The latest funding round for Beijing-based Didi Chuxing shows that investors in high-growth technology companies are turning to debt rather than equity amid concerns about lofty valuations and cut throat competition.
Uber’s China rival has just closed a $7.3 billion fundraising, which includes $4.5 billion in equity and $2.8 billion in debt. The latter component comprises a $2.5 billion syndicated loan led by China Merchants Bank and $300 million in debt from China Life.
It is not a route typically employed for tech start-ups since most early stage companies have irregular cash flows and adopt asset-light models, that leave little or virtual no value for creditors in the event of bankruptcy or liquidation.
In Didi Chuxing’s case, however, both China Merchants Bank and China Life are already existing equity investors.
Since it was set up four years ago, Didi has grabbed an 80% share of China’s car hailing market. The company claims 15 million registered drivers, 300 million active users and 14 million rides per day.
“It may be smarter and more conservative to invest through debt with equity participation attached, whether in the form of convertible notes or, with warrants attached,” said Keith Pogson, a senior partner at accounting firm EY. “Globally investors are starting to get nervous about down rounds where shares are sold for less than the previous valuation.”
So far this has not affected most large Chinese technology start-ups. But it has not been the case elsewhere.
In March, for example, a mutual rund run by Morgan Stanley trimmed the valuation of India’s e-commerce giant Flipkart by 27% to $11 billion. The devaluation may force the company to accept a down round if it needs to raise fresh capital any time soon.
One US venture capitalist told FinanceAsia that Didi needs to acquire new advanced technology from Apple, Tencent and Alibaba in order to beat Uber, which is well equipped to integrate its service with other leading car and technology companies. "Big data is the next frontier in the ride-sharing arms race," the venture capitalist said.
The $4.5 billion equity component for Didi's latest fundraising includes $1 billion from Apple, $600 million from China Life, and an undisclosed amount from Ant Financial, Alibaba’s financial affiliate that owns online payment company Alipay.
Didi says it now has more than $10 billion in cash on hand. Proceeds from the new fundraising will be used for big data research and operations, as well as new business ventures.
At $28 billion, Didi's new valuation represents a signficant step up from $16 billion last September. Just over a year ago, it was only worth $6 billion when the current venture was formed through a merger of two competing taxi-hailing companies.
Didi’s valuation is almost half of Uber’s $68 billion. However, the former only operates in China, while the latter has operations in more than 70 countries.
Didi says it is profitable or break-even in half of the 400 cities it operates in, while Uber expects to be profitable in China over the next two years.
Uber’s China unit is valued at $8 billion and the company has labelled the country its “number one priority” even though it is burning through $1 billion there annually.
Many local observers believe home grown Didi has an advantage over its US rival, thanks to its strong backing from domestic tech giants such as Tencent and Alibaba. Both Didi and Uber are still spending heavily on promotion and subsidies to keeping their customers loyal.
China Renaissance advised Didi Chuxing on its latest funding round.