The situation has changed from "What if BAT copies you?" to "What if BAT doesn't invest in you?"

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October is the golden autumn. For the Chinese Internet, it is also a "harvest" season. In October, many events have occurred that have changed the Internet industry, and even the entire Internet landscape. Let's review them together:

• On October 8, Meituan-Dianping merged to form the new Meituan-Dianping, once again pulling Tencent and Alibaba into the same O2O boat (the last time was the merger of Didi Kuaidi), with a valuation of US$17 billion. Dianping, which was established 12 years ago, was sold to Meituan, which was established 5 years ago. The two loss-making companies joined forces to reduce price wars;

• On October 12, after selling to Tencent, 58 Daojia sold its shares to Alibaba again for US$300 million, with a valuation of US$1 billion.

• On October 15, Shenzhou Special Car and eDaijia officially cooperated, sharing brands and products to fight against Didi, which also suffered huge losses;

• On October 16, Alibaba acquired Youku Tudou-based Tudou for $4.5 billion in cash;

• On October 17, Tencent joined hands with JD.com to launch the "Pin Shang" platform. This was seen as JD.com, which had an annual loss of $800 million, once again getting closer to Tencent, and Tencent once again successfully infiltrated JD.com.

• In the first half of 2015, there were a lot of mergers and acquisitions in the Internet industry. Alibaba invested 590 million in Meizu; Didi and Kuaidi, which were burning money, merged, bringing Tencent and Alibaba, two mortal enemies, into the same boat in the field of private cars; 58, which lost 79.3 million US dollars in the first half of the year, acquired Ganji; Ctrip, the only profitable OTA company, acquired eLong, which continued to lose money...

In this series of mergers and acquisitions/investments, the industries and sizes of the mergers and acquisitions vary, but there are two similarities:

1. Profitable companies merge with loss-making ones, and high-valuation companies merge with low-valuation companies

The basic rule of the industry is that companies with high valuations (high market share) acquire companies with low valuations (low market share). After all, companies with high valuations have promising prospects. VCs are also willing to promote this in order to gain a larger share and stop losses to avoid price wars. The acquisition of loss-making companies by profitable companies is also a new emerging trend. Internet companies, under the hype of VCs, believe in exchanging losses for market share and using prices to attract users. There are only a handful of profitable companies. Their competitiveness is unmatched by their peers who have grown up with price subsidies. Many profitable companies have used mergers and acquisitions to suppress new models and eliminate competition, or to add fresh blood to the investment team, or to quickly gain market share in a niche market.

1. Profitable companies merge with loss-making ones, and high-valuation companies merge with low-valuation companies

BAT is just like what Sun Haiying said in the advertisement, how come you are everywhere? In 2015, BAT once again made its presence felt: Alibaba participated in more than 10 investments of nearly US$4 billion; Tencent participated in 10 investment events in Q2 alone, covering the fields of entertainment, local life, medical health and automobiles; Baidu was also not ambiguous. For a time, mergers and acquisitions became an arms race among BAT. The diverse industrial layout and financial investment were dazzling, forming another landscape besides VC investment.

Since the second half of this year, the market has taken a sharp turn for the worse. The most direct manifestation is that even Baidu, Alibaba, and Tencent have stopped recruiting, with only outflows and no inflows. The continuous decline of the secondary market and the sluggishness of Chinese stocks in the US stock market, as well as the closure of the listing window, have brought panic to the primary market, and the cold winter has arrived. The capital winter has swept the entire venture capital field, and the Internet industry, which has the most bubbles, has been hit the hardest. According to the data from the China Venture Capital Research Institute, the financing amount of China's Internet industry in Q2 2015 was only half of that in Q1. At the same time, the fundraising of venture capital funds has also declined. According to a research report by Zero2IPO, the newly raised capital of Chinese and foreign venture capital and private equity investment institutions in July 2015 was US$3.886 billion, a decrease of 51.4% compared with the fundraising scale of US$7.996 billion in June, and a decrease of 17.4% compared with the fundraising scale of US$4.705 billion in the same period of 2014. The cold winter has arrived, and the pattern of the Internet will also bring about huge changes.

The future belongs to cash flow positive companies

Positive cash flow companies have self-generating capabilities, can continuously develop themselves, gain more opportunities, and occupy a place.

1. Profit is king. Only companies with positive cash flow (self-generating ability) can occupy the market.

In the eyes of Internet natives, people who enter the Internet from industry have a common problem, that is, they are too conservative and too focused on positive cash flow, which limits the speed of enterprise development. Companies that are willing to burn money for subsidies can quickly seize the market with price advantages, occupy the minds of users, and gain more favor from capital. Of course, it would be even better if they can kill their competitors in the middle of the process. In fact, exchanging profits for the market is tantamount to drinking poison to quench thirst. In the end, the data will decline if you don’t burn money, and it will be difficult to sustain burning money, and you may even have to damage future interests in order to burn money. VC is a marijuana, which will definitely make you feel so good that you can’t stop. For example, Yidao Car Rental had to announce a $700 million financing from LeTV on October 20 after burning money and it was difficult to sustain.

