Tencent Investment's tips for spotting the next hit platform

A top dealmaker at the Chinese tech giant shares his insights into unearthing the next generation of ecosystem investment opportunities.

Still kicking yourself that you didn't spot Facebook back when it was a start-up? Don't fret — more platfforms are developing, around the world and in a whole range of different sectors. Here are a few clues for investing in the ecosystems of the future — care of one of China's tech giants.

China’s Tencent expects up-and-coming platform companies will share a few key characteristics: massive computing power, integration of online and offline as well as a trove of proprietary data and artificial intelligence to analyse that data. 

A platform is a company that matches suppliers with demand and, as China’s biggest internet company, Tencent has grown into an aggregator of such platforms. Now Tencent is using the insights it has gleaned to actively search for investments.

For example, Tencent invested in ride-hailing app Didi Chuxing Technology’s Series B financing round. Didi is focused on efficiently matching drivers and passengers.

Forest Lin, managing partner of Tencent Investment said in answer to a question from FinanceAsia that his team invests primarily from the firm's balance sheet. The Shenzhen-headquartered company makes about $10 billion to $15 billion worth of investments a year.

Microsoft could be described as the first platform company and boasted around one billion consumers, said Lin who used to work at the US technology giant. The next generation of platform company could have 25 to 50 billion connection points, Lin added.

An example of online-to-offline businesses might be something similar to Keep App. The app allows users to share their workout results, but also allows them to book online to take part in offline courses in which they can exercise with friends in its gyms using connected equipment.

Apart from brute-force computing power, another characteristic could be massive data collection at an ultra-low cost. 

For example Hikvision, a company controlled by the Chinese government, has security cameras which sell for only around $30 each. Each camera generates about 180 gigabytes of data each every day; collectively, its products collect around 30 exabytes or 1 billion gigabytes, of data a day. Tencent has not invested in this company. 

The new breed of platforms will also be able to command artificial intelligence, like facial recognition firm Mininglamp, which uses its proprietary software for various purposes from fighting fraud in capital markets to locating a child who has been kidnapped.

The potential returns of getting it right are enormous: the largest platform companies have generated returns four times greater than those of the benchmark S&P 500 index since September 2014, with an annual yield of 50%, according to Lin.

“Platform companies enjoy a disproportionate return,” said Lin, who has been at Tencent for over eight years.

There are of course risks to investing in a platform.

Lin has identified the major business-busting mistakes a platform could make including not paying attention to its fiduciary duty to clients, breaking consumers' trust and trying to over-monetise an opportunity. 

For example in a newsfeed, trying to cram too many adverts into the stream of information can impair the reader's experience. 

“It’s really important to resist that temptation,” Lin said at the SuperReturn Asia private equity conference in Hong Kong on Tuesday.

¬ Haymarket Media Limited. All rights reserved.

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