A Brief Guide to China's Newest, and Biggest, Unicorns: The Secrets to their Success
A unicorn is defined as a startup company that is valued at more than a billion dollars. China now has around 164 unicorns, according to a joint study, but this number has increased. China's number of unicorns overtook the US', which has around 132, as of the end of 2017.
According to the 2017 Unicorn Enterprise Development Report, China's unicorns are worth a combined US $628.4 billion. This is still less than the combined value of US unicorns which is worth more than US $700 billion. However, China has created valuable startups faster than any other country, certainly in Asia, over the past five years.
The study puts Alibaba, the Chinese e-commerce giant, as the most prolific investor, with a total of 29 startups it backed having one billion dollar valuations. Its major rival Tencent, China's largest Internet company, was second with 26. The rest were Xiaomi (12); Baidu (8); and JD.com (4) rounding up the top five.
These unicorns were dominant in five sectors: e-commerce, internet finance, health, culture and entertainment, and logistics. The capital Beijing is home to 70 unicorns, with Shanghai having 36. The east coast city of Hangzhou, which is home to Alibaba, has 17; while the southern metropolis of Shenzhen has 13, and Hong Kong four.
Here's a guide to the newest, most notable, and most interesting, of China's unicorns:
Jinri Toutiao (Today’s Headlines)
Written about in The Economist, this smartphone app has appeared in many headlines, which is ironic since it's a news app. Launched in 2012, Toutiao's growth has been phenomenal, and now counts 700m users of its personalised newsfeeds. Key to its success is the way it figures out users' preferences, tailoring content to the individual. The aggregate news platform is powered by sophisticated AI and algorithms that are the pride of parent company Bytedance.
Its 120m daily readers also spend more time on it than other smartphone platforms, an average of 74 minutes a day, which is even more than WeChat, whose users use it for an average of 66 minutes. This stickiness paired with clever ad-matching makes Toutiao an attractive proposition to investors, with some analysts even suggesting it could rival Baidu, China's largest search engine, for revenue generation. Toutiao is reportedly worth around $20 billion.
Founded by a high school dropout, 35-year-old Cindy Mi has led this education startup to global expansion and importance. VIPKID connects English teachers with Chinese students, and has around 60,000 teachers on its online platform. Based in Beijing, VIPKid raised $500m earlier this year at a valuation of over $3 billion. It has grown from having 3,305 students in 2015 to over 500,000 students as of August of this year, according to the company. It generated revenues of $760m for 2017 compared to $300m in 2016.
The success of this company hinges on supply and demand. With only 27,000 qualified North American English teachers in China for around 300 million young Chinese, there is a hunger for good quality English education. But VIPKid's success, like many of the biggest companies, is not just about simple economics; it's about a grand vision, the personal charisma and inspiring backstory of its founder, and the enthusiasm of its employees.
These two bicycle-sharing companies are both based in Beijing and both well into unicorn territory. Users download a proprietary app, scan a QR code or input a pin on a bike, which will unlock. They are then free to ride away, and lock the bike when they are finished. They don't need to be docked. They are rivals fighting it out in China, and around the world, to be the preeminent bike-sharing company.
In Beijing one can see the yellow bikes of Ofo mingling with the metal and orange bikes of Mobike all over the capital. It's a sight repeated across many cities in China. The two companies expanded rapidly, placing their bikes in cities as far afield as Sydney, Australia; Dallas, Texas; and Oxford, England.
Every time a person rides one of their bikes they pay a small fee (based on time and distance) but real value, investors believe, may lie elsewhere such as in advertising and data. Ofo appears to be in trouble however, announcing withdrawals from foreign territories, and large staff cuts. Some investors believe Mobike is the better placed of the two, owing to its more robust bicycles, while others wish the two would merge. Mobike however was purchased by vouchers platform and on-demand delivery company Meituan-Dianping in April for $2.7 billion.
On the streets of China's cities there is no doubt the two companies have changed transportation for many people.
DJI is the world's biggest consumer drone company, taking a massive 72% of the global drone industry, giving it a valuation of around $8 billion. If the company continues to dominate it may well become an even more valuable company. This is because drone hardware development is notoriously difficult and resource intensive as it combines so many fields. These fields, in which expertise is required, includes cameras, computer vision, AI, and deep learning. DJI has managed to combine cutting-edge hardware development while keeping prices that cater to all segments of the market. It is also one of the few Chinese brands that have managed to become a global brand. The Shenzhen-based company has benefited from social media, as many famous YouTubers, such as Casey Neistat (who has ten million subscribers), often use drone shots captured with DJIs. It is an example of a product that manages to deliver on its promise, of excellent performance, with the simultaneous benefit of free marketing on social media.
It is the world's 4th most valuable technology start up, with a 2014 valuation at more than $46 billion, and employs 15,000 people in China, India, Malaysia, and Singapore. Its founder and CEO Lei Jun is China's 11th richest person with an estimated net worth of $12.5 billion. They are the world's 4th largest smartphone manufacturer, after Samsung, Apple, and Huawei. How did they get to this enviable position?
