Expecting a ‘deep winter’ of funding, China’s VC industry instead finds lots of cash sloshing around
28 Apr, 2017WSJ.COM
After a frenzied 2015 when venture money gushed into apps providing on-demand home services from meal delivery to massages, funding for startups was supposed to enter what industry insiders called “deep winter.”
For some of those darlings, capital did freeze up, forcing them to fold, shrink or merge with competitors. But funding is anything but short. China’s venture-capital industry is suffering a different headache: too much money and too few solid prospects to bet on.
It is “more like a drought of assets than a ‘deep winter’ of funding,” says Fang Zhan, an analyst with investment database pedata.cn, which is run by Zero2IPO Research in Beijing.
Money has rushed into the tech sector because of dwindling investment returns elsewhere and policy decisions by Beijing, which opened the credit taps last year to spur slowing growth—and has steered money toward “innovation” in hopes of creating new economic drivers.
Last year 2,438 new venture-capital and private-equity funds raised 1.37 trillion yuan ($198.8 billion), up from 784.9 billion ($113.9 billion) in 2015, according to research by pedata.cn. Much of that money came from 323 government-led funds created last year, the research found.
Established firms created larger funds last year than previously—raising billions and tens of billions of yuan per fund, rather than the hundreds of millions in years past, says Ms. Zhan of pedata.cn.
So much money is sloshing around that China last year fielded a record herd of “unicorns”—startups valued at $1 billion or more—with 70 new entrants. All told, China’s Ministry of Science and Technology counts 131 unicorns. That is 30 more than the U.S., according to data company CB Insights.
Nobody in the industry wants to use the “B” word—bubble—on the record. Privately, many say that the valuations are crazy.
Look at two of the most chased-after investment targets now: startups that offer the use of bicycles or power banks for charging smartphones, for about 1 yuan (15 cents) an hour.
A leading bike-sharing operator, Ofo, announced Sunday that Ant Financial, the financial-services affiliate of Alibaba Group Holding Ltd. , had placed a strategic investment. Though the amount wasn’t disclosed, the founder of the three-year-old company told CNBC last week that Ofo is worth over $2 billion.
Its biggest competitor, Mobike, was declared a unicorn by its investors early this year.
And those are just two of dozens of operators flooding major cities with bikes—making them so ubiquitous in some places that they’ve become sources of annoyance and targets of vandalism.
To win users, the companies offer subsidies and sometimes free rides, a strategy that requires lots of cash while generating little revenue.
“Don’t ask me how the business model might work,” says one early Mobike investor. “I don’t know any longer.”
Mobike says its business scale, with 3.65 million bikes, and technology platform make its offering interesting to its investors. Ofo didn’t respond to requests for comment.
Wu Shichun, founder of early-stage investor Plum Ventures, says that the money lavished on bike-sharing shows the scarcity of worthy projects. Mr. Wu didn’t bite, instead investing in startups that rent power banks to smartphone users in restaurants and shopping malls.
In April alone, nine such startups have raised sums of up to 100 million yuan, according to data firm IT Juzi. Plum Ventures invested in one of them, Mr. Wu says, because he thinks the founding team has potential.
Investors aren’t sure how all this funding will be recouped. As in the U.S., new public listings are in a slump in China. Globally, only 291 Chinese companies made initial public offerings in 2016, the smallest number since 2013, according to the pedata.cn report. Among the 843 Chinese internet companies with investment from VC firms, there were only seven IPOs last year.
Having marquee investors provides credibility for lesser-known and new investors, people in the industry say.
Mobike’s latest funding round, in January, drew Sequoia Capital China, TPG, tech giant Tencent Holdings Ltd. and iPhone maker Foxconn Technology Group, according to IT Juzi, the data firm. Investors in Ofo include Russian billionaire Yuri Milner, ride-sharing company Didi Chuxing Technology Co., New York-based hedge fund Coatue Management and, now, Ant Financial.
A hope among some investors is that Ofo and Mobike may eventually be acquired by Tencent and Ant Financial. Each runs a popular mobile-payment service and sees users of bike-sharing services as a new customer base, analysts and investors in these companies say.
A fundamental problem, according to Zero2IPO chief executive Gavin Ni, is the herd mentality propelling tech investors from one fad to another.
“With so much money pounding on one place, there must be something wrong with the industry,” Mr. Ni said in comments to Chinese media this month.