Chinese internet giant Tencent’s billion-dollar India bet

Tencent Chairman and Chief Executive Officer Pony Ma Huateng attends a news conference announcing the company's results in Hong Kong, China March 17, 2016. REUTERS/Bobby Yip

In April, when Tencent Holdings Ltd ploughed $700 million into India’s most valuable Internet start-up Flipkart, it sent out a clear message to the country’s rapidly growing start-up and venture-capital ecosystem: the Chinese Internet behemoth means business.

It was a landmark moment of sorts for Tencent in India when it decided to lead the mammoth $1.4-billion funding round in Flipkart, alongside eBay Inc. and Microsoft Corp.

Over the past two decades, Tencent has dominated the Chinese Internet economy. Well over two-thirds of China currently uses Tencent’s popular messaging apps WeChat and QQ.

In fact, WeChat’s user base nearly rivals that of the global instant messaging phenomenon, WhatsApp: over a billion people in China use WeChat on a daily basis.

But even as Tencent rose to become China’s most valuable Internet entity over the past two decades, the Chinese internet giant realized that it still faced significant challenges.

First, the Chinese internet market is rapidly approaching saturation point, with little wiggle room left for more rapid growth.

Secondly, even with its billion-plus user base, Tencent has not been able to achieve what WhatsApp has—commanding a truly global customer base.

Armed with this realization and several billions of dollars, Tencent set its sights on India. And that’s why Tencent’s recent bets on two of India’s most valuable Internet start-ups—Flipkart and cab-hailing service Ola—assume extra significance.

In India’s venture capital (VC) ecosystem, Tencent is already being seen as one of the most influential and closely-watched investors in the country’s internet business—in the same league as the likes of Flipkart’s first major investor, Tiger Global Management LLC, and Japan’s SoftBank Group Corp.

Internet behemoths

What makes matters more interesting is the fact that these recent bets have also put Tencent in direct competition with another Chinese internet giant, Alibaba Group Holding Ltd, which has so far backed India’s most valuable digital payments service—Paytm—among others.

For both Tencent and Alibaba, India is easily one of the top markets outside China. As the Chinese internet market matures, Tencent and Alibaba need to keep entering other markets to keep up their growth rates and valuations.

And, given India’s exalted status as the last, big unconquered internet market in the world, Tencent plans to plough billions of dollars into India over the next three years, according to two people familiar with Tencent’s plans for India who spoke on condition of anonymity.

While India’s internet market is a fraction of China’s, it offers a large pool of users—a key metric in the internet business.

Photo: Reuters; Graphic: Sarvesh Kumar Sharma/Mint

So far, Tencent has invested close to $1.5 billion in Indian start-ups, including $700 million in Flipkart. Tencent first invested in Indian start-ups in August 2015, when it led a $90 million round in digital health platform Practo Technologies Pvt. Ltd. Its other investment is messaging app Hike.

India’s largest cab-hailing service Ola (ANI Technologies Pvt. Ltd) said on Wednesday, 11 October, that it had raised $1.1 billion in fresh funding from Tencent and existing investor SoftBank Group.

Ola said it was in advanced talks to raise another $1 billion from existing and new investors, thus rounding off what may turn out to be a $2 billion funding round.

“Ola’s unique local offerings are tailored to India’s burgeoning transportation needs. The strategic partnership with Ola makes it possible for Tencent to be part of the fast-growing ride-hailing space in the country. We look forward to helping Ola further develop India’s transportation solutions,” said Martin Lau, president of Tencent.

Tencent now has a significant presence in four large areas: e-commerce, digital healthcare, cab ordering and messaging. It’s looking to enter more.

Tencent has held talks to invest in online insurance retailer Policybazaar (EtechAces Marketing and Consulting Pvt. Ltd), said two other executives on condition of anonymity. Those talks haven’t yet led to a deal, they added.

So far this year, Tencent has not wasted any time in doubling down on India.

Tencent has also hired former Sequoia Capital executive Tejeshwi Sharma to help scout for new investments in India, said the first two people mentioned above.

Chris Huskey, a Tencent executive based out of Hong Kong, also tracks the company’s India investments closely, they said.

Tencent did not respond to an email from MintAsia seeking comment.

