CVC — Chinese Corporate Venture Capital and Funds

ByteDance, one of China’s newest technology giants, caused a stir in venture capital circles when it dissolved its strategic investment department on January 18, reallocating at least 100 employees.

The company said the move was intended to transfer employees to different business units in order to strengthen internal collaboration. However, outside observers suggested that the decision, together with changes in the company’s investment strategy, represented a step toward compliance with China’s antitrust regulations.

ByteDance’s decision and recent moves by other Chinese technology giants to scale back investments point to changes in China’s corporate venture capital funds (CVCs). After more than a decade as major players in the capital market and important contributors to the development of promising startups, they are now reducing their investment operations.

The Golden Decade of Chinese CVC

From 2010 to 2019, the ten largest companies in China’s investment market by CVC investment volume included Tencent, Alibaba, Fosun Group, JD.com, Baidu, SoftBank Group, Qihoo 360, Ant Financial, Suning Group and Sunac China.

In 2019, ten industry groups, including Tencent, Alibaba, Baidu and Ant Financial, invested a combined RMB 90.5 billion ($14.2 billion). CVC investments accounted for almost 80% of these groups’ total investment volume over the same period.
Chinese companies began making CVC investments in 1998, a relatively late start compared with Western countries. During the first decade, Chinese CVC remained relatively inactive. The sector began to develop in 2010, when traditional industrial giants and technology companies started establishing strategic investment departments.

From 2015, supported by government policies encouraging entrepreneurship and innovation, Chinese CVC entered a more active phase. During this period, the number of CVC organizations exceeded 170. The scale of startups and investment volumes also increased significantly. From 2016, the total investment volume of Chinese CVC became comparable with that of independent venture capital.

Chinese CVC can broadly be divided into two categories: traditional corporate CVC and technology CVC.

In traditional industries, CVC is typically rooted in the company’s core operating business. Such companies usually operate in sectors including media, gaming, real estate, healthcare, logistics, automotive and consumer electronics.

Companies behind technology CVC generally fall into two groups: established technology giants such as Tencent, Baidu and JD.com, and newer mobile-focused companies such as Bilibili, ByteDance and Xiaomi.

Chinese technology CVCs continuously support the development of the real economy while also serving the strategic development of their parent companies, becoming an important part of China’s capital market.

The Investment Landscape of Major CVCs

Today, technology CVC accounts for 20% of the market, while 80% consists of CVCs from traditional industries. Technology CVCs, however, are more active in overseas investment.

ByteDance provides one example.

In the early stages of its development, ByteDance invested primarily in content-related industries connected with its core business. As traffic on its short-video platform Douyin — the Chinese version of TikTok — began to reach its peak, ByteDance started looking for growth opportunities in other areas, investing in education, e-commerce, healthcare, finance, gaming and even more specialized fields such as business services and deep tech.

Data show that ByteDance has invested in 193 projects since its establishment and has increased the number of overseas investments every year since 2019. In 2021, ByteDance invested in 64 companies, with total investment reaching nearly RMB 35 billion ($5.5 billion), equivalent to almost 10% of ByteDance’s total revenue in 2021.
Tencent, meanwhile, operates one of the most successful CVC businesses in China. Its investment department was established earlier than most Chinese CVCs. Tencent is also a shareholder in many well-known Chinese technology companies.

According to IT Juzi, as of December 2021 Tencent, including its subsidiaries, had made more than 1,180 investments. In 2021 alone, Tencent invested in 250 companies, exceeding the combined number of investments made by Baidu, Alibaba, 360, JD.com, Xiaomi, ByteDance and Bilibili.

According to data presented in its third-quarter report, Tencent’s investment projects in 2021 were valued at RMB 1.75 trillion ($280 billion), almost equivalent to the entire 2020 GDP of the northern Chinese province of Shanxi, which has a population of around 35 million.
Tencent prefers to invest in the media industry, particularly gaming, which is one of its core business areas. The company is also active in corporate services, finance, education, healthcare and emerging online food and beverage brands.

Will CVCs Invest Less in Technology?

After ByteDance dissolved its CVC operation, which it called its strategic investment department, copies of purported regulatory documents titled “Rules on IPO and Investment Practices for Technology Companies” began circulating on the Chinese internet.

According to these documents, technology companies seeking to conduct an IPO, make investments or raise funds would have to obtain approval from the Cyberspace Administration of China (CAC) if they met certain criteria: either having more than 100 million users, generating more than RMB 10 billion ($1.58 billion) in revenue during the previous year, or operating in highly regulated sectors such as media and financial services.

Many commentators believed that this document prompted ByteDance to dissolve its CVC department, although the CAC denied issuing such a document. Nevertheless, as Chinese regulators continue to impose antitrust restrictions on leading technology companies, many companies are likely to reduce strategic investments as a precautionary measure.

Even before ByteDance dissolved its strategic investment department, other major technology companies had already begun reducing their ties with portfolio companies.

Alibaba Group first sold its 5.62% stake in media company Caixin in 2019 and exited its investment in Mango Excellent Media ahead of schedule in September 2021, recording losses of RMB 2.3 billion. Alibaba CEO Daniel Zhang stepped down from the boards of Didi and Weibo in late 2021 and early 2022.

Tencent, meanwhile, began reducing its stake in JD.com through the payment of an interim dividend. The company later announced that it would reduce its 2.7% stake in Sea, the largest technology company in Southeast Asia, and give up its preferential voting rights, resulting in a total divestment of $3.1 billion.

CVCs established by technology giants have played a positive role in China’s platform economy, but at the same time they constrain the development of small and medium-sized startups, according to Hu Jie, Professor of Finance at the China University of Political Science and Law.

Leading technology companies sometimes force startups to follow their strategies by holding equity stakes and suppressing competition, Hu added, arguing that startups can survive only by following the rules established by these technology giants.
The Chinese government regards such behavior as disorderly expansion and an abuse of companies’ dominant market positions.

Hu believes that voluntary reductions in technology CVC activity may benefit small and medium-sized enterprises and that Chinese CVC is entering an era of regulated development, leaving behind the period of largely unregulated expansion.

Jasmine Zheng, Ward Zhou, TechNode

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