In its Q3 financial report, Tencent’s investment income is very eye-catching. After adjustment in accordance with non-IFRS, as of September 30, 2020, Tencent’s total income from investment companies reached RMB32.3 billion yuan.
As of November 5, 2020, Tencent has invested in more than 790 companies. Among them, there are many listed companies that may bring direct benefits to Tencent. These include China’s most successful tech companies, including Bilibili, Douyu TV, JD.com, Meituan, 58. Other promising private companies include Didi Chuxing, Chehaoduo Group, Kuaishou, Zhihu, Himalaya Audio.
But Tencent has also invested in failed companies, currently 24 startup projects invested by Tencent have been shut down. Among these failed projects, most of them received Tencent capital in the series A round or before, mainly with Tencent leading the investment, but the single round investment amount is small, and the total financial value is less than RMB5 billion yuan. So combined, these failed projects won’t impact Tencent financially.
But it’s still useful to examine these cases to learn what lessons investors can draw from one of the biggest investors in China’s tech sector. One failed project is Gaopeng.com, which is a group buying startup co-founded by Groupon and Tencent.
On February 28, 2011, the Chinese version of Groupon’s group buying site "Gaopeng.com" was formally announced. Tencent and Groupon invested US$50 million (approximately 325 million yuan) respectively. According to media reports at the time, "Both sides hold 50% equity." This strong background made Gaopeng.com the unmistakably future winner for China’s group buying segment.
Unfortunately, Groupon’s stock price fell from a high of $500 to below $100 in the year after its listing. Gaopeng.com also performed poor amid intense competition of China’s domestic group buying websites. The site was eventually combined with other Tencent business that disappeared later.
Another failed investment, Kaixin.com, is positioned as a white-collar social networking site. It was established in 2008. After 18 months, the number of users has increased from 300 to 60 million.
In October 2011, Tencent strategically invested in Kaixin.com. The amount of investment was not disclosed. According to reports, Tencent may have invested around US$100 million.
According to analysis, the main reason for Tencent’s heavy investment in Kaixin.com is to weaken competitors, seize the white-collar high-end user market, and make up for the age gap of the QQ population to consolidate Tencent’s absolute position in the social field.
After Tencent’s investment, third-party applications and game developers can simultaneously access and operate their applications on the open platforms of Tencent and Kaixin.com. However, Kaixin inevitably declined after users are diverted to other platforms.
Tencent has also invested in an education O2O company called Crazy Teachers for two consecutive rounds. In June 2015, Tencent exclusively invested in the Crazy Teacher’s series B with an amount of US$20 million. A year later, Tencent once again invested RMB120 million yuan in a series C financing of Crazy Teacher. On April 30, 2019, Crazy Teacher ceased operations after not being able to sustain operations.
Another failed investment is Essential Phone, founded by Andy Rubin, the father of Android. The stellar background made the start-up company attract much attention, and it received US$30 million in Series A financing when it was first established. In June 2017, Tencent, Amazon Alexa Fund and others participated in Essential’s B round of US$300 million in financing, with a post-investment valuation of more than US$1 billion. In February 2020, Essential announced the suspension of operations and closed.
So, what lessons can investor learn from Tencent’s failed investments? Tencent’s failed projects fall into four categories:
1. When Tencent wants to break into a field that it is not good at.
2. When Tencent has been the lead investor or exclusively invested in many related projects at home and abroad in the gaming and social networking fields where it is strong itself.
3. When Tencent followed hot trends of the time such as the O2O craze.
4. When investing in random sectors such as smart hardware wearable brand "Pacewear", smartphone brand and consumer electronics brand "Essential Phone".