The Kingmaker Strategy: Pioneered By The Chinese Internet Giants, Coming To America?

Editor’s note: Jeff Richards and Jixun Foo are Managing Partners at GGV Capital, a $2.2 billion venture capital fund focused on the U.S. and China. GGV is an investor in Alibaba Group, MediaV, Meilishuo, Quixey, Qunar, UCWeb and Youku Tudou.

A few weeks ago, Chinese e-commerce giant Alibaba made a number of announcements at its annual developer conference. Several announcements surrounding its mobile strategy related to a Silicon Valley startup called Quixey. What is a $200 billion+ e-commerce giant doing with a startup based in Mountain View, Calif.?

It’s the latest example of the kingmaker model we’re seeing the Chinese Internet companies execute very well:

1)     Pick a fast-growing leader in an important emerging category

2)     Make a sizeable (more than passive or minority) investment in the company, often taking a board seat

3)     Go “all in” to help drive the smaller upstart to new heights and outright leadership in its category

It’s a pattern we haven’t yet seen take hold in the U.S. but believe we might.

Alibaba and Quixey Focus on Mobile Search

Quixey is an emerging player in mobile search. Alibaba led the company’s $50 million Series D round of financing in October of 2013, taking a seat on the company’s board of directors. Since that time, the two companies have been working closely together, with Quixey CEO Tomer Kagan and COO Guru Gowrappan spending a significant amount of time in China.

At the recent Alibaba developer conference, Alibaba announced that Quixey would power mobile search on YunOS, Alibaba’s mobile operating system. The two companies are also focused on building out a strong mobile developer network in China. Quixey remains an independent, private and VC-backed company but has Alibaba as an anchor partner for China in addition to the many advantages of Alibaba’s global resources.

This deep collaboration between a Goliath and its smaller, upstart investment target is a model we haven’t seen historically in Silicon Valley. For the most part, and almost without exception, large technology companies prefer to pursue one of two paths: 1) Keep an “open” playing field, letting many smaller companies compete equally in its ecosystem, or 2) outright acquire an innovative upstart thereby accruing all of the benefits of the strategic alignment to the mother ship.

The key difference in the kingmaker model is component No. 3 above: the Chinese Internet giant’s willingness to pick a winner and go “all in.”

We’ve now seen this model take hold and work well several times in the past few years. Beyond the Alibaba/Quixey example, here are a few others:

Tencent and Didi, Alibaba and Kuaidi go after China’s Taxi Market

Didi and its competitor Kuaidi are the top taxi-hailing apps in China. In late 2013, Didi raised a round of over $100 million led by Tencent. In Q1 2014, Tencent promoted and subsidized rides on Didi via WeChat and its WeChat Pay feature.

Talk about strategic value: In fewer than 90 days, daily bookings went from 350,000 per day to more than 5 million per day and passenger accounts went from 22 million to more than 100 million (source: TechinAsia). Kuaidi has seen similar growth via its investment from, and partnership with, Alibaba.

Why are the Internet giants so focused on taxi hailing? Beyond the attractiveness of the (very large) market, think mobile payments – taxis represent a daily use case for Chinese consumers.

Baidu and Qunar Align for Online Travel

Not surprisingly, China is the world’s fastest-growing travel market, with a double-digit growth rate. Back in 2011, the total online travel market in China was approximately $20 billion in annual bookings, but analysts expected this number to reach $55 billion in 2015 and $75 billion in 2017. With this in mind, in June of 2011, Baidu purchased a majority stake in Qunar, a VC-backed, private company with a lead position in the online travel space.

The two companies also structured a deep, multi-year partnership focused on search traffic and revenue sharing. Qunar remained an independent company, completed a successful NASDAQ IPO in 2013, and today sports a $3 billion market capitalization.

In addition to these three examples, Alibaba recently made a $1.2 billion investment in Chinese Internet video leader Youku Tudou, Qihoo took a significant position in adtech leader MediaV, and Tencent owns a significant stake in vertical commerce leader Meilishuo.

This is not to say the Chinese Internet giants are afraid of outright acquisitions. Alibaba invested in mobile browser leader UCWeb in 2009 and 2013, and acquired the company outright in 2014. UCWeb is a core element of Alibaba’s mobile strategy, and has gone on to extend its leadership in China and India. Tencent invested in Internet gaming leader Riot Games in 2009 and acquired the company outright in 2011. With Tencent’s distribution and user base, Riot Game’s League of Legends has gone on to experience enormous success in China.

A Recent Sign of the Kingmaker Strategy Coming to Silicon Valley?

Will we see U.S. companies begin to pursue the kingmaker strategy any time soon? Microsoft famously made a $240 million investment in Facebook in 2007, several years prior to the company’s IPO. But it would be a stretch to argue that either side went “all in” with the other, and Microsoft’s investment was for a passive, minority stake (though one that turned out to be quite valuable).

On the other hand, Intel’s recent $700 million+ investment in Cloudera (in return for an ownership stake estimated to be in the high teens, percentage-wise) is more in line with the Chinese model.

The Chinese Internet giants may beat their U.S. counterparts to the punch, with Tencent and Alibaba leading the charge. In addition to Riot, Tencent has made investments in Activision Blizzard and several other American online gaming companies as well as a few players outside the sector like

Over the past 24 months, Alibaba has invested in mobile video app Tango, e-commerce site ShopRunner, online gaming company Kabam and next-gen television remote player Peel (in addition to Quixey). These have all been minority investments to date, but given the success in China, we may see a more active approach over time.

Given the rising activity from their Chinese competitors, it would not be surprising to see U.S. companies step up their investment activity and potentially even attempt to pick a category winner and “kingmake” an emerging player or two. It’s working pretty well for Alibaba (market cap: $230 billion), Tencent ($150 billion) and Baidu ($80 billion).