Climateer Investing: Why Is Uber Competitor Didi Raising So Much Cash?

Tuesday, June 6, 2017

Why Is Uber Competitor Didi Raising So Much Cash?

From the Nikkei Asian Review:

Chinese ride service has conquered rivals, but faces other threats

Chinese ride service Didi Chuxing raised $5.5 billion in May, adding to more than $10 billion it raised last year. Assuming it is no longer burning through $1 billion a year as it did during its fight for Chinese market share with Uber, Didi now has a staggering cash balance for a startup, perhaps as much as $13 billion.

This is very strange. Since when do startups raise and then just sit on this much cash? Especially since Didi is now a near-monopoly in China, having conquered its two largest rivals. Following Didi's take over of the local operations of Uber and Kuaidi Dache, Beijing's CNIT-Research recently put its market share at 94%.

So what is the rationale for raising all this money? In the press, the commonly cited motivations for Didi's latest fund raising are international expansion and investment in self-driving cars and artificial intelligence.

Yet other explanations are worth considering. Start with opportunity: If you're a rock-star Chinese company and there is a lot of money being offered to you cheap, why not just take it? At a valuation of more than $50 billion, the $5.5 billion raised in May represents only about 11% of the company. It is generally far better to raise money when you don't need it than when you do.

Moreover, Didi is still likely only mildly profitable, if at all. A big cash pile can secure a long runway before an initial public offering is needed. It also scares off competitors. Most critically, it can enable spending on research and development as well as acquisitions far beyond what can be financed by operations. Given that President Jean Liu is a Goldman Sachs veteran, you would expect a lot of deals in the company's future.

Finding growth

Indeed, Didi likely needs new paths to growth. Beijing, Shanghai and other Chinese cities have imposed regulations requiring that ride-sharing drivers hold local residency. In theory, this could eliminate 90% of Didi's drivers as they are primarily rural migrants. That would be a body blow to the company's core business of providing ride-sharing in China.

How strictly the rules will be implemented is not clear. Didi has responded to the new rules by pursuing city operating licenses. It is worth pointing out that Didi, and previously Uber, operated ride-sharing services in a legal grey area in China for most of their existence. Ride-sharing was explicitly made legal only in mid-2016; the recent restrictions on eligible drivers have thrown the industry's status into doubt.

Didi has been an aggressive growth company from the start. It started with taxi-hailing then moved to ride-sharing. Now it is moving into car rental and integration with public services. It is also seeking a role in artificial intelligence, auto financing and shuttle services. Didi is thus pursuing key roles in the whole range of transportation services in China. So raising cash to continue its aggressive growth makes sense, especially with doubt shadowing its core Chinese ride-sharing business.

Another natural use of the newly raised funds would be to expand abroad given that Chinese app users are already going abroad in great numbers. Didi led a $100 million fundraising round for Brazilian ride-sharing app 99 in January and earlier invested in India's Ola, Southeast Asia's Grab and American app Lyft as part of an alliance of the four companies to take on Uber globally. In March, Didi opened an R&D center in Silicon Valley. I would not be surprised to see another string of international investments over the next twelve months, especially in Southeast Asia....MUCH MORE