Investors back rivals
Uber and Didi, raising eyebrows
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[June 17, 2016]
By Heather Somerville
SAN FRANCISCO (Reuters) - Ride-hailing
companies Uber and Didi have brought many new dimensions to the startup
industry, such as making billion-dollar-plus funding rounds routine.
Now, they have added another to the list: sharing big investors who are
backing both companies, even though they are fierce rivals.
Uber, the leading ride service in the United States and much of the
world, and Didi Chuxing, which claims 87 percent of the Chinese market
for private vehicle ride-hailing, now share at least four investors:
asset manager BlackRock, Chinese investment manager Hillhouse Capital
Group, hedge fund Tiger Global and insurer China Life, according to
investment records and sources familiar with the deals.
"It's very unusual to allow the same parties to invest and get
information rights of sworn mortal enemies," said Max Wolff, chief
economist at Manhattan Venture Partners. "But then again, it's also not
common to raise $14 billion as a seven-year-old pre-IPO company."
Uber has raised more than $13 billion in equity and debt financing since
it started in 2009. Didi this week confirmed a $7.3 billion funding
round, bringing total fundraising to more than $10 billion.
The practice of backing competitors raises concerns about conflicts of
interest, information sharing and whether one company may succeed at the
other's expense, according to investors, academics and dealmakers.
"I think it looks bad," said Rory McDonald, an assistant professor at
Harvard Business School who has done research on the topic. "These firms
are still private, they are still growing and making strategic choices,
and those choices are going to matter a whole lot."
According to McDonald's research, companies that have a link to a
competitor through a shared investor are on average less competitive and
less innovative than if they did not have that tie.
Uber said it does not have concerns about sharing investors with Didi
and none of them had board seats or board observer seats, so they have
less access to and control over the company.
Didi declined to comment.
The four investors came in at a later stage in the companies' lives, and
likely will not have the influence and close relationships that
early-stage venture capitalists would, people who are familiar with such
deals say. And for funds such as BlackRock, investments are most often
made in isolation by individual fund management teams
Startup investors generally try to avoid backing competing startups. But
it happens on occasion: venture firm Andreessen Horowitz backed both
photo-sharing startups Instagram and PicPlz. The firm later gave back
its information access rights to Instagram and did not invest further.
PicPlz eventually shut down.
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An illustration picture shows the logo of car-sharing service app
Uber on a smartphone next to the picture of an official German taxi
sign in Frankfurt, September 15, 2014. REUTERS/Kai Pfaffenbach/File
But as in the Andreessen Horowitz case, the conflict in venture capital often
happens when a startup changes focus or creates a new product, months or years
after the VC invested.
What has raised alarms with the Uber and Didi investments is that the companies
are already in conflict, and still investors are rushing headlong into both, say
investors and industry experts.
The four common investors are not betting on both companies to hedge one against
the other, rather, they are putting the two together to get global coverage,
said Paul Boyd, managing director at ClearPath Capital Partners, a wealth
The four common investors have funded Uber Global and not Uber China, a separate
entity, according to a person familiar with the matter.
Investors think Uber's future looks bright outside of China, but their backing
of both companies signals Didi has the advantage in China, Boyd said.
Regardless, the double dipping will likely create challenges for investors and
the companies. Investors may be limited in their information rights and excluded
from sensitive or competitive information, according to attorneys. Companies
will have to worry about how much to share with investors who are also close
with their biggest competitor.
"Uber will not be comfortable allowing its investors to have carte blanche
access to sensitive information where that information could find its way to
Didi," said Nate Gallon, a partner at Hogan Lovells law firm.
(Reporting by Heather Somerville in San Francisco. Additional reporting by
Trevor Hunnicutt in New York. Editing by Jonathan Webe and Andrew Hay)
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