The Economist

The EconomistAugust 4th 2018 49

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ENSETIME the world’s most valuable

artificial-intelligence startup was not

one to “bow and scrape for five pecks of

rice” said Tang Xiaoou one of its co-foun-

ders last September. Yet within two

months the proud firm which is worth

$4.5bn had buckled and taken investment

from Alibaba a Chinese e-commerce titan.

For ambitious entrepreneurs it was all of a

piece with a bleak scene that Mr Tang had

described: “Google and Facebook ahead of

you; behind you a gaggle of small compa-

nies thinking of copying you. And above

you three big mountains.”

Those three Chinese mountains are

Baidu an online-search giant Alibaba and

Tencent a social-media and gaming titan

collectively known asBAT. Ever fewer pro-

mising young Chinese companies seem

able to escape the reach of theirinsatiable

investment teams. The tech triumvirate

has already invested directly or indirectly

in half of the 124 startups counted as “uni-

corns” (those worth $1bn or more) byIT

Juzi a database of startups in Beijing. By

the time firms hit the $5bn mark over 80%

have taken a form ofBATinvestment. Their

reach is a growing concern among entre-

preneurs though few openly admit it.

Of the triumvirate two are colossi.

Even after declines in their share prices

Alibaba and Tencent are still worth close to

half a trillion dollars. In recent years both

have moved out of their core businesses

into areas as varied as bike-sharing ride-

azon Facebook and Google also mainly in

consumer-internet products. But for sheer

breadth and firepower look to China. Ac-

cording to McKinsey a consultant Ameri-

ca’s giants make just 5% of all domesticVC

investments whereas between them the

BATs account for close to half of those in

China (though Baidu’s are relatively mea-

gre). Tencent has a portfolio of 600 stake-

holdings acquired over the past six years

(see chart) many unannounced. There is

barely a trace of bombast when Jack Ma

Alibaba’s founder says that he eventually

hopes to see former Alibaba employees

running 200 of the top 500 Chinese firms.

Wen Feixiang IT Juzi’s founder says

that it is becoming received wisdom that to

grow into a unicorn a young firm has no

choice but to join one of the two camps.

Alibaba and Tencent are offering more

than just large cheques. Their platforms

have become irresistible. WeChat Ten-

cent’s instant-messaging service counts

over 1bn users. Alibaba’s emporia are

home to 1m merchants. Between them

they account for 94% of mobile transac-

tions through WeChat Pay and Alipay

their rival payment systems.

In America venture capitalists shy

away from backing startups whose busi-

ness centres on the consumer internet be-

cause the likes of Google and Facebook are

so dominant there. In China that is not yet

the case and early-round financing re-

mains plentiful. ManyVCs try to sniff out

the sparkiest startups anticipating a gener-

ous exit later when the giants buy in. Then

dozens of young firms race each other to

secure funding from Alibaba or Tencent.

That race helps propel entrepreneur-

ship argues Gan Jie a professor and board

member ofDJI a whizzydrone firm that

despite its valuation of $15bn has not taken

investment from either Alibaba or Tencent

(it along with other Chinese hardware

hailing and food delivery clashing fre-

quently along the way. Mature and power-

ful they are ruthlessly blocking and tack-

ling not only each other but any firm that

sides with the enemy.

More startups are thus becoming

locked into a proxy war over the consumer

internet in turn shaping how young busi-

nesses strategise and grow. The risk is that

China develops a sort of mandated form of

entrepreneurship driven by the strategies

of a near-duopoly. That would be a disap-

pointing turn of events for a calibre of in-

novators unseen in the country for years.

To venture-capital (VC) firms in Ameri-

ca the story may well sound familiar.

There the talk is of a “kill-zone” around ac-

quisitive technology giants including Am-

China’s venture titans

Feeding frenzy

HANGZHOU

Alibaba and Tencent have become China’s most formidable investors. Their

gorging is shaping the next shoal of startups

Business

Also in this section

50 Bartleby: Mission implausible

51 Tech giants’ earnings

52 Milk wars

52 Selling to Japan’s elderly

53 Commercialising autonomous cars

54 The blockchain and energy

A net cast wide

Source: Crunchbase *Includes subsidiaries

Number of venture-capital investment rounds*

0

20

40

60

80

2008 10 12 14 16 17

Alibaba

Tencent

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