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Wattpad chief executive Allen Lau.

Chinese internet giant Tencent Holdings Ltd. is investing $40-million (U.S.) in one of Canada's hottest tech startups, WP Technology Inc., better known as Wattpad.

The financing, expected to be finalized in the coming weeks following the signing of a term sheet, will be part of a $50-million venture capital deal that values Wattpad at $400-million including the new funding, sources familiar with the startup told The Globe. The Toronto company is still sorting out how much existing investors – a mix of Canadian and American venture capital funds – will provide of the other $10-million, with Tencent covering any balance.

A company spokesman declined to comment.

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Wattpad is a popular online platform for amateur fiction, claiming about 60 million users globally – up 50 per cent from 2015 – who read fiction uploaded by 2.5 million active writers a month. The company, founded 11 years ago by chief executive Allen Lau and chief product officer Ivan Yuen, has been morphing into an innovative media company, licensing content published on its website for original series and films to conventional content producers.

It has announced co-production deals for original video series with Universal Cable Productions – a division of NBCUniversal Cable Entertainment – and Toronto-based Entertainment One and signed a deal last year with Turner to turn content on Wattpad into programming for TNT's Tales From the Crypt series. Wattpad has also struck deals with Harper Collins' childrens' book division and French publishing giant Hachette that will see its contributors sign conventional publishing deals. A partnership with TV5 Manila in the Philippines has resulted in a top-rated program called Wattpad Presents. Hollywood studios have also promoted their films on the Wattpad site.

One of Wattpad's breakout stars is Anna Todd, who published her After fan-fiction stories on the site, inspired by One Direction singer Harry Styles. Her series has been translated into more than 30 languages and published by Simon & Schuster. Another Wattpad contributor, Kelly Anne Blount, optioned screen rights to her young-adult fiction thriller Captured to Komixx Entertainment this week.

Between advertising and licensing, sources say Wattpad now generates annualized revenue of $20-million a year, growing by about 100 per cent annually.

Wattpad is one of Toronto's best-financed startups, raising $46-million in 2014 in a funding round led by Toronto-based OMERS Ventures, following a $17.3-million round in 2012 led by Silicon Valley's Khosla Ventures and a $3.5-million financing in 2011 led by New York's Union Square Ventures. Other Wattpad backers include Canadian venture-capital firms Version One Ventures, Golden Venture Partners, BDC Capital and Northleaf Venture Catalyst Fund, and Silicon Valley financiers AME Cloud Ventures, Raine Ventures and August Capital.

Tencent previously backed Waterloo-based internet messenger Kik Interactive Inc. and Montreal artificial-intelligence (AI) startup Element AI.

The company, which has 130 employees, has been increasingly focused on strategies to make money and shift into AI after laying off about 10 per cent of its staff this year. Those close to Wattpad are particularly excited about its efforts to further drive revenue growth by applying AI "machine learning" technology to determine what stories on its platform appeal to what types of readers, information it can use to help conventional content companies create films, shows and books that are likelier to appeal to audiences.

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While Wattpad wouldn't comment on the financing, it did say in a statement that by using AI, "we've made significant strides towards discovering more great stories on Wattpad and helping them find a home on various platforms … [which] has helped us make inroads into the publishing and entertainment industries."

Wattpad also unveiled a paid subscription service Wednesday that allows users to access an advertisement-free version of its site.

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