Despite high money burn rates, Tencent and Citic’s investment of US$100 million in Didi Dache shows that their motivation goes beyond profitability
Right after New Year’s day, Chinese taxi booking app Didi Dache has announced that it has secured Series C funding amounting to US$100 million, comprising mainly US$60 million from Citic and a follow-on investment of US$30 million from Tencent. This follows its successful Series B and Series A funding rounds earlier last year, which saw it raise US$15 million from Tencent and US$3 million from GSR Ventures respectively.
On the face, it may seem that Didi Dache is doing well, and that its business fundamentals are strong enough for investors to readily turn a profit. However, a report from Sina shows that both Didi Dache and its competitor, Kuaidi Dache, are ramping up promotion efforts to capture market share, with Kuaidi Dache spending nearly 100 million yuan (US$16.5 million) on lucky draws, cashbacks and loyalty programmes. Previously, Didi and Kuaidi have spent nearly 80 million yuan (US$13 million) and 50 million yuan (US$ 8.3 million) respectively on similar promotions.
Such high burn rates will tend to cause caution among most investors, raising questions about the startup’s profitability. However, in a Chinese-language article published on QQ Tech, correspondent Lei Jianping argues Didi Dache provides a value to investors that go beyond mere profitability, letting them establish yet another foothold in China’s burgeoning tech space.
Lei points out one of the few areas in China still relatively untouched by the Internet is the realm of taxi booking, which stands in contrast to shopping, communication and employment, which have all been transformed by Internet companies big and small. In addition, taxi bookings provide yet another opportunity for Chinese tech firms to market their mobile payment systems, expanding their reach and consumer awareness.
Next, Didi Dache holds considerable clout in China’s online taxi booking market. According to 163.com, Didi’s presence in over 32 Chinese cities and a user base of over 20 million is second only to Kuaidi, which covers 40 cities and has a similar user base. Currently, over 70% of Didi’s bookings come from eight major cities including Beijing, Shanghai and Guangzhou, with the implication that there still remains a potential for growth in the other 24 cities that Didi covers.
Finally, Lei believes that this round of investment provides Didi the necessary funds to continue its promotion efforts, which is essential in capturing market share and generating awareness in the burgeoning Chinese online taxi booking industry. Eventually, though not likely before the end of 2014, there will come a point where customer awareness and market consolidation will allow a healthy profit to be generated.
With this investment, Tencent and Citic have shown that they are playing the long game, trading immediate profitability for a chance at a relatively untapped sector with plenty of room for growth. Only time will tell if their decision turns out to be correct.