More unicorns are emerging, perhaps too many

By Li Qiaoyi Source:Global Times Published: 2017/9/19 18:38:39

Illustration: Peter C. Espina/GT


It may be too early to get nervous about frothy bubbles in China's Internet sector, but the country's remarkable rise to global fame in terms of churning out unicorns does merit attention.

The world's second-largest economy - one of the twin engines of global Internet development along with the US - has so far this year become home to 29 percent of the global total of 221 unicorns, referring to start-up firms valued at $1 billion or more. Meanwhile, 50 percent are based in the US, according to a white paper jointly authored and published last week by the Boston Consulting Group (BCG) and the research arms of three Chinese Internet firms, Alibaba, Baidu and Didi Chuxing. The white paper on China's Internet economy, the first of its kind, might be China's answer to US venture capitalist Mary Meeker's annual Internet trends report.

In valuation terms, Chinese unicorns are even more prominent, accounting for 41 percent of global unicorn valuations at $796 billion. This is much closer to their US counterparts, which represent 46 percent of the global total, according to the white paper.

The figures may provoke concerns over frothy Chinese unicorn valuations. But as Gao Hongbing, head of AliResearch, Alibaba's research arm, stated at the release event for the white paper, Chinese unicorns' valuations reflect the fact that some of them like Ant Financial and Didi Chuxing are of great size, and therefore prop up the combined valuation of Chinese unicorns. For some unicorns in the country, instead of their valuations being too high, they are too low, Gao believes.

Whether Chinese unicorns are currently valued at a level that justifies their true worth is still open to question. It is fair to conclude, however, that worries about an Internet bubble in the country are overblown, given that the economy's growing shift toward being driven by technology and innovation, and domestic consumers' increasing reliance on mobile Internet services underpin the potential for continuing growth in online consumption.

What's more, massive potential is still waiting to be tapped in various artificial intelligence (AI) applications and businesses. As well as for AI, the current usage of big data and other Internet technologies is far from hitting its limits.

Having said that, the significantly shortened time required for local businesses to be catapulted to the status of unicorns these days should be watched carefully, as there is a risk of China's market potential being taken for granted.

The Chinese market is apparently a promised land for the creation of tech stars, with the white paper revealing that 76 percent of Chinese firms turning out to be unicorns in the years between 1997 and 2017 needed four years to hit the $1 billion mark and 46 percent of them needed less than two years to reach that stage. This compares to 30 percent and 9 percent, respectively, in the case of US unicorns. On average, it takes four years for a Chinese unicorn to be created, while in the US it would be seven years.

China's gigantic market has 710 million Internet users, similar to the combined size of the Indian and US online populations, and this allows local start-ups to see explosive growth that could easily translate user numbers into lofty valuations.

But the rapidly ballooning valuations of some local Internet firms have so far been based too much on the size of the market, rather than whether they have worked out a profitable business model. That the Chinese market is considered by investors to offer quick access to fame and fortune has accelerated the process of a local start-up becoming a unicorn. But if too many succeed in following suit, China's Internet prosperity could be headed for a painful correction.

The author is a reporter with the Global Times.

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