It set up shop in India in 2014 and planned to grow its messaging app WeChat. That bet did not pay off as Facebook-owned messaging app WhatsApp quickly built a monopoly in messaging.

In 2016, Tencent shifted its focus to investing in Indian internet start-ups.

Valued at more than $400 billion, Tencent is one of two giant Chinese internet companies (the other being Alibaba) that are in a rush to establish a global presence.

In the year to December 2016, Tencent earned a net profit of $6 billion on revenue of $22 billion, according to its annual report.

Its platform is unlike anything people in India or the US have seen: Tencent generates a majority of its business from WeChat and QQ, which are all-in-one platforms for gaming, shopping, social networking and even payments.

“Tencent believes India is behind China by 5-10 years. It thinks India will play out in a somewhat similar way to China; so, it is placing bets early. It will start getting operationally involved in some of the companies within the next two years. Tencent will back its portfolio companies that see traction, and also wants to increase its stake in them,” said one of the first two people cited above.

The Tencent-Alibaba battle is a continuation of the rivalry that the two have already established while fighting for dominance of China’s internet economy.

The rivalry also recalls the battle between Amazon.com Inc. and eBay Inc., which in the 2000s were fighting each other in their home and global markets.

Tencent-Naspers  vs  Alibaba-SoftBank

Tencent has close links with two other investors in India—Naspers Ltd and SoftBank.

Naspers, which owns large stakes in Flipkart, food ordering platform Swiggy and travel website MakeMyTrip, is the biggest shareholder in Tencent, and played a key role in persuading Tencent to invest in Flipkart.

In China and some other markets, Tencent has co-invested with SoftBank, which is the largest shareholder in Alibaba.

The two combinations of Tencent-Naspers and Alibaba-SoftBank are likely to play a key, intertwined role in determining the shape of India’s internet business.

“Tencent is targeting the sweet spot around Series D and beyond. Till a few years ago, what we saw was a dearth in early-stage investors and plenty of late-stage bets. At that time, late-stage was a crowded space. What is happening now is a reverse of that situation. And Tencent wants to take full advantage of the fact that there aren’t too many late-stage backers at the moment,” said a partner at a VC firm that has co-invested with Tencent in India. He requested anonymity.

“While they are taking a long-term approach towards India and are in no rush to return money to LPs (limited partners) like other VCs, they are adopting a VC-like approach when it comes to investing in India. For now, they are happy taking strategic stakes in the likes of Flipkart and Ola—and a few years down the line, they might forge an alliance with Naspers and buy out one of them. They are really bullish on India as of now and they are here for the long haul,” added this person.

Tencent, which is a Hong Kong Stock Exchange-listed holding company, already owns a plethora of companies in the media, entertainment and internet commerce space in China.

Now, the challenge is to replicate its past successes in India.

“They have several billions of dollars on their balance sheet at their disposal. And, given that China is witnessing a fair amount of saturation right now, Tencent wants to ensure they don’t miss out on India, which they see as the last-remaining major internet economy in the world,” said the second person cited above.

To ensure that it does not miss out on India, Tencent has already taken steps to ensure a significant presence in the top-tier of the country’s internet business.

It is already among the most active foreign investors in start-ups in India. The Shenzhen, China-based company has backed a wide variety of ventures in India, including Practo and Hike.

According to the five executives cited above, top executives from Tencent have made numerous trips to India over the past 18 months, meeting a wide range of entrepreneurs and investors.

Executives tracking Tencent’s recent moves in India feel that the Chinese internet giant may find it difficult to dislodge the formidable SoftBank-Alibaba alliance in India, even with its combined forces with Naspers.

Over the past 18-24 months, Alibaba and SoftBank have become intimately connected, especially with their joint backing of Paytm.

Tencent’s moves in India come at a time when the internet economy is currently witnessing a slowdown in entrepreneurial activity.

According to data from Tracxn, a start-up tracker, the number of new start-ups has now dropped steeply for two years in a row.

That, however, is unlikely to deter Tencent.

According to the five executives mentioned above, Tencent will not spare any expense to get the upper hand in India.

“They have billions of dollars at their disposal. Like Amazon, even if they decide to plough in $5 billion in India over the next 2-3 years, it’s not even going to make a dent to their balance sheets,” said the third person cited in the story.

This article was first published on LiveMint.com.