Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Didi Chuxing looks set to put its shareholders in an impossible position by entertaining another round of fundraising, this time for $6 billion.

SoftBank Group Corp. would lead the investment being considered by China's largest ride-hailing company, Bloomberg's Lulu Chen reported Tuesday.

That means current shareholders may be forced to decide whether to double down on their existing investment, or watch their bets get diluted by the new money. Such a dilemma faces investors every time a startup brings out the begging bowl.

Cash Grab
A fresh round of funding would add to the $10 billion cash Didi Chuxing had in June
Source: Bloomberg News

New funding is usually welcome because it means more cash to get the business through the next phase in its development, compete with rivals and move closer to profitability. It typically has the added bonus of raising the startup's valuation, which makes everyone happy.

For Didi, though, it's a little different. As the product of two competitors merging, the company has vanquished its last credible threat. From there, the path to profitability should have been smooth, limiting the amount of cash it would have to burn to get to the IPO finish line.

Except such a conclusion assumes that the underlying business model is actually viable.

The distinguishing feature this time is that a massive pool of money is knocking on the door and wanting in. With its valuation already a heady $33.8 billion, any further escalation would limit the upside for investors in a future public offering, while a flat or down round would be a terrible move.

With as much as $100 billion to deploy, SoftBank chief Masayoshi Son needs to find ways to place a few big bets. Since Didi looks like a sure winner in a gigantic market, it makes sense for him to ask to join. Whether the money comes from SoftBank or its Vision Fund seems almost irrelevant since it's already clear that Masa is using the fund as an off-balance-sheet vehicle for his company's investments. It's conceivable that SB comes in first then on sells to VF, as it's doing with ARM Holdings Plc.

By entertaining a willingness to dilute existing shareholders, Didi Chuxing is signaling that it may in fact need the money. With rivals already gone, it must explain why a viable business should require such a huge amount of fresh cash (and a valuation increase) so late in its development.

No doubt the answer revolves around topics such as driverless cars and foreign expansion. Yet driverless cars haven't been the same spark for Didi as they have for Uber, and I doubt the effort needs an immediate equity-funded $6 billion on top of the $10.5 billion the company said it had in June, especially given the cheap debt sloshing around the markets.

Didi Chuxing's overseas strategy has revolved around investing in and forming partnerships with local equivalents, but anyone wanting exposure to those players could do so directly rather than through the Chinese company.

That makes this new round an impossible dilemma.

Choices
Shareholders may be asked whether or not they want to invest in a new round of Didi Chuxing financing
Source: Bloomberg
- negative; + positive; o neutral

If shareholders don't invest, the outcome will be continued access to a future (albeit diluted) payout, or a limit to the downside from a potentially terrible exit, depending on how Didi performs. If they join, investors maintain their share of what will then be a smaller upside, or will lose more money in the event that the company's value falls.

It's almost as if Didi's investors can't win, even if the company already has.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net