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Kuaishou IPO boosts biggest rival to China’s TikTok

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Gu Jing spends two hours a day filming himself skinning pigs and salting their legs, or sautéing giant woks full of pork.

He posts these short clips to an app called Kuaishou, the biggest rival in China to ByteDance, which owns TikTok and its Chinese sister app Douyin.

Mr Gu’s charms have won him 74,000 fans, and many of these have now started to buy his preserved pork cuts. “At first I was just sharing . . . soon people started to ask me if I can sell them the food I showed in the videos,” explained the 26-year-old, who now earns roughly Rmb20,000 ($3,100) each month, twice what his fellow villagers in central China’s Hubei province earn in a year.

Analysts believe Mr Gu’s rising fortunes reflect Kuaishou’s wider potential. More than 262m Chinese check the app an average of 10 times a day, and Kuaishou, which is set for a splashy initial public offering in Hong Kong this week, is increasingly persuading those users to buy products from its online stars.

The app, which is likely to hit a valuation of over $60bn at its IPO, got its start about a decade ago when investor Fisher Zhang discovered a paralysingly shy entrepreneur named Cheng Yixiao.

Mr Cheng was building programs by himself in his Beijing apartment for people to make GIFs, small animated images, on their smartphones. “He had no motivation to make money at that moment, he was doing it out of passion,” said Mr Zhang. “We wrote him the first check.”

GIF Kuaishou, as it was first called, soon pivoted to seven-second video clips as smartphones grew more powerful and network connections became faster. But the app was a chaotic jumble of amateurish clips, mostly selfies or home videos. “Money was running out and user growth was stuck,” said Mr Zhang.

The team solved the problem by recruiting Su Hua, a former Google engineer, who built an algorithm to analyse user behaviour and push personalised content to viewers. “Within one year, the company’s user numbers went up 100 times,” said Mr Zhang. 

Today Mr Cheng leads product, Mr Su is the chief executive and Mr Zhang is a director. His VC firm 5Y Capital holds a 16.7 per cent pre-IPO stake in the company. 

Gu Jing sells his meats on Kuaishou

To make money Kuaishou embraced livestreaming, where hosts entertain viewers for hours in real time, and hope to earn money by people showering them with small gifts, such as a virtual beer sticker (Rmb1.5) or golden dragons (Rmb1,400).

These stickers flash across the screen of the app, showing a fan’s appreciation, while hosts interact and respond to comments. Sales of these virtual gifts, from which Kuaishou takes roughly a 45 per cent cut, represented 95 per cent of the app’s revenues in 2017.

But the share fell to 62 per cent in the nine months to the end of September, and only grew by 10 per cent year-on-year in the period. Analysts said viewers were feeling the pinch because of the coronavirus pandemic.

In response, Kuaishou has dialled up its adverts, with sales growing by 213 per cent on-year in the period, powering a total revenue increase of 49 per cent to Rmb41bn. 

Mr Zhang said the company would continue to grow its ad business, noting it was following in the footsteps of tech giant Tencent which has slowly increased the ad load in its hugely popular social media platform WeChat. Ads on social platforms contributed Rmb18bn in the third quarter for Tencent, or 14 per cent of total revenue. Tencent holds a 22 per cent stake in Kuaishou.

Column chart of Revenue (Rmb m) showing Kuaishou diversifies its revenue streams

Kuaishou vs Douyin

A $60bn market capitalisation would leave Kuaishou worth roughly one-third of its rival ByteDance, which created TikTok, the first genuinely successful global app to come out of China.

Even though Kuaishou pioneered the short video format, in some ways, Douyin, the Chinese version of TikTok, is far ahead. It generates more than three times the advertising revenue per user hour of Kuaishou, according to estimates from analysts at Bernstein, for example.

Lillian Li, author of the Chinese Characteristics newsletter, says Kuaishou prioritises engagement between users and creators, which can create friction for viewers, whereas users of Douyin passively flip through an endless stream of viral videos.

But fostering closer ties between users and creators on the platform may pay off in other ways, Ms Li suggested. “You can take them [the fans] further down the monetisation funnel, so not just ads but tipping or buying on your recommendations,” she said.

