Pando

Excellent reasons for Didi to raise this much money

By Sarah Lacy , written on March 31, 2017

From The Travis Shrugged Desk

So, Didi  is considering raising the world’s largest VC deal, some $6 billion led by SoftBank.

It’s as if while Uber was down on one knee, winded on the race track, Didi just swooshed by and grabbed the “ridiculous financial press announcement” baton.

First off: We have to stop calling this venture capital.  

Earlier this week, Edison Research admonished Didi saying: Enough! As the only player in China, DiDi needs to focus on making money.

By why should Didi be different than any other decacorn? This round is a gauntlet thrown down that Didi doesn’t “merely” want a monopoly in China. It intends to be a seriously global player. And as we wrote a few weeks ago: It could win. It will almost certainly be the global leader in ride volume, given the size and urban density of the Chinese market. But Didi is far better positioned than Uber when it comes to global domination.

Rather than wasting billions and operational focus, it has invested in global players like Grab, Ola, 99, Lyft, and even Uber. And it has co-invested in those deals with many of its closest investors like SoftBank, Alibaba, and Coatue.

Edison whines that the only “good reason” for Didi to raise so much capital is to acquire global players, but that would be better done with a stock currency not cash.

First off, I don’t think Didi is raising this capital to out and buy up other companies. I do think it plans on continuing to invest in them, even buying up major share percentages along with this conglomerate of billionaire co-investors.

But there is another excellent reason for Didi to raise this much money: To send a loud signal to all these players in the global market -- and potential Uber backers-- while Uber is looking weaker than it ever has.

Sure, it’s behind Baidu in China’s whole race for autonomous cars, but that race is very different in China than in the US. Ridesharing isn’t some “baller” nice to have like it is in the West, in China companies like Didi are solving very real transportation issues of congestion, low car ownership and spotty public transportation with far more options than simply traditional ride-sharing. If autonomous cars are five to ten years off in the the mainstream of the US, believe me, it’s at least that far out in China, India, South East Asia and other markets.

And as the only ridesharing player in China, Didi has far more ability to control pricing and make a profit. Indeed, it has said even when it was competing with Uber in China it was break even in its largest cities. Didi doesn’t need self driving cars to happen in the near term and to win it in order to live up to its current valuation, the way Uber does.

And my guess is Didi plays it a lot smarter, just as Didi played the game of global expansion a lot smarter than Uber did. It’s possible Didi, for instance, just licenses technology from Baidu or partners with them, rather than trying to compete head-to-head. (Or, you know, allegedly buy stolen technology.)

I’d written before this deal, why I think Didi has the best shot of any of the current deca-corns at eventually building a super unicorn or a company worth more than $100 billion. It’s local market opportunity is just so much greater, it’s played the global game better, and unlike so many US decacorns it is solving an intense actual problem in China.

If I’m right (and I pretty much have been to date when it comes to Uber and Didi…) this would represent a watershed moment for China and Silicon Valley writ large. Already, this was the first time a Chinese company simply out-executed a Silicon Valley startup to become the larger global player-- without the aid of the Chinese government, while both were still “startups” growing their businesses.

Going forward we may see something even more dramatic: China is where more super unicorns are being build than Silicon Valley, at least when it comes to digital consumer products. It’s not just that China has more large problems to solve, a larger, more densely urban addressable market, and has all of the ecosystem pieces firmly in place. It’s that in the US, Amazon, Google and Facebook have simply refused to fall victim to the normal startup to IPO to fat/dumb/lazy public company cycle.

As we’ve written repeatedly: They have stayed aggressive, they have changed the math around acquisitions (it’s never too much if it staves off a potential threat), they have changed their corporate structures to be more like holding companies so that teams can stay nimble, acquisition talent remains after it sells, and leaders can be empowered within the companies. As they march towards possibly becoming the first trillion dollar companies, Facebook is controlling all things people, Amazon is controlling all things place and logistics, and Google is controlling all data. It’s nearly impossible to fight Amazon on anything retail related, and Google and Facebook own north of 85% of the digital ad market.

When I first moved to Silicon Valley some 17 years ago, people freaked out at the idea of competing on the fringes with Microsoft. These three companies taken together are so much more intimidating.

That’s why you see Snap essentially trying to carve off a niche in the consumer market and make it lucrative, constantly innovating to keep that customer base happy. Or as Ben Thompson calls it: “The Gingerbread Man strategy.” LINK

If Snap falters? Well then Snap and Twitter are the only two companies who have turned down lucrative acquisition offers from Facebook. If Snap becomes a new Twitter, Silicon Valley is going to go pattern-recognition apeshit on the idea that you can’t build a $10 billion-plus company in messaging in the US and you are better off selling. (Get ready for all the hot takes now!)

The pressure to sell will be that much greater on the next Twitter or Snap. There’s a scenario where social and messaging and other ad-based consumer content becomes like the pharma industry is now in the Valley: VCs and entrepreneurs “incubate” new “drugs” for the consumer before selling its product into large behemoths who can plug it into their machinery and take it to market.

Uber has to be eyeing this Didi deal with mixed emotions. As part of its deal with Uber, Uber owns a juicy stake in Didi, which could set up a redux of Yahoo and Alibaba. Uber does benefit financially as Didi grows. On the other hand, this is a complicated alliance. There is no love lost between the two companies, as seen by Didi continuing to invest in foreign rivals after that deal occurred. And given everything you know about Travis Kalanick, do you think he’d be content as Yahoo with an Alibaba-like asset? Especially one whose front person is… a woman?