Tencent-Backed Waterdrop Seeks Valuation of More Than $1 Billion

(Bloomberg) -- Tencent Holdings Ltd. is gearing up to battle Jack Ma’s Ant Financial in Chinese health care. Beijing startup Waterdrop Inc., backed by the social media giant, is seeking new financing at a valuation of more than $1 billion to fend off its better-capitalized rival in the emerging field of health care crowdfunding.

Three-year-old Waterdrop is the early leader among a raft of startups upstaging a conventional insurance industry dominated by state-run behemoths. The company will spend the money on automating reimbursements and developing blockchain technology with Tencent, founder and Chief Executive Officer Shen Peng said in an interview. So far, Peng said, Waterdrop has paid out 440 million yuan ($65.3 million) to more than 3,000 of its over 70 million active users.

The product itself, Waterdrop Mutual, is a software platform that operates somewhat like a collective. The app’s basic principle will be familiar to the roughly 55 million users of Ant’s Xiang Hu Bao: People chip in small amounts of money to help those diagnosed with critical illness, with payouts capped at 300,000 yuan on each platform. The companies take commissions of 8 percent.

Shen estimates that at least 50 companies, including ride-hailing giant Didi Chuxing, now offer similar services in China. The country is grappling with a rapidly graying population, soaring rates of critical illnesses, and a yawning gap in medical coverage—all pressing long-term threats to the world’s second-largest economy. “We see ourselves as a supplement to traditional commercial insurance,” said Shen. “It’s a good thing that more players are coming into the space. It cuts our cost and time for educating users.”

Shen declined to disclose how much money he’s seeking to raise in Waterdrop’s new funding round, but said the company wants to look for strategic investors that are in the insurance industry or at least understand it. The company said in March it had completed a B round led by Tencent that raised close to 500 million yuan. Other backers include Meituan Dianping, IDG Capital, Gaorong Capital, Sinovation Ventures and DST Global founder Yuri Milner.

Ant, best known for the PayPal-like Alipay service that underpins Alibaba Group Holding Ltd.’s online shopping platform, said in April it hopes to sign up 300 million Xiang Hu Bao users, meaning more than 20 percent of China’s population, within two years.

Unlike Xiang Hu Bao, which requires no payment upfront to join, Waterdrop asks users to have at least 1 yuan in deposit. It gives people the option to top up 3 or 10 yuan at a time. Shen said the deposit is meant to make users take the system’s terms seriously.

There are restrictions. Infants younger than 28 days won’t be allowed to participate, nor will anyone older than 65. Beneficiaries can’t have any medical history of critical illness, can’t make any claims in their first 180 days, and receive payouts pro rated based on their age and condition. An adult under 30 years old with malignant cancer is eligible for the full 300,000 yuan, whereas a 62-year-old with less severe cancer might receive just 20,000 yuan. Shen said Waterdrop adjusts the rules yearly, based on member suggestions and voting, and that half the startup’s more than 2,000 employees focus on approving and inspecting claims.

“The challenge for this model is it needs a large number of people to help each other,” said Steven Lam, a Hong Kong-based analyst with Bloomberg Intelligence. “The moment the pool of people is shrinking is where problems and bad customer experience could come up.”

Waterdrop Inc. said it has also expanded into selling traditional insurance products provided by more than 50 third-party financial institutions. Shen said that while Waterdrop Mutual cannot call itself an insurance product and the Chinese insurance regulator doesn’t supervise its operations, the company makes sure to keep government officials updated on its activities.

Meituan was among the earliest to back Shen. “We invested immediately after he left Meituan,” CEO Wang Xing said.

©2019 Bloomberg L.P.