被红杉和AT统治下的中国互联网China's Internet, Ruled by Sequoia, Alibaba, and Tencent

"Just as an Eastern Conference team can never dodge LeBron, in this industry you eventually find Sequoia and AT everywhere you turn."

Post #13

Start with a few numbers.

Among U.S.-listed Chinese companies, eleven are worth more than $10 billion: Alibaba, $454.5B; Baidu, $87.7B; JD, $52.3B; NetEase, $33.3B; Weibo, $24.9B; Ctrip, $21.9B; TAL Education, $17.9B; New Oriental, $14.2B; 58.com, $12.3B; Autohome, $11.1B; ZTO Express, $11.3B.

Five more clear $5 billion: Huazhu (Hanting), $9.7B; Momo, $7.1B; Sina, $6.7B; YY, $5.8B; 51job, $5.0B.

Look back at that first list. Of the twelve $10-billion-plus names, set aside the three special cases — Weibo, New Oriental, and TAL — and you're left with eight. Sequoia China caught five of them, more than half in the bag. After Sequoia, the most prolific is Today Capital, with four.

Alibaba: Sequoia, GGV, SoftBank China, DST. Baidu: IDG. JD: Today Capital, Sequoia, Tencent, DST. NetEase: Today Capital. Ctrip: IDG, Morningside, SoftBank China. 58 (Ganji): DCM, Warburg, Tencent, BlueRun, Today Capital, Sequoia. Vipshop: Today Capital, Sequoia, DCM, Tencent. ZTO: Sequoia.

Of the five $5-billion names, Sequoia caught two — again, close to half.

Under $5 billion: Hanting: IDG, Northern Light. Momo: Sequoia, Alibaba, Matrix, DST. Sina: Sequoia, SoftBank. YY: Shunwei, GGV, Morningside. 51job: DCM.

Among the $10-billion-plus unicorns still private or about to list, Sequoia caught eight of nine. Only Xiaomi slipped away — which also happens to be the deal that handed Morningside a return for the history books:

Xiaomi ($45B): Morningside, Shunwei, Qiming, IDG, DST. Toutiao ($30.7B): Shunwei, Source Code, SIG, DST, Sequoia. Meituan ($30B): Sequoia, Alibaba, Northern Light, Tencent, DST. Didi ($56B): GSR, Tencent, Matrix, DST, GGV, Sequoia, Alibaba. DJI ($15.3B): Sequoia. Kuaishou ($18B): Sequoia, Tencent, Morningside, DCM, Shunwei. Pinduoduo ($15B): Sequoia, Gaorong, IDG, Tencent. VIPKID ($3.5B): Sequoia, Matrix, ZhenFund, Tencent. Guazi Used Cars: Sequoia, Matrix, BlueRun, DST, Today Capital, IDG, Tencent.

All of that gets us to the first half of the title. The 80/20 rule holds in basically every industry, and it explains a lot of what you see. The primary market is no exception: at bottom it's a game for the few, and the Matthew effect is stark. Whether you look at the already-listed Chinese ADRs or the unicorns big and small born of the mobile-internet era, Sequoia's hit rate is second to none. Neil Shen topping the Forbes global list is no fluke — he earned it.

Yes, there's more money, more people, more firms every year, and new openings and reshuffles will keep coming. But right now, and for the near term, Sequoia's dominance is unrivaled. The rankings blew up everyone's feed a few days ago; leave the specifics aside, and you still have to concede that whatever the ranking and however you cut the seniority, Sequoia is the industry's number one.

Zoom in on just the mobile-internet era, and over the past five years Sequoia has let almost no major unicorn slip away — an outright monopoly. TMD, all caught. Of roughly nine most-valuable unicorns, Sequoia caught eight; only Xiaomi got away. Tencent caught six, but you can't file Tencent under mainstream VC. Second place goes to Russia's DST with five. Nobody else broke three (Shunwei, IDG, Matrix). Morningside had two. Apart from Sequoia, only Shunwei hit two of them. Toutiao and Kuaishou made SIG, GSR/Matrix, and Morningside; Pinduoduo made Gaorong and Lightspeed.

