Commentary

Blame liquidity when unicorns set up their venture-capital funds

When unicorns start setting up their own venture-capital (VC) funds, you know the tech world is getting frothy.

In June, Singapore-based ride-hailing app GrabTaxi Holdings launched Grab Ventures, shortly after its Indonesian rival Go-Jek Indonesia set up its own Go-Ventures. 

One-time unicorn Meituan Dianping - the Chinese food-delivery firm that just completed its US$4.2 billion (S$5.8 billion) IPO in Hong Kong - raised a US$302 million fund in July for its DragonBall Capital fund. 

What are unicorns doing in the venture-capital world when they still need plenty of their own financing?

Just in the past few months, Grab has raised US$2 billion to double down on its expansion into Indonesia and Go-Jek is close to adding US$1.5 billion more to its war chest.

As for Meituan, its ailing service helped burn through US$1.2 billion for the year ending June.

Blame liquidity.  These days, even private-equity funds, fearful of missing out, have emerged in the venture world. KKR & Co is co-investing with SoftBank Group Corp in Beijing ByteDance Technology Co, a deal that would value the parent of news aggregator Toutiao and video sensation TikTok at US$75 billion.

As liquidity in China's private-funds industry starts to dry up, there are still plenty of angel investors out there. To encourage innovation, the Ministry of Finance stipulated in May that early-stage venture-capital firms can deduct up to 70 per cent of their investment for future capital-gains taxes. As a result, more than 50 per cent of VCs in China are in A-and pre-A rounds, and these funds account for almost 20 per cent of capital raised. 

If there is one lesson from the past decade, it is that tech investors win: Since 2009, the Nasdaq Composite Index outperformed the S&P 500 Index by 250 percentage points.

These generous cheques are pushing back IPO timelines - and, as they mature, unicorns are being forced to buy growth.

For young start-ups, having Meituan or Grab as an early investor is a prestigious talking point. But it doesn't mean these stakes come cheap - in China, at least.

As liquidity in China's private-funds industry starts to dry up, there are still plenty of angel investors out there.

To encourage innovation, the Ministry of Finance stipulated in May that early-stage venture-capital firms can deduct up to 70 per cent of their investment for future capital-gains taxes. As a result, more than 50 per cent of VCs in China are in A-and pre-A rounds, and these funds account for almost 20 per cent of capital raised. 

 

In the past, strategic buyers such as Tencent Holdings and Alibaba Group Holding were often aggressive, wanting 30 per cent to 40 per cent ownership.

That pressured young start-ups to cede control of business decisions, even forcing them to fight for market share at the expense of profitability. If unicorns take a page out of the blue chips' playbooks, they better pay up.

"We do not want strategic buyers to come in too early," said Mr Yipin Ng of Yunqi Partners, an early-stage venture-capital fund, at last week's 31st Annual AVCJ Private Equity & Venture Forum in Hong Kong.

There's a note of caution in all this. Despite its glamorous US$100 billion Vision Fund, SoftBank - loaded up with a tangle of investment arms and non-core businesses - famously suffers from a deep conglomerate discount.

So when - and if - the world's most-valued unicorns go public, they risk coming across as a bit bloated, too.

BLOOMBERG