The Changing Role of China’s Corporate Venture Capitalists: From Monopolization to Decentralization

In December 2020, following the last-minute block of Ant Group’s November IPO, which was set to be the largest IPO in world history, China’s market regulator (the State Administration for Market Regulation) opened an antitrust investigation into the e-commerce giant Alibaba. This investigation reflected China’s increased scrutiny of large, deep-pocketed conglomerate corporations. But while the government is targeting conglomerates like Alibaba,  China is also making great efforts to encourage new startup growth. According to a report jointly released by China’s Development Research Center of the State Council (DRC), China’s Ministry of Finance, and the World Bank Group (WBG), the country is aiming to stimulate efficient innovation, boost productivity and build a modern economic system. These efforts to curb conglomerates while encouraging startup innovation will likely have an effect on China-based investors’ domestic and international investment theses and corresponding corporate governance activities, in particular, it will likely have great effects on the role of corporate venture capital in the international startup ecosystem.

According to the Wall Street Journal, investments by Asian VCs represented 40 percent of the record $154 billion in global venture financing in 2017 with Silicon Valley leading the field at 44 percent. It also noted that “U.S. investors now lead less than half of all venture finance, while China’s share is nearly a quarter and growing fast.” Most Chinese VCs are offshoots of China’s tech giants, including Baidu, Alibaba, and Tencent, referred to collectively as BAT. These VC market players are known as corporate venture capitalists (CVCs) – investment groups backed by large corporations. Easily identified, the venture arms of these corporate giants take on their parent company names like Baidu Ventures and Alibaba Entrepreneurs Fund, mirroring that of their American counterparts like Google Ventures (now GV), Intel Ventures, and Microsoft Ventures.

While CVCs invest in startups that traditional VCs also target, their governance structure may not reflect that of traditional VC firms. While traditional VCs report to their limited partners (LPs), CVCs may answer to executive management teams or other company departments. Reporting to a CEO rather than managing partners or LPs gives rise to many different pressures beyond traditional financial returns. That is, when a CVC invests in a startup, many times the startup will then be “invited” to join their company’s unique startup ecosystem, providing them valuable access to the company’s expertise and guidance. Thus, through CVCs’ investment, these giant technology companies can form their own “factions” of small companies domestic and abroad. Once it has joined the “faction,” each startup is only available to their Chinese tech parent’s payment and social media platforms, which hinders their long-term success, limiting them within its parent conglomerates. A significant exception to this “faction” rule is China’s most popular ride-hailing app—Didi Chuxing—which accepts both AliPay (Alibaba) and WeChat pay (Tencent). In fact, Didi Chuxing even expanded its own in-app financial services and is aiming for independence from Alibaba’s Alipay and Tencent’s WeChat Pay. Didi’s long-term success reveals how companies may find success in not being part of a corporate “faction.”

Given that the Chinese government has expressed its interest in breaking up domestic tech giants as well as enthusiasm for cultivating startups (thus promoting innovation), these CVC’s behavioral patterns, particularly the “faction” phenomenon, will also be changed. While nobody can be sure where these Chinese CVCs go, given these CVCs play a huge role in the Asian venture capital ecosystem as well as China’s goal to continue investment in startups, it’s unlikely that they will cease to exist. However, when these tech giants try to “invite” their invested startups to participate in their “clique,” stringent regulatory scrutiny, including antitrust litigation, will likely play a bigger role, leaving room for other investors and other CVCs to contribute to innovation. Thus, no matter the real concerns behind China’s current policy, it at least has one probable effect: to stimulate innovation and prevent the already giant tech companies from becoming supergiant.