Look at the rounds where Sequoia entered these ten-billion-dollar "whales": Meituan (Series A), Toutiao (Series C), DJI (Series B), JD Finance (Series A), Kuaishou (Series A). Among the multi-billion names: iQiyi (strategic), Mobike (Series C), NIO (Series B), WM Motor (Series B+). Trace the exact rounds and you find Sequoia's grip is strongest in the mid-to-late stages, but early-stage coverage is near-total too. On late-stage checks above $30M, they've basically never whiffed.

From another angle — the deals themselves — Sequoia's edge is just as clear. Look at the share of Sequoia China's portfolio companies that graduated to the next round over the past five years: of the 2013 vintage, 87.8% have already reached a further round; 2014, 63.42%; 2015, 57.92%; 2016, 53.95%; and even the class of 2017, only just behind us, is already at 18.18%. Averaged across the last five years, 56.25% of portfolio companies advanced to the next round — more than half.

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Beyond the graduation rate, the most powerful proof of Sequoia's track record is its IPOs. Per ITjuzi data, by the end of 2017 Sequoia China had racked up 58 exits, with 10 IPOs in 2017 alone — and the vast majority of those companies were entered at the Series A stage.

On the deal side, I've heard the same story more than once: for such-and-such company, everyone knows the founder, and he'd have been fine taking money from any of them — but his rank-and-file would ask, "Why did you take so-and-so's money and not Sequoia's?" The other firms in question aren't weak, but that long-entrenched perception is nearly impossible to shift.

On fundraising: a new Sequoia fund runs to around $7 billion, roughly the entire firepower of a rival first- or near-first-tier shop. When you're that rich, and you never have to worry about being locked out of allocation, you can only marvel: real money really does let you do whatever you want. Gaorong, Source Code, Joy Capital, and Yuanjing — the "2.0" crowd that emerged around 2014 — have played their hands beautifully and hold their own against Sequoia; but to reach Sequoia's altitude, the road ahead is still long.

So much for Sequoia. Back to the second half of the title. The very concept of "BAT" arrived more or less in lockstep with the mobile internet. BAT became China's three largest internet companies — though Baidu may slip to fourth once Xiaomi lists, turning it into "ATM." A few years ago BAT stood as a three-way balance of power, each giant building its own ecosystem and strategy, each commanding a different class of data — Baidu, informational; Alibaba, transactional; Tencent, relational — and each using its pipeline to the masses to keep swallowing the innovators coming up behind. Now it's collapsed into an AT duopoly, with more than a whiff of the Cold War about it.

The Hurun Research Institute's Q1 2018 Greater China Unicorn Index shows that as of end-March 2018, Tencent had captured 27 unicorns — second only to Sequoia. That chart doubles as confirmation of the first half of this piece.

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AT are harvesting everywhere. To "check or contain a rival closing in too fast," Tencent and Alibaba kicked off an investment arms race back in 2013 — e-commerce, payments, ride-hailing, food delivery, bikes, cloud, new retail — and between them they now carry the daily life of the Chinese consumer, the very infrastructure, in hand-to-hand combat the whole way.

Tencent especially — Daddy Tencent — moves with a speed, a scale, a breadth, and a depth of impact that leaves you slack-jawed. From 2014 to 2018, Tencent's investment map expanded from China to the world. From O2O and e-commerce it spread into mobility, healthcare, education, finance, retail — every vertical that could plausibly touch the internet.

In 2014 Tencent backed 40 companies for nearly $8 billion total; apart from JD, it clustered in O2O — 58.com, Dianping, Didi Dache, and the rest. Basically the nine-square grid inside WeChat.

In 2015 Tencent took part in roughly 50 deals worldwide, the founding year of mobile-internet mergers: Didi–Kuaidi, 58–Ganji, Ctrip–Qunar, Meituan–Dianping, Jiayuan–Baihe, Weiying–Gewara, all merged in succession. Every one of those marriages ended up taking the surname Ma.

In 2016 Tencent did 85 deals, and closed its biggest acquisition ever: $8.6 billion for mobile-game maker Supercell.

