A man holding a phone walks past a sign for the TikTok app of the Chinese company ByteDance, known locally as Douyin, at the International Artificial Products Exhibition in Hangzhou, Zhejiang province, China, on October 18, 2019.
Reuters
Feeling the blood in the water, venture capitalists want to buy the majority of TikTok from Chinese parent company ByteDance. That does not mean that ByteDance must sell.
TikTok, the popular short-form video application, said earlier this month that it was “evaluating changes in the corporate structure of its TikTok business.” The scenarios under discussion include the creation of an independent board of directors, the election of an independent headquarters and the sale of a company stake to venture capital or private equity companies, according to people familiar with the matter.
ByteDance is exploring its options after US Secretary of State Mike Pompeo said earlier this month that he is “studying” the ban on TikTok and other Chinese apps for security reasons. TikTok is expected to announce its plans in the coming weeks, according to a person familiar with the matter.
The US government is concerned that the Chinese government may access user data collected by TikTok. The Pentagon banned TikTok from government-issued mobile devices in January. On July 20, the United States House of Representatives did the same. Donald Trump’s presidential campaign has urged people to sign a petition banning TikTok with ads on Facebook and its Instagram affiliate. Facebook is also preparing to launch its competitor TikTok, Instagram Reels. Chief Executive Mark Zuckerberg has publicly questioned TikTok’s connection to the Chinese government over censorship issues.
“While our services, like WhatsApp, are used by protesters and activists around the world due to strong encryption and privacy protections, on TikTok, the rapidly growing Chinese app worldwide, mentions of these protests are censored even in the United States, “said Zuckerberg last year. “It is one of the reasons why we do not operate Facebook, Instagram or other services in China.”
Meanwhile, India has banned TikTok, and the company has withdrawn from Hong Kong.
This confluence of events (competitive threats, potential worldwide bans and uncertainty among its users) has prompted a group of existing ByteDance shareholders to discuss buying a majority stake in the company, The Information reported earlier this week. . The information reported current projected valuations for TikTok between $ 25 billion and $ 40 billion. Bloomberg reported this week that ByteDance founder Zhang Yiming has so far rejected that idea, given his desire to remain in control of the company.
That is probably wise.
TikTok configured for success
Selling TikTok now could help ByteDance avoid a dangerous path forward. But it could also cost ByteDance huge future profits. Obviously, it is impossible to predict future value gains. But TikTok, who recently hired former Disney + boss Kevin Mayer as its CEO, has put itself in a position to be a Wall Street favorite if it becomes a publicly-traded company.
TikTok has a fledgling advertising business. Last year, TikTok generated around $ 200 million to $ 300 million in global revenue, according to The Information. To put that in perspective, Facebook’s global revenue in 2019 was $ 70 billion. The company has never disclosed total users, but there is little doubt that the growth is surprising. TikTok has been one of the most downloaded apps in the United States and in the world for more than a year, according to analyst firm AppAnnie. TikTok has around 800 million global monthly active users, more than Snap, Pinterest or Twitter, according to DataReportal.
Organic branded TikToks and audience algorithms that quickly reduce what users like to see are a theoretical panacea for advertisers, who are looking for specific ways to reach consumers, especially younger ones. While Quibi has failed to reach a large audience with short Hollywood content, TikTok user-generated minute videos have become a global sensation. The company is following paths traveled by Google’s YouTube and Facebook’s Instragram by establishing routes to foster creative content from the public. Announced a $ 200 million creator fund this week. The company is developing self-service platforms and other advertising tools for companies. It had its first so-called “new fronts,” a speech to advertisers, last month.
Instagram and YouTube are probably worth more than $ 100 billion as part of Facebook and Alphabet, respectively. It’s not a huge leap to assume that TikTok is heading there, too.
A risk worth taking
There is little doubt that venture capitalists would love to have as many TikTok shares as possible in their hands, given the advantage. TikTok alluded to that wish in a statement suggesting that speculation surrounding the sale of a majority stake to venture capital firms may be more an illusion of venture capitalists than reality.
“Since we publicly announced two weeks ago that we are evaluating changes in the corporate structure of TikTok’s business, outsiders not participating in the company’s internal discussions have made numerous suggestions,” TikTok said in a statement. “We are not commenting on rumors or speculation. We are confident in TikTok’s long-term success and will make our plans public when we have something to announce.”
TikTok experts acknowledge that they don’t have a good read on the government’s upcoming moves. The US government has already banned Chinese tech companies Huawei and ZTE. It’s not ruled out that TikTok users can run away from the app en masse if the government urges Americans to remove it from their phones. At least, growth would halt if Apple and Android stopped making it available in their stores. Blocking value now and holding a minority stake to participate in future profits is arguably the safest move.
But there are also presidential elections in November, and President Trump is lagging significantly behind in battlefield states across the country. If TikTok can calm the US government with less drastic measures until November, it could ease political tensions in a Biden administration.
It’s a bet. Relations between the United States and China can be strained for decades to come. Still, TikTok is a risk worth taking. And that’s why private equity will line up to invest if ByteDance decides to sell.
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