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This past week was a national holiday in China; my days were spent in various states of eating and food coma rather than research. Our piece today is thus a tad late, shorter than usual and more speculative.

In the shadows of every early 2010s Chinese tech war, lurks the capital of Alibaba and Tencent. Each one picks a horse among the swarm of startups to back*, and then cue a battle of cash burn to the death (or a merger). Not content with straight forward combat on payment, enterprise collaboration and cloud products, Tencent and Alibaba fight proxy battles on many fronts.

In the West, corporate VCs are often labelled with 'dumb money' or being the M&A department in disguise. In China, at least for Alibaba and Tencent, they are kingmakers that can outcompete most financial VCs. They have longer time horizons and deeper pockets than institutional VCs, and bring actual value-adds like consumer traffic and supporting product ecosystems such as payment infrastructure. The battle between every startup and incumbent comes down to whether the startup gets distribution before the incumbent gets innovation. In the West, startups can buy consumer distribution as social networks all monetise through advertising. In China, since Alibaba nor Tencent rely on advertising revenue, distribution can't be brought as easily, it has to be earned. It's not a surprise that among the waves of startup contenders, Alibaba and Tencent's picks (and for a time, Baidu) are always among the favourites to win.

This pattern is so acknowledged that Chinese startups will use the investment activities of one giant as a reason to solicit backing from the other. They know it's picking a team, but not doing so also has its consequences.

"The founding entrepreneur of a young content company in the Sequoia portfolio feared the possible loss of independence by accepting Tencent money. However, she discovered that if she did not allow the company to invest, Tencent's WeChat, the ubiquitous social media platform also used for mobile payments and as an email service, might forever be closed to her content, which would have been far more costly than the loss of independence." - FT

An investment from one company will often prohibit investment and curtail partnerships with the other. Post investment, the startups fight it out figuratively and very occasionally literally on their investors’ behalf. One ex-DiDi product manager on getting into physical fights with Kuaidi Dache workers during the ride hailing wars: ‘the rules were that you can’t throw the first punch, but if a fight did start then you can’t lose the fight’.

What’s in it for Alibaba and Tencent to invest billions in this endeavour? For starters, the user-centric approach of Chinese tech means that every battle for consumer's attention is a relevant one. For both, strategic investments allow increased usage of their respective product ecosystems. While the ride-hailing wars in China between Didi and Kuaidi collectively burnt through millions in rider and driver subsidies, they were a cheap user acquisition and retention funnel for WeChat pay and Alipay (which were the payment infrastructures). Tencent allegedly reached user parity with Alipay through their series of investment partnerships with DiDi and Meituan**. The additional dimensions of user data that comes through these product usage also drastically improves their algorithms. Lastly, the least talked about reason in corporate strategy maneuvers is owning access to an asset for the sole purpose of depriving your competition of access, I'm sure slowness in the shadow wars is one of the reasons Baidu has been falling behind.

The shadow war has become global, as both Alibaba and Tencent have their sights set increasingly on South East Asia and India. We are probably going to see a similar pattern play out in these regions too (if not already in progress with Tencent's investment in Flipkart and Alibaba's investment in Paytm Mall). I wonder how they will fare since their control over distribution is greatly diminished in these regions (if you know more about this, drop me a line!). The old foes are also going through a period of detente now as new challengers are popping up - in the short-video space after their homegrown offerings were bested, they both invested in Kuaishou to try to fend off Bytedance's TikTok. They will also both invest in scarce assets like Bilibili or Little Red Book. I guess the best way to destroy an enemy is to make him a friend.

*Chinese tech is full of horse metaphors, as both Jack Ma and Pony Ma have the same surname of 马, which means horse, Pony's English name is also a nod to this.

** Meituan and Elema have a very convoluted history with Tencent and Alibaba with lots of side switching through acquisitions.

Corrections: In an earlier draft of this essay I mixed up the investment ownership of Ofo and Mobike.

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