Internet & Tech, Talking Point

Horns of plenty

Top 50 China Unicorns Ranking reveals it’s all about tech and the ‘Big Four’

Sina-w

One of the ‘Big Four’: Sequoia China’s founder and managing partner Neil Shen has backed plenty of unicorns

When US venture capital investor Aileen Lee coined the term ‘unicorn’ in Silicon Valley in 2013, she could only find 39 companies worthy of this exclusive club of start-ups valued at $1 billion or more. Unicorns are supposed to be rare, hence the name. Yet because of a genuine revolution in internet and tech – and perhaps an investment bubble inflated by quantitative easing from central banks – the number of unicorns around the world has moved beyond 500.

According to Lee, each new wave of innovation gives rise to one or more ‘super unicorns’, or companies that have defined their era. Apple and Microsoft were both founded in the 1970s at the dawn of the personal computer. The boom in internet usage in the 1990s gave birth to Google. And in the 2000s, Facebook thrust itself forward with the rise of social media.

These firms are some of the most glamorous faces in corporate America and many such unicorns are also seen as a signal of the strength of their home economies.

In 2013 there was not a single unicorn from China in Lee’s group. Today she could identify as many as 200. The current list paints a picture of China’s progress across some crucial industries and sectors. And as more unicorns join the herd, they also point to the future of the country’s economy.

From BAT to TMD: who are the top Chinese unicorns now?

Based on information from several financial data aggregators including 36Kr, CB Insights and Hurun, our list of China’s top 50 unicorns is still topped by Ant Group in terms of valuation (see table below).

The fintech affiliate of the internet heavyweight Alibaba was priced at more than $300 billion when it was about to uncork what would have been the world’s biggest ever IPO in November (see WiC516). Ant’s dual listing in Shanghai and Hong Kong was then blocked by financial regulators days ahead of its trading debut. Reportedly it is still trying to revive its IPO, although the Chinese government’s subsequent review of monopolistic behaviour among the biggest internet firms is likely to deflate its valuation significantly.

Ant’s core asset, Alipay, was introduced as one of China’s first digital payments platforms as far back as 2004 by Alibaba. For purists that means that it may not be deserving of the unicorn title, which presupposes a shorter, more spectacular lifespan.

The rise of Bytedance – the second company on the list – has been more meteoric, for instance. The eight year-old firm operates popular news aggregator Toutiao and short-video platform Douyin. It became more recognised internationally after former American leader Donald Trump ordered a forced sale of the US operations of Douyin’s sister app TikTok. Hong Kong media has reported that Bytedance is looking to IPO in the city this year, in a deal that could value the unicorn in excess of $180 billion.

We first reported on the ‘TMD’ triumvirate – Toutiao (of Bytedance), Meituan and Didi Chuxing – in 2018 (see WiC425), talking about why they seemed to be best-placed to challenge the dominance of the established BAT (Baidu, Alibaba and Tencent).

Meituan has since gone public in Hong Kong. Trading at $280 billion as of this week, the food delivery and ‘all-in-one app’ has already dwarfed Baidu’s valuation ($94 billion).

Ride-hailing app Didi – ranking third on our list – is reportedly looking to list its shares on the Hong Kong bourse at a valuation of around $60 billion to $80 billion. Didi was riding high after gobbling up Uber’s China unit back in 2016. But the eight year-old firm then ran into a series of regulatory roadblocks in 2019 after two female passengers were murdered when using its hailing service.

Didi has set itself a mission “to build a better journey” for people around the world. But in search of a newer growth story, it has also expanded into carmaking and launched its own concept car last November. The idea is that Didi’s customers of the future won’t need to own cars of their own, CEO Cheng Wei told the audience at the launch.

Kuaishou was another of the frontrunners in the herd, but ceased to be a ‘unicorn’ in early February when it went public in Hong Kong. Such was the stellar performance of the app’s IPO (see WiC527) that Bytedance could be tempted to spin off its own (bigger) rival Douyin, perhaps testing the water for an even larger IPO for the parent firm.

E-commerce major JD.com is another of the leading unicorn breeders – and probably the most active Chinese firm in Hong Kong’s stock market in recent times. It completed its own secondary listing in Hong Kong last year, accompanied by the spin-off of JD Health. It is also planning to list JD Logistics, the fourth most valuable Chinese unicorn on our list.

What does China’s unicorn heat map look like?

More than 80% of the top 50 unicorns we list offer their core business via the internet. E-commerce is the most prolific of the sectors, accounting for seven of the most valuable start-ups.

Another trio comes from the logistics sector, which is increasingly appreciated by investors, with JD Logistics and Alibaba’s logistic affiliate Cainiao ranking 4th and 6th.

Internet finance provides another batch of unicorns, including the fintech or private-sector banking units of the BAT and JD.com.

Besides shopping online, the Chinese have been spending more money on education and healthcare too, fuelling the rise of Yuanfudao, an online education service provider backed by Tencent. The Covid-19 outbreak highlighted the reach of remote learning – as was made plain in Yuanfudao’s latest funding round in October which valued the education platform at $15 billion (see WiC517). Two other edtech platforms and five healthcare firms also make the top 50 club.

Then there is the much-hyped artificial intelligence (AI) sector. Led by former Google chief Eric Schmidt, the National Security Commission on Artificial Intelligence has been warning repeatedly that China is on the verge of surpassing the US as an “AI superpower”. In its final report to the US Congress this week, it again urged Washington to do more to protect America’s position. “AI is going to reorganise the world. America must lead the charge,” the commissioners warned in their 756-page report.

