Tech VC funding in China gets squeezed amid coronavirus epidemic

Venture capital funding in China’s technology industry plunged midway through the first quarter of this year, as concerns over the novel coronavirus epidemic hinder start-ups and investors from meeting.

The amount of investments in Chinese tech start-ups fell 67.1 per cent to US$1.4 billion from January 1 to February 19, down from US$4.3 billion in the same period a year ago, according to data released on Thursday by PitchBook, which tracks global venture capital and private equity transactions. It also found the number of deals had shrunk to 144 from 340 a year earlier.

“In an industry that relies on in-person contact, Chinese start-ups are facing challenges travelling to meet with VCs to raise capital,” said Alex Frederick, senior venture capital analyst at PitchBook.

The situation has added further apprehension in China’s venture capital market, which has been hit by a cooling technology sector, policy headwinds and political uncertainty caused by the prolonged trade war between Beijing and Washington.

The Chinese government had extended the Lunar New Year break, implemented travel restrictions, locked down a number of communities and ushered in the world’s largest work-from-home experiment to stop the deadly coronavirus from spreading.

Sequoia Capital moves fundraising online amid coronavirus

In the country’s southern coastal tech hub of Shenzhen, many VC firms have yet to resume full operations.

“Only senior management has come back to work, mostly remote though,” said Feng Weidong, senior partner at Tiantu Capital. “We try to avoid business visits due to travel restrictions and sclerotic quarantine rules in many cities.” Tiantu has invested in Shanghai-based education tech firm Squirrel AI Learning and social commerce platform operator Xiaohongshu, also known as “Little Red Book”.

Other enterprises have sought to minimise the disruption by moving their meetings online. More than 50 VCs and nearly 30 start-ups last week signed up for online financing and matchmaking events organised by Sequoia Capital China, according to the company’s post on its official WeChat account.

Other firms have decided to postpone their investments until conditions on the mainland have somehow stabilised.

“We are holding investments for deals that have been closed,” said Li Oucheng, a partner at angel investor Autobot Capital Partners. He said the company has already halted five tech-related funding deals because of the coronavirus crisis. Autobot has invested in mobile game developer TulipGames and blockchain start-up ArcBlock.

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The changed landscape of China’s venture capital market is expected to hit some tech start-ups harder than others. “Start-ups with the highest burn rates may struggle to stay solvent until conditions improve,” Pitchbook’s Frederick said.

Still, the challenges today could pave the way for new opportunities when the coronavirus crisis subsides. Many Chinese consumers have turned to new tech applications and the internet for information on how to combat the virus and to carry out daily necessities, such as shopping and work.

“Delivery apps, autonomous delivery robots and digital entertainment such as virtual reality are sectors likely to see increased VC activity in 2020,” Frederick said.