Chinese start-ups scramble for cash as venture capital investments freeze amid coronavirus outbreak
- As China venture capital-backed deals drop to a six-year low, venture capitalists are advising start-ups to go into “hibernation”
- As the Chinese economy slows, some venture cap see fewer deal opportunities in 2020
China’s once frothy venture capital market has seen its slowest start to the year since 2013, as fast-growing start-ups struggle to keep their research on track and secure vital funds amid the spread of a deadly coronavirus.
Travel restrictions aimed at blocking the spread of the viral epidemic, which causes the disease known as Covid-19, have had the unintended consequence of derailing investors’ plans to meet with China’s cash-hungry companies.
“There will be fewer investment opportunities this year, and fewer new funds will be able to complete their fundraising,” said Wayne Shiong, a partner at the venture capital firm China Growth Capital, in an interview with South China Morning Post.
China Growth Capital, which is raising its fourth fund, is likely to sign five to six investment deals this year, Shiong said, a fraction of the 20 investments the fund made last year in fledgling companies.
One such start-up that has been snared by the general slowdown in business is Beijing Ningju Technology, a Beijing-based technology company also called NeuraMatrix, that embeds microchips into the brain to enable human-computer interactions.
NeuraMatrix has been reaching out to investors to check that they will continue to fund its R&D. So far, funding is on track.
Other start-ups have not prospered as well as NeuraMatrix. Fundraising by Chinese start-ups slumped nearly 60 per cent to US$1.79 billion and a six-year low of 168 deals so far this year, from US$4.18 billion in 440 transactions in the same period in 2019, according to data by Preqin, which tracks the alternative assets market. Venture capitalists are seeing similar disruption to their own fundraising. Only six funds have closed so far this year, raising US$300 million, Preqin said.
State champions and unicorns – unlisted companies valued at over US$1 billion – will be relatively immune to the funding slowdown, given that most still have plenty of cash at the bank from previous cash calls.
To underscore the point, 81.3 per cent of the 40 late-stage private-equity and venture capitalists surveyed by China TH Capital said the coronavirus outbreak has no impact on their investment activity, while 18.8 per cent said they are cutting back in their investment plans for the year ahead.
Still, a few start-ups could come out of this crisis stronger than ever, as their applications and online services are embraced by the estimated 50 million homebound consumers locked down across China in the world’s largest work-from-home experiment.
“Some of our companies are seeing a good opportunity in the midst of the crisis,” said Helen Wong, a partner at Qiming Venture Partners. “Our online education company is seeing a lot of interest from parents. Same for our online grocery and online entertainment companies.”
“Cash is king,” said Jason Lam, a managing director at investment bank China Renaissance, who expects financing negotiations to drag out this year and founders to consider alternative funding such as convertible bonds and to be more open to selling their companies amid less liquidity in public and private markets.
To be clear, deal making was already depressed versus the go-go days of 2017 and 2018.
This caused a chain reaction in private markets, down from larger IPO-ready companies to the smallest firms looking for seed capital to kick-start their business.
Earlier than usual Lunar New Year holiday delayed business at the start of the year and the outbreak of the coronavirus made a bad situation worse, say deal makers.
Many young start-ups are now in survival mode. Some of the best advice financiers can offer entrepreneurs facing a cash crunch is to mothball operations and lay off staff. They could offer staff equity options to try and make sure they come back when fundraising opens up again.
“For new start-ups it’s really hard,” said Shiong. “You need at least six months’ cash to get through this situation and younger companies probably don’t have that much money – so our advice generally is to go into hibernation.”
Entrepreneurs tend to burn through cash raised from venture capitalists quickly before generating their own income as their fledgling companies grow. Even during prosperous times, failure is common.
China had 63 million self-employed businesses at the end of 2018, which collectively provided 150 million jobs, according to the latest economic census by China’s National Bureau of Statistics.
“We would advise start-ups to raise funds if they can,” said Qiming’s Wong, drawing on her experience during the 2003 outbreak of the severe acute respiratory syndrome, or Sars. “The strongest players often emerge victorious.”
Alibaba Group Holding, owner of this newspaper, launched its Taobao online shopping service in 2003, as millions of people were prevented by quarantines from venturing out to shop. Almost two decades later, Taobao and its sibling site Tmall.com are the world’s largest e-commerce platform, handling 3 trillion yuan (US$426 billion) of gross merchandise value of products in 2017.
“They are a good example of winning after battling through tough times,” said Wong, who was involved in the investment in Alibaba at her former firm GGV Capital.
To be sure, venture capitalists are adapting and still taking online meetings from Chinese tech companies such as AI and science driven opportunities next-generation technology.
Prominent venture capitalist Sequoia Capital China, led by Neil Shen, has switched its annual matchmaking day for start-ups and investors to a teleconference for the first time next Tuesday, a person familiar with the matter said.
“When we look back at these challenging times, we will realise that these events are occurrences that each business must face and overcome in the path to becoming lasting companies,” said Shen in an e-mailed response to queries by The Post. The founder and managing partner of Sequoia Capital China also went through the Sars outbreak.
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