Koubei, an affiliate company of the Alibaba Group, has completed a $1.1-billion equity financing led by private equity (PE) major Silver Lake. CDH Investments, Yunfeng Capital and Primavera Capital also participated in the round.
This transaction provides Koubei with a strong capital base to execute on its aggressive growth strategy, with Alibaba intending to use Koubei as a vehicle for competing with Tencent-backed WeChat, which has expanding its footprint into domains such as online payments, in-store payments, ecommerce, fintech, and other areas competing with Alibaba’s service ecosystem.
The post-money valuation of Koubei is now estimated at $6.9 billion with aggregate equity funding raised at $2.1 billion. This places Koubei firmly in unicorn territory (i.e. $1 billion market capitalisation) and closer to decacorn (i.e. $10 billion market capitalisation) territory.
This development was reported in a December quarter 2016 announcement by Alibaba Group, which noted that the transaction occurred this month. Koubei, a local service joint venture (JV) with Ant Financial, generated RMB73.1 billion ($10.5 billion) in payment volume transacted through Alipay during the December quarter, representing a 52 per cent increase over the prior quarter.
Koubei originated as a life search engine in 2004 providing information on living consumption, restaurant entertainment, house renting, house buying, working, travelling, and more. Its two major channels are restaurants and entertainment transactions. In addition to this is also provides release, query, and transaction services about house renting information and secondhand house dealing information, in addition to a credit system in the field of domestic classified information.
This positions it as a player in China’s growing online-to-offline sector (O2O), competing with other Chinese Internet majors to attract and retain consumers in their networks.
Increasingly sophisticated middle-class social shoppers are having an impact on Chinese e-commerce, according to a McKinsey survey, which indicates that growth potential exists in the travel, dining and transportation services segment .
However, McKinsey also notes that a flood of liquidity since 2015 has created market distortions in the form of deep discounts and subsidies in China’s O2O market. This is likely to continue with Alibaba backing Koubei and Tencent backing Meituan Dianping; both Internet service majors will be seeking to tie customers into their respective service and product ecosystems.
The trend of women driving O2O commerce will also see both firms tailoring their market and product strategies to appeal to female customers. According to an eMarketer report, consumers with a higher education level were more likely to engage O2O service, with the most common service that was engage being food – including both restaurants and food delivery – which ties into higher usage by women.
Additionally, with low-tier cities seeing higher expenditures on O2O commerce than high-tier cities in China, this latest investment will likely see Koubei tailor its growth strategy to target these various cities, with the additional angle of connecting them to Alibaba’s retail ecosystem.
In the long term, given news of discussions with Russia’s Sberbank of a JV, lessons from Koubei’s growth strategy could also aid in tailoring Alibaba’s growth strategy for Russia and Central Asia, using their growth strategy for China’s Tier 3 and Tier 4 cities as a model.
In an exchange with the New York Times, Ken Hao, a Silver Lake managing partner and managing director, said, “This is how Alibaba wants to get those people — the customers who go to restaurants or to local convenience stores — to transact and bring them more fully into the Alibaba ecosystem.”
Silver Lake has previously backed Alibaba, having invested $500 million into the e-commerce major in 2011 and 2012. This investment yielded a stake valued at $5.1 billion during Alibaba’s initial public offer (IPO).
In a December 2016 report, Yunfeng Capital, a fund backed by Alibaba co-founder Jack Ma, and PE firm Silver Lake were reported to be planning on investing in Koubei, which was established by Alibaba and Ant Financial to compete with Meituan Dianping.
On-demand local services have attracted major spending in past years and have become a costly battleground for Chinese internet companies from Alibaba to Tencent Holdings Ltd., as more people turn to the web to order take-out, schedule beauty treatments and hire domestic helpers. Alibaba was originally an investor in Meituan along with Tencent but fell out with its partners and exited the venture to focus on Koubei.