Only companies with self-sustaining capabilities can survive the capital winter. Capital is like flies, they appear wherever there is fishy smell, and never appear where there is no fishy smell. Capital is the most stingy. Don't expect capital to help you in times of need. When there is no hope in the capital winter, you can only rely on the company itself to survive. Only three types of companies can survive the capital winter:

• Companies that have the ability to generate their own blood and grow on their own, such as the three major portals that found the SP profit model after the Nasdaq index plummeted in 2000. You may not even remember the names of the companies that died during this period;
• Companies that have already stored up a certain amount of surplus before the cold winter, such as 58 Daojia in this cold winter, and Alibaba, which survived the 2008 financial crisis with the US$1.7 billion raised from its listing on the Hong Kong Stock Exchange at the end of 2007;
• Companies that were forced to reduce their valuations, such as JD.com, had no money to raise after Lehman Brothers collapsed in 2008. After launching its Series B financing, its valuation dropped from $160 million to $60 million, which led to JD.com making four or five bridge loans. In the fourth round of financing in 2011, Letao's valuation was only $80 million, but in the same period of 2010, Letao's valuation was $250 million.

Undoubtedly, the first is the most benign way of development, while the third is very lucky to raise funds at a loss, and most companies can't survive it! Taking the O2O field, which burns the most money, as an example, in 2014, as many as 846 companies received A round investment, while the number of companies that received B round dropped sharply to 225, and there were very few C rounds. C round financing is like a steep cliff. Many companies face the inevitable "C round death". After the capital chain is broken, the company can only starve to death. If there is a positive cash flow, many companies can survive.

2. Profitability is the endorsement of a company’s good operational capabilities

Under the same conditions, the more profitable a company is, the easier it is to be favored by capital. Profitability is the proof of the internal strength of an enterprise, which cannot be achieved by simply burning money. Similarly, in the stage of large-scale investment that requires profit in exchange for market share, companies with profitability and profit experience can make capital more assured, because you can burn money more efficiently and more cost-effectively, which is the only way for companies to stand out under the accelerated maturity of capital. Otherwise, there will only be no capital, and the company will shrink rapidly and then die. Therefore, VC's pursuit is not to make you spend money, but to spend money more efficiently than competitors.

3. Profitability allows companies to expand new strategies without constraints

As the old saying goes, when the granaries are full, people know etiquette; when they have enough food and clothing, they know honor and disgrace. If an adult is busy filling his stomach every day, then don't expect much room for development in the future. The same is true for enterprises. When they are constrained by financial support and may run out of money at any time, the only thing they can do is to survive, not to live better. The most direct example is Dangdang.com. Except for the 2014 fiscal year, it has been in the red since its listing. In the first half of 2015, it lost 81.4 million yuan. Constrained by funds, Dangdang, which was established 16 years ago, is still forced to shrink in the book field. Even the expansion of new businesses familiar with reading in Q1 was packaged by PR as giving up profit and aggressive expansion. Little did they know that the market value of JD.com, which Li Guoqing has always looked down on, is more than 67 times that of its own.

Of course, if you have a "real father" who is willing to support you unconditionally, you can't do without unconditional support. Tencent Paipai, Weibo, Baidu, and Baifa are examples. Once the real father is ruthless, he is even more cruel than VCs; or you are lucky enough to find a godfather who supports you unconditionally, such as Vancl, which can never fail with Lei Jun; JD.com, which is unique in getting Xu Xin, a hot girl, to support it without limits; Nuomi, which has 20 billion yuan and is not worried about food and drink. If you are not sure whether you have this luck or charm, then you can think about whether burning money to exchange for market is suitable for you. Of course, expecting to get a salary and use the company to improve the industry's reputation instead of building a successful enterprise is another matter.

4. VCs’ profit-seeking nature leads to their inherent short-sightedness and natural conflicts with enterprises

The source of VC funds is time-limited, ranging from eight to ten years to three to five years. When the funds expire, they need to be liquidated, which is the main source of profit for VCs. The mechanism of VC profit sources determines that their investment period must be short-term and medium-term, and it is impossible for investors like Soros to hold for a long time. Therefore, what capital wants to do most is to ripen the company as quickly as possible like KFC ripens white-feathered chickens, and then increase the valuation and quickly find new buyers to sell. In a certain period, VC can ripen the company, give birth prematurely, and even consider killing the goose to get the eggs.

However, entrepreneurs generally hope to build a long-lasting business, to establish a century-old company, and to continue to expand and improve their business. Therefore, there is a natural conflict of interests between VCs and enterprises. In order to achieve the goal of rapid maturity, VCs also have many means, such as gambling.