Kuaishou is looking to capitalise on those recommendations from streamers and says it sold Rmb333bn worth of goods through its app in the 11 months to November 30. Analysts at Avic Securities estimated Douyin registered Rmb200bn in livestreaming orders last year, while market leader Alibaba took Rmb500bn.

For Mr Gu, the butcher-cum-creator, sales are about equal on Douyin and Kuaishou even though he has six times the fan count on Douyin. “People on Kuaishou are more down to earth,” he said. 

Making money from livestreaming ecommerce remains in early stages for Kuaishou. The category in its account that holds this unit, and other growing businesses, made Rmb2bn in the nine months to September 30, roughly 5 per cent of total revenue.

The rivalry between the two short video giants is fierce. They have traded lawsuits alleging various malpractices, and this month, when Douyin announced it would give away Rmb2bn in gifts for the Chinese new year, Kuaishou jumped in a couple of days later with a pledge of Rmb2.1bn.

Ms Li notes the two apps are converging to some degree as they replicate one another’s best features.

A hiccup in its global ambitions

Kuaishou’s rivalry with ByteDance led it to create an ill-fated international competitor to TikTok last year.

Zynn briefly topped Android and iPhone app download charts in the US last year after promising cash payments to users for signing up and watching videos. But it was quickly undone by allegations from TikTok stars that their videos were being posted on to Zynn without their permission. 

Google and Apple pulled the app, eventually reinstating it after changes were made. Kuaishou’s 867-page prospectus does not mention Zynn but notes that “one of our international apps was temporarily removed from certain app stores”. It has also faced problems in India where four of its apps were banned last year, along with more than 200 other Chinese apps.

The international push, along with the launch of Kuaishou Express, a new app that mimics Douyin more closely, helped to send its sales and marketing fees up 256 per cent in the first nine months of last year, swinging the company to a Rmb9bn operating loss. 

Line chart of Monthly active users (m) showing  Douyin's user count quickly overtook Kuaishou

Mr Zhang said internationalisation remained in the company’s long term plans. “Chinese companies have competitive advantages, they can go beyond China,” he said, noting TikTok’s success was a sign of what is possible.

Regulation at home

But there are further challenges for Kuaishou at home as regulators take aim at both the content in livestreams and the safety of products being sold.

China’s National Radio and Television Administration released new livestreaming rules in November banning minors from gifting and limiting the amount any single user can tip, while also possibly requiring platforms to hire more censors to moderate content.

Meanwhile, China’s market regulator is taking aim at the sales of food over livestreams that is not up to safety standards, which could potentially affect not only Mr Gu, but hundreds of thousands of other farmers selling their homemade goods on the app.

Mr Gu said he was fully licensed and not worried about new regulation. “My product is safe,” he said.

Additional reporting by Nian Liu in Beijing



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US Spac boom lures UK tech companies in blow to London

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Some of Britain’s most promising tech businesses are considering stock market listings in the US, amplifying the pressure on the UK to change listing rules at a time when ministers are keen to show an ambitious strategy for the City after Brexit.

UK tech businesses, including used car site Cazoo and health app Babylon, are discussing potential mergers with US special purpose acquisition companies, according to people familiar with the talks.

Other so-called Spacs, blank-cheque vehicles that hunt for companies to buy and bring public, have also approached Darktrace, these people said, although the cyber security company is more likely to opt for a straight UK listing. The companies declined to comment. 

The flurry of interest, which comes after UK electric vehicle company Arrival listed in the US through this channel last year, highlights the prickly environment in the UK for Spacs, which are proliferating rapidly on the other side of the Atlantic. Bankers and lawyers are lobbying for a swift change in UK rules.

“The appeal of doing a Spac is severely limited in the UK,” said Jason Manketo, capital markets partner at Linklaters. Current regulation makes London “less competitive particularly for tech IPOs and founder-led IPOs compared to the US”.

Bar chart of amount raised ($bn) showing US Spac frenzy overwhelmingly dominates that of the UK

The US Spac craze has become the dominant equity capital markets trend, with more than 173 vehicles raising $55.2bn so far this year, according to Refinitiv data.

Some UK and European companies are fielding a “frenzy” of offers, according to their executives and investors, as US sponsors look to deploy capital before the two-year deadline to complete a merger expires. 