In 2017 Tencent's deal count hit 113 — nearly ten companies a month. Per Crunchbase, in the primary market alone it made 72 investments last year, second in the world. And Tencent's harvest season officially arrived: the IPOs of ZhongAn Insurance, Sogou, China Literature, and Yixin brought Tencent at least $44.1 billion in gains.

People started to realize the logic had flipped: it used to be "wherever the hot sector is, that's where BAT invests"; now it's "whoever BAT invests in becomes the hot sector."

After the 3Q war with Qihoo, Tencent settled on its core competencies: traffic and capital. Its evergreen "acquaintance messaging + closed relationships" — its social traffic — feeds an endless pool of users. And what does a bottomless traffic pool mean? Wherever the eyeballs go, the money follows. Today that pool is a living stream of user contexts. Tencent's customer-acquisition cost is essentially zero, which is why Joe Tsai's line on Tencent lands so well: except for their low acquisition cost, we're not afraid of anything they do. As Mr. Qu puts it: social traffic is the highest and most primal form of traffic, and the entire private-domain traffic of China's future internet may sit in Tencent's hands.

For years, from internet founders to investors, people have waited for a new social network to replace or even overthrow WeChat — but WeChat is no longer the simple social app it once was. Before WeChat, plenty of people set out to replace QQ; in the end the thing that replaced QQ was Tencent's own WeChat — while, ironically, it's today's younger users who lean back toward QQ. In recent years the new contacts people add on WeChat leave the paper address book in the dust, and the paper business card has all but lost its occasion. Tencent's "acquaintance messaging + closed relationships" has effectively made WeChat the largest professional network / alumni network / family network / interest club, all in one. In that world, using the old network to incubate a new one is a task of almost unimaginable difficulty: how do you move a vast number of nodes to a new network fast, and how do you rebuild the connections between them? Absent a new technological shift that brings a genuinely new mode of interaction, there's no opening in the near term. As for a way through, I see two possibilities: either you get killed by Tencent fast, or you land a term sheet from bosses like Cao Xi, Yuan Ye, or Wang Huadong.

Tencent makes money from its core business, turns those earnings into capital, levers up through stocks and bonds, concentrates on the best targets and the leading startups, and empowers them with traffic and capital to compound their value. In 2017 Tencent's investments and acquisitions touched 122 companies, spread mainly across twelve fields: anime, gaming, short video and film, reading and paid content, social and tools, education, healthcare, life services and e-commerce, finance, autos and mobility, enterprise services, and robotics and smart hardware. Last November, James Mitchell revealed that Tencent's cumulative investment had passed 100 billion yuan, with more than 50 unicorn-scale companies among the bets. At Tencent's early-2018 investment conference, Martin Lau disclosed that the new value created by these companies had already exceeded Tencent's own market cap.

Alibaba is no slouch next to Tencent. Its 2014–15 investments are in the chart below.

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Among Alibaba's larger 2016 investments: Ele.me, $1.25B; Lazada, $1.0B; Didi, $4.5B; Magic Leap, $793M; Ucar, $561M; Weibo, $135M.

In 2017 Alibaba's investments and acquisitions touched 68 companies, concentrated in seven fields: VR/AR and AI, autos, cloud computing and cloud services, the sharing economy, life services, new retail, and fintech. It leaned mainly into new retail and logistics — taking just the bigger checks: Sun Art Retail, $2.9B; Intime, $2.6B; Tokopedia, $1.1B; Lazada, $1.0B; Ele.me, $1.0B; Cainiao, $799M; ofo, $700M; Souche, $335M; Yiguo, $300M; BigBasket, $280M.

AT buying up everything has, on one hand, spawned the "Tencent camp" and the "Alibaba camp," forcing founders to pick a side. And it isn't just founders who have to choose sides — the mainstream PE/VC shops have "sadly been reduced" to reading the moods and faces of the AT / Toutiao / Kuaishou strategic-investment daddies. For firms, in the short run this is good news — especially for the small and the new, because there's someone to take the ball off their hands; but over the long run it's an unambiguous bad thing, and a sad one.

Every investor dreams of backing the next unicorn, even the next BAT — and to watch a company that could have grown into something far bigger, with a far wider horizon, get sold off at just a few billion dollars is a genuine shame.