SENSETIME, 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-founders, 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 companies 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 as BAT. Ever fewer promising young Chinese companies seem able to escape the reach of their insatiable investment teams. The tech triumvirate has already invested, directly or indirectly, in half of the 124 startups counted as “unicorns” (those worth $1bn or more) by IT Juzi, a database of startups in Beijing. By the time firms hit the $5bn mark, over 80% have taken a form of BAT investment. Their reach is a growing concern among entrepreneurs, 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-hailing, and food delivery, clashing frequently along the way. Mature and powerful, they are ruthlessly blocking and tackling 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 businesses strategize 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 disappointing turn of events for a calibre of innovators unseen in the country for years.
To venture-capital (VC) firms in America, the story may well sound familiar. There the talk is of a “kill-zone” around acquisitive technology giants including Amazon, Facebook, and Google, also mainly in consumer-internet products. But for sheer breadth and firepower, look to China. According to McKinsey, a consultant, America’s giants make just 5% of all domestic VC investments, whereas between them the BATs account for close to half of those in China (though Baidu’s are relatively meagre). Tencent has a portfolio of 600 stakeholdings 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, Tencent’s instant-messaging service, counts over 1bn users. Alibaba’s emporia are home to 1m merchants. Between them, they account for 94% of mobile transactions through WeChat Pay and Alipay, their rival payment systems.
In America, venture capitalists shy away from backing startups whose business centres on the consumer internet, because the likes of Google and Facebook are so dominant there. In China that is not yet the case, and early-round financing remains plentiful. Many VCs try to sniff out the sparkiest startups, anticipating a generous 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 entrepreneurship, argues Gan Jie, a professor and board member of DJI, a whizzy drone firm that, despite its valuation of $15bn, has not taken investment from either Alibaba or Tencent (it, along with other Chinese hardware companies, has found it easier to resist). But it also means the giants get to determine who wins and who loses, she adds. When Tencent invested $600m last summer in Mobike, a shared-bike startup, for example, Alibaba countered with a $700m stake in a rival, Ofo. In a flash, dozens of smaller competitors were out of the race.
The duopoly’s rivalry also thwarts ambition at younger firms. The story of Ele.me, a food-delivery platform founded a decade ago, whose name roughly means “Hungry yet?”, is illustrative. It was expected to grow into an independent firm with a valuation as high as $20bn or more. But in 2015 a merger occurred which made Alibaba feel insecure in food delivery. Meituan, backed by Alibaba, joined with its arch-rival, Dazhong Dianping, backed by Tencent. Soon afterwards Meituan-Dianping raised $3.3bn in a funding round led by Tencent, giving the latter more sway.
Alibaba’s riposte was to dump almost the entirety of its shares in Meituan. Seeking a new way to rival it, Alibaba invested in Ele.me and in April bought the platform outright, in a deal that valued Ele.me at $9.5bn. It is now merely part of Alibaba’s arsenal, one among 60 investments the giant has made since 2017, according to a tally by Sanford C. Bernstein, a research firm. An Alibaba vice-president has been installed as its new chief executive.
As ambition shrinks within startups, innovation suffers. Few are trying to build a platform of users, because they expect to rely for traffic on WeChat. Startups which win Tencent’s or Alibaba’s favour expect to profit from reams of data, logistics networks, payment gateways and technological support, too. Gordon Orr, a former head of China for McKinsey, says that entrepreneurs tend to prefer a data-sharing agreement cemented with an equity shareholding than one without. For Alibaba and Tencent, these often come with a board seat and voting rights.
The Chinese government, for its part, is surely delighted that its national technology champions are snapping up stakes in hundreds of startups. Being able to manage a handful of established private players with long-standing links to the Communist Party, with their tentacles in many young firms, makes the whole tech industry easier to control, be it through censorship directives or in directing its know-how to the state’s industrial plans.
For that reason, the government is unlikely to want to break up the “walled gardens” that the giants have built round their offerings, in which startups must also operate. WeChat does not let users send friends direct links to Taobao, Alibaba’s main shopping site. Apps owned by the two firms tend to make it either finicky or impossible to pay using their rival’s payment system. Startups with backing from Alibaba or from Tencent have therefore come to expect to be frozen out of parts of the market. Liu Zihong, the founder of Royole, an independent startup valued at $5bn that makes flexible displays, says that, as a rule, “if you band with one giant you lose the chance to work with the other”.
As independents, plenty of startups are giving Alibaba and Tencent a run for their money, often serving markets into which the giants have been slower to move. Pinduoduo, a discount-buying app, built its group-buying platform by targeting China’s poorer cities. Tencent soon took a stake. Douyin and Huoshan, short-video apps backed by Bytedance, a technology firm with no current ties to the two giants, have hooked youngsters and left Tencent scrambling to create a rival offering.
Fast-growing platforms such as Youmiao, a luxury-handbag rental firm based in Hangzhou (also home to Alibaba), reckon they can take their pick of the giants’ investment offers (Alibaba and Tencent came calling within months of Youmiao’s launch). Some firms reject an investment from the duopoly. Lea Liu of QingCloud, an ambitious cloud-computing platform in Beijing, says that “if you want to be IBM for the cloud, you cannot be a pawn in a giant’s data-technology strategy”.
Many entrepreneurs also welcome the recent rise of a new tech trinity: TMD, for Toutiao (a news-aggregation app owned by Bytedance), Meituan and Didi Chuxing (a ride-hailing service). The trio is among China’s fastest-growing platforms, all founded since 2010. Meituan and Didi both rose with backing from a giant, but Bytedance publicly fell out with Alibaba-backed Weibo, a Twitter-like platform that eventually retracted its investment from the bolshie tech startup. It has since pursued its own course. “Nobody thought that a company like Toutiao would emerge to rival the likes of Tencent and Baidu,” says Richard Peng, a former investment chief for Tencent who now runs Genesis Capital, a China-based venture capital firm.
Last year Meituan set up its own investment fund, opening a new channel for startups (that is at some distance from Tencent). It will doubtless be closely monitored by the duopoly. The two firms have rarely been so watchful of the other, in a competition that Tencent’s Pony Ma says has been “formalized in our country”. Even he has confessed on the occasion that it is an unhealthy one. But the two giants should be on their guard for another reason: having for so long fostered innovation, they are now at risk of sapping it. They would be among the first to suffer.