan (about $621 million). The Beijing-based company raised the money in direct response to Chinese-government promotion of rental housing.

Alibaba has also participated in four rounds this year, two of which were early-stage funding rounds led by the Alibaba Entrepreneurs Fund. The first of the two was a Series A funding round for the Taiwan-based e-commerce platform, Citiesocial, which brought in $2.8 million. The second was a Series B round that raised about $15 million for Taiwan-based exercise platform, Space Cycle.

With more growth to come, and Alibaba and Tencent looking to expand their platforms and move into foreign markets, it will be interesting to see if 2018’s investments will keep pace with their yearly growth, or if foreign challenges will inhibit expansion.

Illustration: Li-Anne Dias