The role of the gambling agreement is to protect VCs and constrain entrepreneurs. It uses KPIs to force entrepreneurs to establish a short-term and medium-term incentive mechanism that is consistent with the goals of VCs, prompting entrepreneurs to focus on profit growth during the gambling period and ignore long-term plans. The gambling agreement may cause entrepreneurs to sacrifice future development opportunities to achieve short-term gains, and even have to damage the foundation of the company in order to achieve the gambling period goals. From the perspective of the company, this is not necessarily a good thing. Therefore, my friend Chu Feng, the CEO of Yueji Network Technology Co., Ltd., would rather take Hong Kong's industrial capital than the investment of famous VCs when choosing financing. You know, the price offered by VCs is more attractive.

There are many companies that succeeded because of gambling. Mengniu's performance growth far exceeded the predetermined profit target of the gambling agreement with Morgan Stanley, and achieved a 550% return on investment. Mengniu executives also received stocks worth billions of yuan. But more gambling ended in corporate failure. ChinaHR.com failed to go public due to the gambling agreement with Monster, so it had to be sold at a low price. Xu Xin, who was in charge of the operation at the time, withdrew all his money. South Beauty also lost control due to the failure of the gambling agreement with CDH Investments. Yongle lost control in the gambling agreement with Morgan Stanley and CDH Investments and was acquired by Gome.

At the same time, compared with foreign capital, Chinese capital itself is more speculative, which leads to its impatience in cultivating markets and industries. Foreign general funds generally last for 7-10 years, while Chinese Internet funds only last for 3-5 years, so Chinese VCs are more aggressive than foreign ones.

Why BAT is a better "takeover man"

Tencent and Alibaba both have a market value of 180 billion US dollars, Baidu has a market value of 50 billion, and annual revenues of 23.8 billion, 23.4 billion, and 13.1 billion yuan, respectively. They are all super cash flow companies. As the Internet companies with the highest market value in China, BAT has a huge imagination space in every move. The question that entrepreneurs used to be unable to avoid was what to do if BAT copied you? The question that cannot be avoided now is what to do if BAT does not invest in you? How to choose BAT? Of course, the BAT mentioned here is not limited to BAT, but also includes a few healthy Internet companies with extremely high cash flow and high valuations like BAT.

1. The Matthew effect makes BAT's competitive advantage more obvious

BAT is ahead of others because they are ahead of others. Because of the accumulation of capital and business operations for more than ten years, BAT has unbreakable relationships between people and information, people and goods, and people. The Internet industry itself is a highly monopolized industry. The second largest company must die. BAT has more possibilities than emerging companies. The enrichment of resources and talents has exacerbated this trend. The Matthew effect is particularly prominent in the Internet because the product form of the industry changes too fast. It has been less than 20 years since the discovery of the Chinese Internet in 1997, but the overall industry has gone through five waves of adjustment. This is unimaginable for traditional industries. Television has been the same for 40 years, and the first personal computer is still what we can imagine 40 years later! Therefore, IBM, cocacola, and BMW can thrive, but the Internet industry has only given birth to BAT. It is possible that X, which is on par with BAT, is still in its growth stage.

From the development of web1.0 to 2015, the entire Internet was still in the form of traffic. As long as enough traffic could be gathered, commercial success could be achieved. This was the case for the three major portals, online games, and BAT. No matter how the Internet develops, BAT still firmly controls the most huge product and user resources. BAT's new product attempts can easily gain a large number of users, which is an advantage that other emerging products cannot match. This is why the rise of new products with huge markets is increasingly affected, and what should you do if BAT copies you? That's why Bona President Yu Dong made a surprising statement, predicting that film companies will work for BAT in the future.

2. BAT needs to expand its moat and strengthen its core advantages through mergers and acquisitions

With the rise of Internet+ and Internet thinking, services and customer segmentation have become more important. How to provide users with better services (such as the resulting community, Luoji Siwei is valued at 1.32 billion yuan) and how to segment customer groups (such as Vipshop, which focuses on special sales, and Xiaohongshu, which focuses on overseas shopping) have achieved great development. The development of the Internet is too fast, and product forms are emerging in an endless stream. A company's own resources cannot take into account all aspects. Simply relying on "plagiarism" to copy the success of opponents has become an increasingly difficult task. Therefore, BAT has aggressively acquired shares in companies through mergers and acquisitions.

In the past few years, BAT has entered multiple fields such as finance, entertainment, travel, medical care, education, local life, O2O, etc. through a large number of mergers and acquisitions. Data shows that 80% of the top 30 unlisted Internet startups in China have BAT behind them, but BAT's capital footprint is not limited to this. The three giants have invested in 30 listed companies and hundreds of unlisted companies, which hints at the breadth of BAT's layout.