Spearheading China’s challenge in AI will be the six unicorns in the top 50 list, including SenseTime and Megvii. Both have attempted to go public in Hong Kong but their plans were scuppered after Trump’s sanctioning of various Chinese tech firms saw both AI companies placed on the so-called US blacklist.

As Sino-US tech rivalry rages on, many Chinese regard the American sanctions as belated recognition of the high quality of their domestic champions. The underlying logic: only the most tech-savvy firms are deemed as a threat by the American authorities.

The field of artificial intelligence looks like being a fertile one for unicorns of the future. Although it is not on our top 50 list, Moore Threads, a start-up that makes graphics processing units (GPUs), claimed it had joined the unicorn club last month after raising “billions of yuan” within 100 days of its founding. Its claim to greatness is that its GPUs will play a key role in the AI era in applications like autonomous driving, Big Data and image recognition.

Click to magnify table

List of Unicorn Companies

How do Chinese unicorns compare with their US counterparts?

A study compiled by Beijing News that focused on large domestic enterprises, suggests there were 248 Chinese unicorns in 2020.

Another by the New York-based research firm CB Insights claims there were more than 500 unicorns worldwide last year, of which China accounted for 122 (251 came from the US, the report said).

Bytedance, a Chinese firm, topped the CB Insights list at $140 billion in valuation. SpaceX was second at $74 billion, followed by Didi at $62 billion.

While the Chinese have closed some of the gap on the US in the number of unicorns created in recent years, there are signs that the growth spurt is fading. According to CEIBS Business Review – a business journal for company executives and business school students in China – there were 107 new entrants on the CB Insights ranking last year: 68 were from the US, but only nine from China.

Most of the Chinese unicorns feed from “internet traffic” and have depended on a surge in customer base for much of their growth. These include the e-commerce, fintech, edtech and car hailing platforms. “China’s enormous domestic market comes with scale and demographic dividends, and allows internet firms to quickly monetise their traffic. However, looking at the other side, Chinese unicorns’ innovative capacity is relatively weaker [than their US counterparts],” CEIBS Business Review concluded.

In particular, the magazine noted the 15 American unicorns that focus on internet network security, with no equivalent companies showing up in the China ranks. “American unicorns tend to put more emphasis on core technology such as healthcare, software and network security,” the report advised. “Most of them are not oriented to the consumer market. Their ability to monetise their businesses might be weaker than the Chinese unicorns. But the US remains in a leading position in terms of overall tech strength.”

At harvest time, which of the private equity firms have done best?

The composition of the unicorn list can change quickly when the stock market heats up, opening up prime opportunities for early investors to take profits. This has been the underlying trend for much of the Chinese tech sector in the last two years, bringing harvest time for pre-IPO investors.

Another report by 36Kr, a Chinese news portal, applauds Hillhouse Capital and Sequoia China as the two most prolific investment groups in terms of IPO exits in 2020, seeing 27 and 25 of their portfolio firms go public respectively.

That bumper crop could keep on giving as American stock markets trend towards historical highs. Hong Kong’s bourse is also keen to accommodate the highest-growth candidates, while the STAR Market in Shanghai has made available another lucrative tech-focused listing platform for venture capital players to exit unicorns and take profit.

Among the top 50 unicorns on our list, 16 are portfolio firms of Sequoia China. Hillhouse (an early investor in Tencent back in early 2000s) accounted for four. But neither firm classes as the biggest players in their own game if tech giants Alibaba and Tencent are counted as private equity firms in their own right. Tencent has invested a sizable stake in at least 16 of the top 50 Chinese unicorns, while at least 10 are affiliates or portfolio firms of Alibaba.

That’s why analysts in China have long described Alibaba and Tencent as the country’s two biggest players in venture capital and private equity (remember the latter’s 5% stake in Tesla?).

Some unicorn founders have complained that the duopoly is too dominant, setting too many of the terms across a wide range of sectors, and often prepared to act in a predatory way to prevent the emergence of potential challengers. But there are also advantages of having the benefit of the financial firepower of either of the two giants as shareholders, as well their reach across so many sectors. For instance, this is what happened when Tencent masterminded consolidations in creating the undisputed leaders in online publishing (China Literature) and eSports broadcasting (Huya-Douyu).

And if the ‘Big Four’ of Tencent, Alibaba, Hillhouse and Sequoia China are not always content to be passive investors in their unicorns, it suggests the quartet hold an outsized influence when it comes to shaping the competitive landscape of China’s tech future.

How about some of the more unusual unicorns in the list?

There are only a handful of unicorns in our top 50 list that make hardware or that don’t rely heavily on the internet for their business growth.

DJI, the world’s biggest drone maker, is the standout example, with a valuation of $26 billion.

Eight year-old Royole makes foldable smartphone screens. Valued at $6 billion, the Shenzhen-based firm is also one of the rarer breed of animal that isn’t a portfolio firm of the ‘Big Four’. Royole had planned to raise Rmb15 billion ($2.3 billion) via the STAR Market but the company postponed the plan last month without a detailed explanation.

United Imaging Healthcare is another intriguing case among the top 50. The medical equipment maker’s major backers are all state-owned enterprises, including China Life, China Development Bank and Citic.

Local governments in China have been keener than ever to raise their own unicorns. United Imaging was groomed by the Shanghai municipal government and it counted the Chinese Academy of Sciences (CAS) as one of its earliest shareholders when it was founded in 2011.

WiC will be launching a dedicated webpage to update the unicorn list on a regular basis – offering more details on the constituent firms.


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