China will continue attracting investors, but start-ups need to prove their profitability, Rise Conference hears
- Sentiment dampened by big listings that have failed to perform after IPOs
- Public investors willing to pay ‘quite a bit lower’ than pre-IPO rounds
Companies looking to attract investors must prove they can be profitable soon, a panel of top venture capital players heard at the Rise Conference in Hong Kong on Tuesday.
Last year, a number of companies with huge valuations listed in Hong Kong and the United States, but failed to live up to the hype, with share prices slipping once public. Now, amid global macroeconomic uncertainties and downbeat sentiment, investors are evaluating more carefully how much money they will devote and are more focused on returns.
Optimism about China means “investors in general are willing to put a lot of capital” into companies that are yet to list, turning them into mega unicorns, said Harry Man, partner at venture capital firm Matrix Partners China.
“[But these companies] have to prove to investors and everyone else that they are producing results, using real data and projects to produce efficiency in the market, which will eventually be turned into revenue and profit,” Man told the panel.
“They have proved they are good at raising capital, but eventually they will have to make themselves into profitable companies, one way or another. They will have to face the world and say ‘I am worth this amount of money’,” he added.
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In fact, in January, a wave of investors got out as both Xiaomi’s and Meituan’s lock-in periods ended.
The number of venture capital deals in China fell to 1,375 in the first half of 2019, compared with 2,593 in the same period last year. Deal values also dropped, by 66 per cent to US$19.9 billion, according to market-research firm Preqin, cited by Quartz.
And private investors are learning from previous deals, noting how public investors were willing to pay “quite a bit lower than some of the pre-IPO rounds”, Nisa Leung, managing partner at Qiming Venture Partners, told the panel. This was helping private investors determine the right valuations.
Two of China’s largest unicorns, internet giant Bytedance and car-hailing app Didi Chuxing, are still not public. Beijing-based Bytedance became the world’s most valuable start-up, valued at US$75 billion in a funding round late last year, while Didi exceeded US$65 billion after its 2018 funding round, according to Reuters. Both are considering IPOs.
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“The question is whether companies like Didi can ever turn profitable, so folks are looking at what are the companies that may turn profitable faster, that require less capital,” said Leung, whose company has US$4 billion in assets under management. “There is probably more and more pressure from investors.”
But while uncertainty continues to affect markets, the investment environment remains healthy. Jing Ulrich, vice-chairman of global banking and Asia-Pacific at JPMorgan, said: “Obviously the risks have not disappeared. Market participants have now learned to deal with uncertainty.
“We do have investors who are seeking growth capital, they want to invest in high-growth companies. Everyone is aware risks are still here, but that doesn’t mean you stop investing.”
