From funded to funder: how Tencent places its VC bets

It all started in 2008. That year, social media giant Tencent struck a deal to invest in Outspark, a small US-based gaming company.

Now, 12 years after Outspark’s $11 million Series B, Tencent has funded more than 140 companies outside China. These investments have been part of funding rounds worth a total of $46 billion, a total that includes other investors. Tencent has driven a set of companies that includes Uber, Gojek, and the studio behind popular mobile game “Clash of Clans.”

The idea for this newsletter came from a simple question we asked late last year: Where does Tencent put its money?

We thought finding the answer would be a matter of simply doing a search on Crunchbase. Two days of data cleaning and analysis later, we realized how little we knew. How many companies has Tencent taken a stake in? And in which industries? Good data just wasn’t available. So we decided to dig a little deeper.

I’ve spent the past few weeks scraping and analyzing the data in attempting to gain a more granular understanding of how the company operates around the globe. The data is still incomplete, because in most cases, Tencent’s individual contribution in each round is a closely guarded secret. Moreover, the terms of dozens of deals have not been made public, a common practice in the tech industry.

But what has emerged is a picture of a firm with global ambitions that has fashioned itself into something of a VC, taking stakes in companies unrelated to its core offering. I’ve plotted the data and here’s what I found:

• A third of all the funding rounds in which Tencent participated were focused on gaming companies. The majority of its acquisitions are also in this sector.
• The company has focused on small but numerous investments in early-stage startups. 
• The Covid-19 pandemic has had a negligible impact on Tencent’s investment volumes. 
• Tencent has a sprawling geographical footprint, but nearly half of all the funding rounds it has participated in are US-based. 

A tech VC?

Tencent’s international portfolio dwarfs that of rival tech giant Alibaba—the focus of the last edition of this newsletter. According to my analysis, the number of companies outside China that Tencent has invested in is more than double that of Alibaba.

While gaming is one of Tencent’s most important businesses, the company has spread its bets across a range of verticals. Some have connections to Tencent products, while others appear to be simply companies it believes in.

Tencent invests in a vast array of companies, from those that it pushes billions into, to smaller startups that it deems worthy of a few million dollars.

Mobility is a big-ticket item for Tencent, totaling more than $18 billion in investment rounds, or around 40% of the value of all global rounds in which Tencent has taken part.

But the company looks a lot like a VC. It has made dozens of bets on small, early-stage startups that focus on artificial intelligence, biotech, security, and aerospace.

Tencent’s approach is vastly different than Alibaba’s. While the Chinese e-commerce giant tends to focus on investments that could aid its new retail push, Tencent focuses more on returns.

Pre-Series C startups account for around 40% of all the rounds Tencent has participated in. (Companies up to Series B are widely defined as being early-stage.) The amount of money the company has contributed to these startups makes up just 6% of the total value of the rounds the company has taken part in.

Fifteen of these companies are gaming studios, while 12 focus on fintech. Of all startups from Seed to Series H, the vast majority were Series A or Series A+.

Global focus

Tencent has investments on every continent except Antarctica. Of the country’s more than 900 investments, around 180 are outside China. The company has injected money into several focus industries around the world. In North America and Southeast Asia, the focus is mobility. In these two regions, Tencent has spent billions of dollars on companies including Uber, Tesla, and Gojek.

In Africa, Australia, and South America, Tencent has been involved in high-value investments in fintech. In India, e-commerce comes out on top, albeit by a small margin.

Meanwhile, in Europe, the company has spent the most on gaming firms, including what was—at the time—the largest investment figure in gaming history.

According to the data, Tencent has shown little interest in the Middle East, particularly Israel, which has become a major focus of Chinese tech companies. The one investment we identified in the region was in Phytech, an Israeli firm that provides IoT and analytics services to farmers.

Another trend not represented in our charts: In more mature markets such as the US, Tencent makes lots of small bets in early-stage companies. In immature markets, it makes bigger bets—less frequently—on later-stage companies.

Betting on games

Tencent has attempted to dominate the global gaming industries through acquisitions and investments. Early on, its typical approach was to stay south of a billion dollars. It bought Riot Games for $400 million, its investment in Epic Games cost $330 million, and South Korea-based CJ Games’ venture round amounted to $500 million.

But in 2016, something changed. Tencent spent $8.6 billion on the Finnish gaming studio behind “Clash of Clans.” It stands out as their largest investment in a gaming company, and probably the largest it has made outside China. The only possible larger investment is Uber’s $9 billion fundraise in late 2017, in which Tencent took an undisclosed share.

Founded in 2010, Finland-based gaming studio Supercell started off developing browser games, but quickly made the switch to mobile. In 2012, the company released “Clash of Clans“ and “Hay Day”—both of which became hits in Apple’s App Store and Google’s Play Store. Clash of Clans has remained one of the top-grossing games in the App Store.

Supercell became one of Tencent’s largest-ever investments—made through a Luxembourg-based consortium, of which Tencent owned 50%. The Chinese tech giant went on to take a controlling stake in the consortium in 2019.

The acquisition was the largest in gaming history—only Activision Blizzard’s $5.9 billion buyout of “Candy Crush” developer King came close. For Tencent, Supercell was a means to become a mobile-first gaming company abroad, which executives had previously highlighted as an area of importance as gaming shifted to handheld devices.

Supercell also allowed Tencent to drastically scale its international presence. Because “Clash of Clans” was hugely popular outside China, buying Supercell was a way to quickly increase Tencent’s international market share.

For the most part, the values of Tencent’s gaming acquisitions were not disclosed. Details of the deals were shared in just five cases.

In the past 12 years, Tencent has invested in 11 gaming companies over 43 funding rounds. The value of these rounds total $11.6 billion, excluding those in which the terms were not disclosed.

No Covid slowdown

As Covid-19 began spreading across China in early 2020, the government took measures to limit the impact of the virus. Authorities shut down entire cities, bringing the economy to a halt.

According to the data, however, Tencent kept investing. The company took part in an average of four funding rounds per month during the first half of the year. Thus far, that amounts to 17 investments between January and June. During the same period in 2019, that number was 12.

At this rate, Tencent could outpace its 2015 high of 30 global investments.

Tencent’s sustained investments in the age of Covid-19 set the company apart from other VC investors, who had already been cutting back their investments before the pandemic hit. Tencent also stands alone among its peers, making smaller bets on lots of companies in various sectors in the pursuit of return on its investments.

If this trend continues, Tencent could keep the fire burning through China’s VC “ice age” and a slowdown in investments abroad, giving it more influence over global tech and positioning it for a post-Covid-19 world.