By Rick Carew 

HONG KONG--U.S. hedge funds are jumping onboard China's dominant taxi-hailing app business, putting an $8.75 billion valuation on the Chinese startup.

Coatue Management LLC is leading a consortium of investors buying about $600 million of shares in the combined Didi Dache-Kuaidi Dache business, according to people familiar with the situation. Coatue is purchasing about $250 million of common shares of the combined company and Farallon Capital Management LLC is buying about $75 million, the people said.

Other institutional investors and insiders are taking the remainder of the shares, the people said, although the other investors couldn't be identified.

The $600 million stake being sold is a portion of the common shares in the combined company currently owned by Kuaidi Dache's management team, they said.

The deal increases the value of the business to $8.75 billion, nearly 50% higher than the previous valuation of about $6 billion, which was based on fundraisings in recent months. The skyrocketing valuation of the company highlights the record amounts of cash going into Chinese technology startups, as investors bet on rapid growth in the country's e-commerce market. Hedge funds and high-net-worth individuals are putting hefty price tags on Chinese startups that haven't yet figured out how to generate revenue consistently, let alone make a profit.

The higher valuation is being driven by investors' expectation that Didi Dache-Kuaidi Dache will now turn from competing against each other for taxi-hailing customers--99% of rides booked through an app in China are made using either Didi Dache or Kuaidi Dache--to offering a range of new services. Expansion includes an emphasis on promoting higher-end private car service and new plans to operate airport shuttles and cargo services.

Still, Didi Dache-Kuaidi Dache's current valuation is much lower than that of global ride-hailing app Uber Technologies Inc., which is currently valued at $41 billion. Uber has found it difficult to make inroads in many Asian cities, where local competitors have taken more market share.

China's two big taxi-hailing apps, Didi Dache and Kuaidi Dache, merged in February in a $6 billion deal after neither firm was able to triumph in an escalating battle to win over China's taxi riders. The two services spent hundreds of millions of dollars of investor cash trying to gain an edge by offering free rides and other deals. They will continue to operate under separate brands with their own apps.

The end of the Chinese taxi war is paying off for Didi Dache-Kuaidi Dache investors as new investors are increasing their expectations for the company's value. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are big backers of the combined company after separately investing in the two businesses. They have struck a careful balance in the shareholding, as Alibaba and Tencent are competitors in many parts of China's Internet landscape.

Alibaba and Tencent handle payments from the app company's taxi riders through their online payment platforms. Other big-name investors in Didi Dache-Kuaidi Dache include Japan's SoftBank Corp., U.S. investment firm Tiger Global Management LLC, DST Global and Singaporean state investment firm Temasek Holdings Pte. Ltd.

The Kuaidi Dache management team's decision to sell shares is part of a plan for them to take a back seat in running the combined company, according to people familiar with the situation. Kuaidi's top managers will likely exit from senior roles in the company in the next six months, although Chief Executive Dexter Lu will continue to serve as a board member and in other roles after that transition is complete, according to these people. That puts Didi Dache's managers--Chief Executive Cheng Wei and President Jean Liu--in the driver's seat of the combined company. Ms. Liu is a former Goldman Sachs Group Inc. banker and the daughter of Liu Chuanzhi, the founder of Chinese computer maker Lenovo Group Ltd.

Coatue Management, which hired deal maker Tony Zhang from DCM Ventures last year to spearhead its entrance into private deals in China, has been particularly active of late. China's Uxin Ltd., one of the country's largest online used-car auction service providers, raised $170 million from Chinese search giant Baidu Inc., Coatue and KKR & Co. in recent weeks.

Farallon Capital is a multistrategy fund manager that oversees about $20 billion in assets.

Juro Osawa contributed to this article.

Write to Rick Carew at rick.carew@wsj.com

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