Will China lose its tech mojo as venture capital for innovative start-ups gets harder to come by?
- With money going to later-stage tech giants, can the ‘red unicorn’ wave keep rolling on?
- Polarised market threatens to undermine entrepreneurship and innovation
Investors are pouring capital into China’s more mature, later-stage tech companies, polarising the tech scene into established “decacorns” – private companies with valuations of US$10 billion or more – versus capital-hungry, start-ups.
Unlisted technology giants are attracting bigger and bigger private fundraising rounds, leaving less on the table for start-ups who need to raise their first two critical rounds of financing to get off the ground and scale up.
A polarised market in which early-stage financing is sidelined could frustrate entrepreneurship and stifle innovation. After all, it is that kind of financing in recent decades that catapulted Baidu, Alibaba, Tencent and the like into global tech giants.
So it’s not an easy time to have big dreams if you are a unicorn – a tech start-up valued at US$1 billion or more – or a wannabe unicorn.
Last year, eight unlisted companies valued at US$10 billion or more got venture capital investment. In 2017, the number was just one, according to data from Preqin.
“On both the capital-raising and investing sides, the Chinese market is getting more polarised. You see a lot of capital going into billion-dollar mega funds, leaving behind a lot of smaller funds that could not raise sizeable US dollar funds,” said Cheng Yu, a partner at early-stage Morningside Venture Capital, who was speaking at a panel of the Hong Kong Venture Capital and Private Equity Association conference in January.
The tilt toward decacorns comes as China last year surpassed the US as the home of the world’s top venture capital deals, with seven of the top 10 deals going to Chinese private tech companies. The moment was so breathtaking that some market observers have taken to calling 2018 the “Year of the Red Unicorn.”