The new “League of Legends” for startups

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Now, more and more Chinese Internet startups are joining the investment ranks to build their own new "League of Legends". For the alliance? No, they all want to survive in the fiercely competitive Chinese Internet.

Strategic investment departments and industry funds were originally the configurations of first-tier large companies such as BAT3M, but are now becoming the standard configurations of a number of second-tier Internet startups. Companies such as Dianping and Meituan established strategic investment departments a long time ago, and companies such as Chunyu Doctor and e-Daixi have also recently established industry funds.

Public venture capital data shows that since August, there have been more than ten cases of Chinese Internet startups investing in other startups (see the figure below). Starting a business while investing seems to be becoming a trend.

Before a company goes public, it often operates capital, invests in mergers and acquisitions, improves its strengths and boosts its valuation. Two years before Facebook went public, it acquired at least 14 companies; before Alibaba went public, it invested in at least 87 companies.

The difference is that this group of “new investors” with “young faces” not only have to prepare for listing, but they also have to fight for survival.

Born in the special era of China's Internet, startups are creating their own "League of Legends" and showing an "early" trend. E-Daixi, which is valued at US$500 million, and Career Dream, which just completed its A round, have become "investors"

Monetization

For companies that do not yet have a clear profit model, investing in startups is also a way to monetize traffic.

This group of "new investors" have basically escaped the "C round of death" and developed into small giants in a certain vertical field, with a large number of users and leading market share in the niche.

But most of them sprouted in the "cracks" of first-tier Internet companies, or started in areas that giants are unwilling to get involved in, commonly known as dirty and tiring work; or focused on niche areas and specialized in low-frequency areas.

After years of development, even if a company has a leading market share in a niche segment, it either does not have a proven profit model or can only capture a small market share.

What’s even more difficult is that most companies didn’t figure out how to make profits in the early stages of their business, and were pushed to the current stage by capital. Traffic monetization is a problem they urgently need to solve.

Meitu, founded in 2008, was originally a photo processing app. It has now accumulated 980 million users, but its main sources of income are mobile phones and advertising. Chunyu Doctor, founded three years later than Meitu, has a total platform user base of 86 million, 360,000 doctors, and solves more than 270,000 problems every day, but has never had a stable way to make money.

Investing in startups, monetizing their own traffic as resources, directing traffic to the invested companies, and promoting the company's own development in the future. After investing in the nail art O2O platform Meiliyuan, Meitu can direct traffic to the latter, improve the latter's sales performance, and help itself build a beauty economy empire.

Focusing on vertical and low-frequency fields, the market size may not be large enough. Although traffic can be monetized, it is not efficient. Before these companies go public, they may need to expand their product lines horizontally to increase GMV, or integrate upstream and downstream to enhance their bargaining power.

After five rounds of financing, fast fashion e-commerce Meilishuo is facing IPO pressure and has also focused on GMV. In addition to acquiring the "second Vipshop" Tianpin.com and the "second Dianping" Shishenyaoyao, it has also been emphasizing the need to continue to attract more market traffic.

More entrepreneurs need to connect upstream and downstream and increase their bargaining power, and investment is an effective means of doing so.

Dianping started investing in 2014, and in a year and a half, it invested in at least 10 companies (as shown below), including 3 catering ERP companies, 2 CRM manufacturers, 1 commercial WIFI company, 1 catering supply chain platform, and 2 meal ordering platforms. This is equivalent to building infrastructure to enhance the attractiveness and voice of merchants.

However, the time left for startups to improve their internal strength is getting shorter and shorter.

These newly-grown small giants are under attack from big companies like BAT above and start-ups below. Competitors in adjacent tracks are eyeing them eagerly.

They must transform themselves into new platforms faster.

BAT and early platform companies are scrambling to grab land, relying on their traffic advantages and dimensionality reduction attacks, hoping to integrate more businesses into their own platforms.

Public data shows that in 2015, Baidu invested in at least 15 companies, Alibaba invested in at least 13, and Tencent invested in at least 11. New and large companies such as JD.com have also made investments. Their tentacles have already covered all aspects of culture and entertainment, medical health, local life, etc.

What if big companies don’t invest? This is a problem they have to face. Even if BAT or platforms invest, it doesn’t mean they won’t do it themselves in the future. After investing in Meituan, Alibaba is still increasing its subsidies for Taodiandian.

In this year's fierce offline war, e-bag washing felt this pressure very early. "Last year, we had discussed cooperation with the 58 home delivery platform and thought that the other party would be open to cooperation. Later, because the 58 platform's opening ideas were not clear, there was no news for several months." CEO Lu Wenyong realized that "in the future, we still have to have our own barriers and ecology."

This sense of insecurity is still growing. The capital boom has given rise to homogeneous competition and also led to more attention being paid to the market segments. In the future, when these small companies grow up, they may not be able to maintain their advantages in the face of Shengwei's attacks.

After providing laundry and private kitchen sharing services, e袋洗 hopes to build a community neighborhood sharing C2C platform. In the nearby community O2O track, there are already many players who are as ambitious as e袋洗. They are targeting similar users as e袋洗.

Although entrepreneurs in more subdivided fields are still weak, they have planned bottom-up innovation and breakthroughs. There will inevitably be business overlaps in the future, and competition cannot be completely avoided.

Offense is the best defense for these small giants who are surrounded by enemies. It can not only turn potential enemies into friends and buy future moats, but also expand the current leading advantages and increase the capital to fight against large companies. The Wuyou Babysitter, Peiba Mama and Niuniuma invested by e-daixi all follow this idea.

In recent years, the valuation of startups has remained high. If you don’t invest now, you may have to spend several times the price to chase after it in the future, or you may even no longer be able to afford it.

Surprise Attack

After completing multiple rounds of financing, these small giants often have cash reserves in their accounts that can be used for investment, which may lead to higher returns.

The company's business development is continuous. After obtaining a large amount of financing, the startup company does not need so much money for a while. The money is not valuable if it is kept in the account. Inflation and increased operating costs have led to a disguised depreciation.

A former investor gave us this economic account. The cost of using funds for general investment institutions is about 13%. These startups set up industrial funds and use industrial resources to invest in a startup company. With the guidance of experience, it is equivalent to adding to the investment, and the success rate of this company will be higher. In the end, the investment income of the institution is likely to be much higher than 13%.

These small giants have more or less business connections with the invested companies. Their resources are likely to be directly injected into the new companies. After Peibaima received financing from e-bag washing, it used Xiaoe Guanjia, which was exactly what the latter lacked, to speed up the promotion in the community and reduce the cost of educating users.

When a company invests in multiple companies, there is a possibility of chemical reactions between these invested companies, forming a resource matrix.

Perhaps, in the future, more entrepreneurs will be willing to accept this kind of investment.