Headquartered in Beijing, Xiaomi has a small number of retail spaces across China where Xiaomi acolytes finger their phones, smart home devices, and laptops, among other devices. Xiaomi, unlike most Chinese consumer tech companies, has a devoted fan base in China, which it actively cultivates.
With an efficient supply chain, demand-driven manufacturing fueling further low-production costs, and longer than usual life cycles for its products, Xiaomi was able to sell higher spec phones for lower prices while reaping higher profit margins the longer their phones were in the market. This created a large user base and Xiaomi expanded into selling internet services; a hugely profitable business and a growth area for the young company.
Xiaomi had a disappointing IPO in July which valued it at less than half the $100 billion it originally hoped for. But in 2017 Xiaomi increased its Chinese market share from 8.9% to 12.4%, and it also became the biggest smartphone vendor by volume in India. However, Xiaomi has yet to headway in European and North American markets. But what is for sure is that Xiaomi's success so far makes it one of the biggest unicorns in China.
Ant Financial was created in 2014, after a rebranding from its former incarnation as Alipay. Since then it has become the world's most valuable unicorn, and the highest valued fintech company. On June 9, 2018, the company raised about $14 billion, a huge fundraising round for a private company, giving it a valuation of $150 billion. In contrast publicly-traded Goldman Sachs is worth a mere $88 billion.
It operates Alipay, widely used in China for e-commerce as well as retail and restaurant payments, and which is the world's largest mobile and online payments platform, and Yu'e Bao, the world's largest money-market fund. It is also involved with the Chinese government's Social Credit System programme.
Customers can use Ant Financial's virtual credit cart Huabei to buy products on Taobao, Alibaba's massive e-commerce business. Or put some of their monthly salary into Yu'e Bao to earn a little interest. But a digital wallet or online bank is nothing new, what has driven Ant Financial's startling valuation is its ubiquity.
With 870 million users already, the company has set its sights on 2 billion users worldwide. "If Facebook started a bank, that's kind of what it feels like," said Joe Ngai, managing partner of McKinsey's greater China operation, in The Guardian, about Ant Financial's scale.
Chinese shoppers spent $12.8 trillion on mobile payment platforms between January and October 2017, in comparison to the $49.3 billion US shoppers paid via mobile, according to data from eMarketer. And there is still room to grow. With over 720 million mobile phone users, only about a third use mobile payments in China.
Ant Financial's ambition to be a "lifestyle platform" with an integration into people's lives hitherto unseen could make its already hefty valuation seem dismal in the not too distant future.
While China's tech giants Tencent and Alibaba battle for the wallets and purses of customers in China's bigger cities, another competitor has emerged, swooping for a less targeted segment of the market: lower-income people from lower-tier cities.
Pinduoduo, in breakneck speed, now rivals JD.com (which is backed by Tencent and sells groceries, electronics and household items among other things) for users with a customer base of 300 million. The biggest e-commerce site in China, Alibaba's Taobao, has 540 million users.
In three years, since its launch in September 2015, Pinduoduo reached a reported GMV (gross merchandise volume) of $6.35 billion for the month of January 2018. In April of this year it completed a round of financing worth $3 billion, with Tencent a lead investor, giving it a valuation of nearly $15 billion.
The Shanghai-based startup has upturned China's e-commerce landscape - so how has it done this, and so rapidly? Firstly it used the idea of "social shopping", using WeChat as a platform, and taking advantage of Groupon's business model where users can buy with friends for a group discount. The satisfaction of getting a big discount, with your own group of friends, helped the new e-commerce platform spread like lightning.
Another key to its success is Pinduoduo's emphasis on cheap goods that appealed to China's emerging market of people with lower disposable incomes. Although this meant the e-commerce company was able to take advantage of a huge neglected segment of the market analysts fear the low cost and low quality association might be a longterm detriment. Complaints and user satisfaction appears to be a recurring problem. In response Pinduoduo set up a consumer protection fund and has become more vigilant over merchant links and dodgy goods.
It is possible that Pinduoduo's GMV will reach a plateau relatively quickly, and will need to find more revenue streams, keep customers returning, and make them happy. Many eyes are on the young e-commerce platform and its future.
Its name means "beautiful vegetable" and it's become quite the beauty to small and medium-sized restaurants who use its app to order vegetables direct from farms to their kitchens. With about 10 million of these restaurants, Meicai has been valued at about $2.8 billion. The Beijing-based startup was founded in 2014 and seeks to go big in the fresh-foods market. Its valuation and funding rounds just goes to show China's scale and opportunities for companies who want to innovate, connect and satisfy their customers.
For more analysis of China's unique unicorns, their effect on China's economy and the insights they throw up, stay tuned for NMG's posts.