China Startups Struggle to Escape the Shadows of Alibaba and Tencent
In their IPO filings, rising companies are warning investors that the tech giants’ deals can feel like a trap.
More big Chinese tech companies are going public these days than American ones, thanks to heavy investing by Alibaba Group Holding Ltd. and Tencent Holdings Ltd. But the largesse from the tech giants comes at a price. A review of initial public offering filings by Chinese companies shows that while the startups benefit from the cash and customers Alibaba and Tencent provide, the deals can also feel like a trap. They can give Alibaba and Tencent inordinate voting power through board seats and veto rights; come laden with conflicts of interest over hiring, mergers and acquisitions, and other strategic decisions; and deepen the startups’ dependence on traffic from the larger companies to life-and-death proportions.
Almost two dozen companies have flagged Tencent or Alibaba as risk factors in their IPOs in the past two years. They include Meituan Dianping, the food-delivery giant aiming to collect $6 billion in a Hong Kong IPO, and social-shopping site Pinduoduo Inc., which raised more than $1.6 billion in its July offering in New York. “Failure to maintain our relationship with Tencent could materially and adversely affect our business,” Pinduoduo said in its filing, a warning typical of the genre.