China is currently facing a lack of venture capital for its startups and many tech wizkids are simply crying foul. The situation is not simply affecting startups as IPOs, stock performances etc are all down. But startups and accelerators are finding it hard to secure funding as capital is becoming scare in the country.
Some are claiming it was a lack of creative innovations that created this as venture capitalists turned to newer developing markets. But the reality is that the ongoing trade war and the world economy which is slowing and entering a recession phase is actually the cause of the problems.
The value of VC investment in China was $9.2 billion in the first half of 2019. This was down by nearly 81% from the $47.5 billion invested in the same period last year.
Analyzing the past decade, the first mobile boom produced some of China’s largest successful technology companies like Ant Financial, Tencent and Bytedance. Since then, a lack of new platforms have created a vacuum as the current platform is getting saturated and most of the time new innovations simply are banal and simply not interesting enough. VR, Crypto, AR and AI are all terms that investors are getting bored with. Hopefully the advent of 5G might change things.
Some analyst attributed the current US-China trade as well as lackluster performance of some Chinese technology companies in the public markets, as factors for the fall in investment. Edith Young, managing Partner at Proof Of Capital commented in an interview with Thailand Startup News, “A lot has to do with the confidence level with the China-U.S. trade war and also a lot of the IPOs (initial public offering) that happened in 2018 have not really performed, hence it sends a negative signal for the early VCs.”
Many Chinese tech companies are being caught in the middle of tensions between the U.S. and China. Huawei, for example, has been put on a U.S. blacklist that restricts American companies from selling to the Chinese firm. While Huawei is not publicly listed, negative sentiment toward Chinese technology firms have played out in the public markets, especially with some of the companies that have listed in the past year. Xiaomi, a smartphone maker which went public in July 2018, is down over 27% and shares of electric carmaker NIO which is listed in the US, is down more than 47% in 2019.
Early stage venture investors are concerned over such market performances.The pre-IPO or the growth equity investors are being more cautious when they look at their valuation metrics and dynamics which affects the series B entities(ie those seeking relatively early stage funding round for businesses.)
Many start-ups planning to grow quickly burn through cash to gain market share and scale with the aim of trying to achieve profitability in later phases. Some public companies also continue to lose money as they sink money into growing the company. As a result of this various factors, investors are these days discussing “unit economics” earlier in fund-raising, something that never occurred six years ago. Unit economics refers to the revenue and costs associated with a company’s business model. In the case of many mobile phone applications and tech, a single user is the unit. Working out unit economics can be a way of projecting how profitable a company will be and if their business model is viable.
Many companies in China at the moment are anticipating that they will not be able to raise capital or funds for the next 6-18 months. Many startup entities are simply going bust or simply closing shop.