In Europe, mobility start-ups Tier and Voi, best known for their fleets of rented electric scooters, have also been approached. Voi and other European start-ups are fielding “a lot” of interest, said Fredrik Hjelm, chief executive of Sweden-based Voi. While he said it was “too early” for Voi to go public, like many of his peers Hjelm is maintaining an open dialogue with a small number of Spac sponsors “to understand it and take a stance on how, when and if”. 

LVMH founder Bernard Arnault and former UniCredit chief Jean Pierre Mustier earlier this month announced plans for a European Spac listed in Amsterdam to snap up financial companies in the region.

In the UK, though, the key hurdle is a rule requiring a Spac’s shares to be suspended once a target is chosen. Share trading cannot resume until a deal prospectus is published. That means Spac shareholders who dislike the target and want to sell can find themselves locked in. Only one Spac has chosen London since the start of 2020.

Bar chart of amount raised ($bn) showing European sponsors are increasingly listing Spacs abroad

Former EU commissioner Jonathan Hill has been urged to make London more Spac-friendly under his review of UK listing regulations that is due for release before the budget on March 3, according to people familiar with the matter.

Xavier Rolet, former head of the London Stock Exchange Group, this week said the UK should strive to become a centre for Spac activity in the wake of Brexit.

Bankers and lawyers say removing the suspension rule would encourage UK businesses to list at home and place London on the same footing as Amsterdam, which has emerged as Europe’s Spac hub.

“If the Hill review and [the UK regulator] gave their blessing around the stock suspension point, I feel the UK Spac market would open up rapidly,” said Paddy Evans, head of UK equity capital markets at Citigroup. “If I can convince you that the UK market is going to value [the company] in the same way, a UK tech champion would and should list at home,” he added.

Some UK investors are wary of Spacs because of several high-profile historical failures. Nat Rothschild, a member of the eponymous banking family, raised a £700m Spac in 2010 and merged with Indonesian mining company Bumi which was later fined by regulators for breaching listing rules. In 2015, Gloo Networks raised £30m but never made a deal.

But, today, Spac sponsors include some of Silicon Valley’s most prominent founders and investors. “People confuse how Spacs were viewed 18 months ago with how they are today — which is they are pretty viable alternatives,” said one UK tech executive who is weighing several offers. “They have created a ready-made path for people who want to IPO, with ready-made capital.”

UK investors have traditionally been considered more conservative than their US counterparts and less supportive of lucrative “promotes” for sponsors, which typically hand them 20 per cent of the Spac’s equity for $25,000.

Given the reputational baggage attached, many European venture capitalists remain wary of encouraging their companies to pursue a Spac, with one saying it was for “good companies” but not the “best companies”. “It’s a highly efficient structure, but I think it’s still a bit like settling for a .net domain,” he said, rather than a classic .com. 

However, UK sponsors could integrate several rules popular in the US, such as allowing shareholders to vote on the chosen acquisition and to redeem their shares if they dislike the target. Those urging the Hill review for change argue that attracting Spacs will not erode London’s reputation for upholding a gold standard of investor protections.

“They’re being lobbied quite hard,” said a senior banker. “The environment is perfect for Spacs and people can’t wait.”



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Dual-class shares: duelling purposes | Financial Times

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The ship looks set to sail on Britain’s aversion to dual-class shares. A government commissioned review, released on Friday, backs the structure, which is popular with tech founders keen to retain control after taking public money.

Lex, among others, has opposed weighted voting rights as poor governance. Advocates point to the bigger picture: spurn dual-class shares and lose out on big initial public offerings. London would not be the first to cave. A similar argument saw Hong Kong capitulate after Alibaba took its record $25bn IPO to New York in 2014. Singapore swiftly followed suit; even Shanghai now hosts companies with dual-class shares on its tech-oriented board.

Ron Kalifa, author of the UK report, lays out the numbers: the US nabbed 39 per cent of the 3,787 IPOs on major exchanges between 2015 and 2020, while the UK took under 5 per cent. US companies with dual-class shares have outperformed peers, but this is as much to do with tech credentials as, say, Mark Zuckerberg’s stranglehold on Facebook votes. Proponents also applaud the poison pill conferred by weighted voting rights. This, they say, would have seen off pesky foreign buyers of British assets such as Arm and Worldpay, coincidentally Kalifa’s own old shop.

