Editorial: Management approaches to portfolio

Which camp are you in? In China, it seems, there is Alibaba and there is Tencent.

Alibaba and Tencent account for 40% to 50% of venture capital flows in mainland China, according to data from McKinsey quoted by news provider Financial Times*.

Their approaches, however, seem slightly different at the operational level in how they engage with portfolio companies.

E-commerce group Alibaba has this week agreed to fully acquire Ele.me, the China-based food delivery service in which it already owns a substantial stake.

Alibaba reportedly invested $1bn in Ele.me May 2017 at a valuation of $5.5bn to $6bn, increasing its share to 23% and Ele.me’s overall funding to approximately $3.35bn in the process. Alibaba and its financial services affiliate, Ant Financial, previously supplied $1.25bn for the company in 2016 at a $4.5bn valuation.

The firm has now bought out Ele.me’s other shareholders, which include Tencent, fellow internet group Baidu and e-commerce company JD.com. Alibaba values Ele.me at $9.5bn.

Ele.me’s early funding came from Matrix Partners, Sequoia Capital and GSR Ventures, before food listings platform Dianping, now part of local services platform Meituan-Dianping, invested $80m in 2014.

Ele.me runs an app-based food delivery service that has a 49.8% share of the market in China, according to Bloomberg, while Meituan-Dianping has much of the rest of the market and is expected to float later this year at about a $60bn market capitalisation.

Alibaba had earlier backed Meituan while Tencent backed Dianping and then followed up to take greater ownership in the joint business after its 2016 merger and buy out Alibaba the following year, which lead to Alibaba turning its attention to Ele.me.

Alibaba has separately recently been taking over its delivery affiliate, Cainiao, and putting money into warehouses as well as investing in traditional retailers, including Intime Retail Group Co. and China’s largest operator of Walmart-style hypermarkets.

In a sign of Alibaba’s focus on adding delivery and logistics to its core ecommerce platform, Zhang Xuhao, Ele.me’s founder, will become chairman of the company, while Wang Lei, vice-president of Alibaba Group, will become CEO of Ele.me, the company said.

Tencent’s approach has been to generally eschew full acquisitions and instead leave greater operational control in the hands of its portfolio company executives. Tencent’s largest acquisition, $8.6bn for majority control of Finland-based Supercell, left the company in Finland under control of its CEO, Ilkka Paananen, and saw Tencent syndicate its stake with financial investors.

In a discussion between Martin Lau, president of Tencent, and Paananen at Slush last year, Tencent’s concern over the impact of taking majority control on the founders and executives was clear. Instead, it would initially (in 2011-2012) have preferred taking a significant minority stake of about 20%.

Given the rise of intangibles in the economy, control versus delegation strikes at the heart of modern business practices. If or whether both companies continue to perform as well in the future might reflect their approaches in management.

* Henny Sender, FT reporter of this article, is to moderate a panel at the GCV Asia Congress on 20 September in Hong Kong.