Opinion: Chinese startups should consider Tencent and Alibaba their allies, not enemies

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This article is part of Tech in Asia’s partnership with GGV Capital where we publish articles that feature the firm’s valuable insights. This article was co-authored by Zara Zhang, investment analyst at GGV Capital. Hans and Zara also co-host 996, the most popular English-language podcast on tech and entrepreneurship in China. You can listen by searching “996” in any podcast app. For more articles from GGV Capital, go here.

China’s two tech giants, Alibaba and Tencent, have a combined valuation of US$1 trillion. Together, the two have divvied up the vast majority of Chinese people’s time spent online (and increasingly offline as well). Out of the top 20 most used apps in China, 15 are either owned or invested in by Alibaba or Tencent, according to QuestMobile.

This has led to the perception that Chinese startups are only pawns in a game dominated by giants. Some have said that the realistic outcome for any internet startup in China is to be acquired or controlled by Alibaba or Tencent, and Chinese VCs would only invest in a startup if they can see this happening. So, the narrative goes that the two giants will stifle innovation in China, as companies will be sold to or controlled by one of the “Ma’s” (i.e. Alibaba chairman Jack Ma or Tencent chairman Pony Ma).

We respectfully disagree.

We would argue that Alibaba and Tencent are increasingly willing to help startups succeed by strategically investing in them. This is a vast improvement from the old days, when the giants used to directly compete against smaller players, often easily destroying them by creating in-house copycats.

As recent as early 2010, Tencent was notoriously known as “the king of copying.” Whether it was gaming, social, or commerce, whenever the company saw a promising startup on the scene, it would develop a similar product in-house and leverage its vast number of users (thanks to QQ) to crush the startup. According to an article, the standard question that VCs asked founders at that time was: “What would you do if Tencent copies you?”

Then, around late 2010 to early 2011, a shift started to happen. Tencent came to realize that instead of doing everything by itself, it might be better off investing in startups and helping them grow. Several factors led to the change:

1. Tencent suffered significant backlash following a vicious battle against internet security company Qihoo 360 (“3Q War”), which shocked China. It badly needed an image makeover.
2. In 2008, Facebook launched Facebook Connect, allowing users to log into other websites with their Facebook credentials and move their social graph anywhere on the web. This move helped the social media giant extend its influence. It also impressed many Chinese tech leaders who came to see the value of a more open internet ecosystem.
3. In 2011, Tencent launched WeChat, which gradually evolved into a “super app” that’s akin to an operating system. Tencent now has an ecosystem where all kinds of companies can integrate their service into, allowing it to easily direct traffic to smaller players it invests in.

Moreover, the rise of Alibaba made Tencent realize that it could hardly compete with the former alone.

Let’s take ecommerce as an example. In 2006, Tencent launched a C2C ecommerce platform called Paipai, which was similar to Alibaba’s Taobao. But even with traffic from QQ, Paipai was a latecomer and never caught up with Taobao. Tencent, a social and gaming king, didn’t seem to have the right genes to pull off ecommerce on its own. It then tried investing in the top three and four players in several verticals to catapult itself into category leaders (such as OkBuy/Hao Le Mai, an online shoe-seller, and Yixun, the electronics seller).

The players that Tencent invests in nowadays are not pawns, but allies. And they are strong players in their own right.

But these companies had operational issues, and Tencent was not able to turn them around simply by directing traffic to their sites. The company eventually learned that it needs to invest in the best player in each category in order to have a chance to catch up with Alibaba in ecommerce and on-demand services. The players that Tencent invests in nowadays are not pawns, but allies. And they are strong players in their own right.

In 2014, Tencent sold its ecommerce business to JD.com, and bought 15 percent of the latter’s stock. Thanks to the partnership and its own operational acumen, JD.com has become a formidable competitor of Alibaba’s. Its market cap has almost tripled to US$72 billion since it went public in 2014.