3. BAT is more likely to be on the same boat with enterprises than VCs, and not be short-sighted

BAT itself started from the enterprise and has its own ideas and goals for the enterprise development stage. This is the biggest difference between BAT investment and VC investment. BAT investment is nothing more than four types: 1. Existing business complementarity; 2. Emerging business layout; 3. Financial investment; 4. Eliminating innovation and eliminating competition. Through the failure of Paipai, Youa, and Laiwang, BAT realized that there are some things that they can't do by themselves, and they can't do them even if they spend time and money. Therefore, future entrepreneurs don't have to answer the question of what if BAT copies you, they just need to make good products. Regardless of the investment motivation, BAT's interference in enterprise development and short-term target supervision are much looser than VC. BAT investors do not have the account period restrictions of VC, and their interest in pure financial investment is weaker than business complementarity, so they are willing to exchange long-term development for short-term benefits. But no matter which one, for entrepreneurs, there is an additional exit channel and new direction for development.

4. BAT is the best “buyer”

For entrepreneurs, if there is no step-by-step financial support from VCs, no matter how the development trend is, it is easy to end up dying in the C round, because the exit channels of VCs are too limited. One way is to find a new buyer to exit, whether it is a new investor or a merger and acquisition, but mergers and acquisitions are not so easy to achieve. Youku Tudou, Didi Kuaidi, and Meituan Dianping, which we are familiar with, were all achieved under the mediation of the VCs of both parties to the merger and acquisition. Without a common investor, mergers and acquisitions are also impossible. Another way is to wait until IPO, but IPO is too strongly affected by policies, and it is easy to have the window closed or go public at a loss.

The situation is different for BAT. Because of the corporate characteristics of BAT, entrepreneurs have an additional choice. They can not only be increased by BAT, but even be wholly acquired by BAT if the product fits the needs, thus enjoying a second spring of development. For example, on January 24, Baidu announced the acquisition of all the shares of Nuomi.com held by Renren, and in June it invested 20 billion yuan to continue the investment; on February 10, Alibaba paid 1.1 billion US dollars in cash to acquire the remaining 72% of AutoNavi, increasing its map business; on February 19, the news that Tencent bought 20% of Dianping.com was finally settled, with the goal of upgrading local life services. There is no doubt that the BAT camp is determined to fight against O2O, and the pace is accelerating.

5. BAT’s resource advantages are what startups lack

The biggest support that BAT provides to enterprises is not money, but people and resources. Each BAT company has its own most unique and unrepeatable resource advantages. Tencent has WeChat and QQ; Alibaba has shopping data such as Taobao; Baidu has search data. BAT are all huge traffic entrances. If startups are connected to the traffic value will be enormous. From JD.com's access to WeChat, Weibo sharing Alibaba's shopping data, and Qunar's access to Baidu's Zhixin plan, they have all created huge value for them.

The Internet has a huge Matthew effect, and the first-mover advantage is very important. The resources provided by BAT are also of great help to the development of start-up companies.

With the development of big data, an indispensable part of the cross-emergence of data is massive data. BAT is a massive data source. BAT will eventually be open, but to whom will it be open? The decision-making power to connect those information islands lies in the hands of BAT. It is particularly important to connect to the BAT system through investment!

The cold winter is the best opportunity. In the cold winter, the pressure of funds prompts companies to pay attention to how to spend money more efficiently, which helps them reduce losses and even turn to profits. However, can the deformed Internet that has been led astray by capital return to the path of sustainable development? I am afraid not!

When the tide recedes, we will know who is swimming naked. When external funds are cut off, we will know who can survive. No matter who it is, it will not be the entrepreneur who continues to lose money. Yu Gang left because of the continuous losses of No. 1 Store; Zhou Hang had to lose control of Yidao Car Rental, which was losing money; Dianping and Meituan each had to merge...

Going public is the goal of entrepreneurs, but what does it matter if they go public under a loss-making situation? Gu Yongqiang led Youku, which had no hope of profitability, to a downward valuation, and finally had to surrender to Alibaba; Dangdang, the largest online bookstore that continued to lose money, still managed to survive in a corner; Maclean's, the first e-commerce stock, was struggling to survive; Sohu's portal value was 0... Compare the market value of BAT, NetEase, 360, and Momo, which remained profitable...

Don't let Amazon's high valuation "convince" or confuse yourself. Amazon's high valuation is unique in Nasdaq. Of course, it is also due to Bezos's efforts to build Amazon into a company that exchanges current profits for future markets. It is also a company that has absolute dominance in the retail market and has no competitors at all. This model cannot be replicated.

Xu Xin of Capital Today said: The Internet only has large companies and small companies, but no medium-sized companies. I would like to say: The Internet only has BAT and companies with positive cash flow. Non-profit companies will either become BAT's food or die quietly, whether it is winter or spring!