If dual-class shares are inevitable, curbs should be too. Sunset clauses, converting founders’ shares to ordinary class over time, are one obvious step already in use. At Slack, for example, shares convert over 10 years to common stock. Another is to exclude certain votes; on executive pay, say, or related party transactions.

One big caveat: dual-class shares will not open the floodgates to new listings. Ask Hong Kong, a market four times as liquid as London. Post-relaxation of the rules, China tech listings continued to flock to the US because valuations are higher. Last year, despite ground-zero Sino-US relations and tightened accountancy rules, Chinese tech companies flocked to the US. The current run of “homecomings” — US-listed companies such as Alibaba securing secondary listings in Hong Kong — is politically driven. More effective, certainly, but not an option for the UK.

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A Lucid sign of the tech bubble

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This week, tech stocks dipped and a generation of entrepreneurs was offered a glimpse of its own mortality.

At the very least, it has been a reminder that a reset is long overdue after a year-long surge in tech stocks — and that capital will not always be as readily, and cheaply, available.

When cash is plentiful, the close alignment between Wall Street and Silicon Valley can feel almost unbreakable. Tech start-ups promising to change the world supply the big vision for investors eager to find a reason to believe. Conditions like this favour so-called story stocks — ventures that can spin a simple narrative about a huge new market opportunity.

A classic of the genre is the electrification of personal transport. This week’s additions to the dream of a world beyond combustion engines include the $4.6bn flowing into luxury electric car maker Lucid Motors and the $1.6bn raised by would-be air taxi service Joby Aviation.

Despite the obvious risks when a wave of capital washes into tech start-ups, there are some benefits. It can, for instance, help to drag new technologies into the mainstream: the tech and telecoms bubble at the turn of the century may have led to huge financial waste, but it funded the communications networks and digital infrastructure to support the next generation of internet companies.

It also means promising technologies are no longer at risk of being underfunded — though simply pouring in cash won’t bring them to commercial viability any quicker. It has taken many years for battery technology to ride the cost curve. The fact that billions of dollars are suddenly available cannot speed that process. Yet Wall Street’s financial vehicle du jour for channelling money into tech start-ups — so-called special purpose acquisition companies that raise cash and then seek a promising company to merge with — come with two very big warning signs.

The first is that, in this new form of stock market-financed venture capital, windfall profits can flow to promoters and speculators long before the new businesses prove their commercial viability. Traditional venture capitalists usually don’t see profits, or get the chance to sell, for years.

The different incentives embedded in Wall Street’s version of VC is exemplified by the Lucid deal. On paper, the Spac involved has already made an 87 per cent profit from its investment, just for doing a deal. And its promoters, who paid a grand total of $25,000 for their “founder shares”, are sitting on a stake the market values at $1.5bn.

The Spac has also provided a vehicle for wild speculation. Its publicly traded shares had already shot up more than fivefold in anticipation of a deal, before falling back by nearly half.

There are some mechanisms to encourage a longer term view, such as placing limits on how soon a Spac’s promoters or follow-on investors can cash out. But the 18 months lock-up on the Lucid Spac’s founders is nothing compared with the many years traditional VCs often have to wait to see a return.

The second concern is that the current close alignment between investors and entrepreneurs is highly unlikely to last. Financial conditions will change. Even with perfect execution over many years of the promises made by start-ups, it will be hard for the new companies to support their current valuations.

Unlike companies that arrive on Wall Street through a traditional initial public offering, Spacs make revenue promises upfront. Joby says it will not have any sales at all until 2024, but then reach $2bn in revenue five years from now. Lucid, which has not launched its first vehicle, is predicting that annual revenue will rise above $20bn within five years — a figure that Tesla only topped in 2019.

These promises are supporting heady valuations. Lucid is judged, on paper, to be worth $24bn. Tesla only reached that after it had been making and selling cars for five years, and a year after its groundbreaking Model S had hit the road.

It may be the case that the world is on the way to more electrification, with luxury cars like those made by Lucid, and air taxis like those operated by Joby, an important part of a clean energy future. But when times change on Wall Street, many investors may no longer have the patience to go along for the ride.

richard.waters@ft.com



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