Update | China’s O2O darlings risk becoming zero-to-zero as valuations outstrip earnings

Chinese internet startups in the online-to-offline (O2O) category are getting a cold shoulder from private equity and venture capital funds, as valuations have exceeded projections while good business models are harder to find.

A quarter of the 42 startups that raised a combined US$913.2 million in the third quarter were O2O companies, fewer than the same quarter in 2015, when 40 per cent of 169 companies successfully funded were O2O firms, according to ChinaVenture Investment Consulting’s data. The amount of funds raised in the three months ended September fell 22 per cent from the same quarter last year.

The lacklustre investment figures, a fresh sign of waning enthusiasm toward the much-hyped O2O businesses, also led to a devaluation of existing “unicorns,” or unlisted technology firms valued at more than US$1 billion.

“The valuations of some of the established O2O players in China are making investors quesy,” said Cao Hua, a director at Tripod Capital, which manages more than 4 billion yuan in assets. “Upon seeing the lacklustre performance and limited potential for further growth, it’s not a surprise that bearish sentiment is starting to swirl, especially for the embattled businesses.”

In a typical O2O business model, retailers identify customers via an online platform before drawing them to a physical store to complete the transaction.

The increasing popularity of internet and mobile technologies in China, mixed with changing lifestyles and consumer habits, have nurtured at least five technology companies with market value exceeding US$10 billion, in addition to 37 “unicorns,” according to CB INsights.