Who’s Betting on Industry Internet before the Concept Sizzles?
China is making its way into supply-side reform in recent years, with capacity-cut goals in saturated steel smelting and coal mining sectors beaten, and deleveraging pushed forward steadily.
In the previous article, EqualOcean introduced what kind of fundamentals that VCs will look at when valuing an Industry Internet company (as well as what founders should consider before starting the businesses).
“Industry is a vertical concept. In B2B marketplaces, you have to find the right category you sell. In a classical market structure in favor of a marketplace, you have to address the ‘discovery problem’. The aggregation by the marketplace help the very fragmented demand and supply-side make deals with better prices or products. There is a good chance that you can take a healthy take rate by providing more than matchmaking. ”
--Wang Guodong (Jason), Associate Partner, Lightspeed China Partners
Venture capitals have been very enthusiastic about new markets, new business models and cutting-edge technologies when nobody else could see it – basically, that’s what in their genes. They are paying prices, putting amounts of capitals to something that has never been proven by history, looking to capture the value that may prove elusive post-close. The most agile and effective VCs are stepping up their games to identify targets and sharpen costs, while planning for the worst.
Giants, conglomerates, are joining the game as they saw significant risk in digital newcomers coming after its customers. If they are not reacting, chances are their competitors are. Giants select fields they interested, often related to their core businesses, out of strategic perspectives. Compared to purely financial investments, capitals from CVCs (Corporate Venture Capitals) can be a double-edged sword for their target startups. Founders can enjoy the muscles they could flex in the competition, power and scale that their investors bring to, while being exposed to the risk of losing controlling power towards what they put the life-time efforts in.
“In Consumer Internet era, founders can prove one business model in a short time, while that can hardly happen in the era of Industry Internet. 2B businesses have to be financially viable: for marketplaces, we consider GMV, customer retention, growth, UE, which combined to build a company’s moat; for enterprise service, things are pretty much the same. Once customers are unhappy, they will churn quickly, and it reflects on reports.”
--Wang Xingshi, Managing Director, Source Code Capital
For companies like Alibaba and Tencent which have a startling market cap in public markets (USD 454 billion and USD 389 billion as of September 7, 2019, respectively ), it’s hard for them to maintain a 40-50% annualized revenue growth. They need the next generation of growth engine, just as Amazon’s AWS.
For a long time, Tencent has been considered as an Internet company that lacks 2B genes, while Alibaba built the largest marketplace in the country that allows the company to cooperate with millions of retailers and factories closely and naturally has 2B genes. Its Cainiao and Fresh Hippo business divisions address the brick-and-mortars, building logistics infrastructure and expanding its offline operations, respectively, not even mention Alibaba Cloud, the absolute IaaS leader in China’s public cloud market.
While Tencent claimed the cloud business grew robust year-on-year. This is, however, a low base compared to Alibaba. Moving away from only consumer-facing software and brands, the company has been refocusing much of its efforts towards business services – mainly on the Cloud and smart industries (comprise of smart education, automobile, healthcare and retail). It plans to leverage its huge user base in the consumer market, technologies in a varies of internal business units and infrastructure to drive a C2B2C business across different sectors.
Baidu’s best practice in Industry Internet is autonomous driving, thanks to its Institute of Deep Learning. Baidu IDL has spawned dozen of AI talents, for instance, AI chipmaker Horizon Robotics founder and CEO Yu Kai, L4 autonomous driving car company Pony.ai founder Lou Tiancheng. The open-source autonomous vehicle technology platform Apollo, a key pillar of Baidu's AI strategy in auto, already used by 130 partners around the world. Baidu focuses on RPA, HR talent SaaS, Smart manufacturing recently. One weak point of Baidu is that it lacks transactional data.
Similar to Baidu and Alibaba, Tencent still invests more into the business side, not only by running its own businesses as well as by relying on strategic investments to expand its ecosystems. Baidu has three subsidiaries to accomplish that mission: strategic investment department, two independent investment firms Baidu Venture and Baidu Capital. Tencent industrial funds are seeking startups to expand its digital ecosystems; Alibaba’s strategic investments, on the other hand, are more proactive compared to the other two. Meituan Dianping and ByteDance are following the patterns as well.
E-commerce service SaaS provider Youzan (08083:HK) has got strategic investments from both Tencent and Baidu. Baidu invested CNY 550 million (USD 77.7 million) into ERP company HAND Enterprise Solutions (300170:SZ). Alibaba bought U.S. e-commerce services provider Vendio in 2010. Alibaba also invested CNY 3.6 billion (USD 520 million) in China TransInfo (002373:SZ) - a public transport software provider. They signed a cooperation framework to work in V2X (Vehicle-to-everything) technology. BAT’s capital investment divisions are seeking opportunities in the private market continuously for the past few years. Some prominent targets are e-contract company fadada (Tencent, Series C, CNY 398 million) and FMCG B2B platform Yijiupi (Tencent, USD 89 million).
But what are all these mean to startups that got investment from BAT? What it would be like for the startups to be treated by BAT’s arch-enemies? It’s hard to say. As we emphasized before, verticals know-how matters, and sometimes it is more important than the technology itself. Besides, linking end-consumer data in gaming and steel supply chain data generates nothing.
“We spent a lot of time in researching on 2B transaction, 2B service and 2B software. They improve transactional efficiency, production efficiency and overall efficiency by using operation tools along the value chain. We bet on horizontal opportunities like HR SaaS, accountancy as well as pharma CRO, etc. No matter you are doing in 2B sector – building a marketplace or providing an enterprise service, you have to be patient. ”
--Xiong Fei, Partner, Matrix Partners China