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Unicorn fever seizes China as start-ups and investors seek the next big thing

It takes an average of four years for a start-up in China to reach unicorn status – or US$1 billion in valuation – but competition is severe for the hundreds of companies, founders and financiers who are seeking the next big thing

PUBLISHED : Friday, 29 December, 2017, 6:45am
UPDATED : Friday, 29 December, 2017, 6:50am

It is approaching lunchtime on a crisp and clear Thursday in December and the first of the start-up founders have arrived at the glass-roofed teahouse in Beijing’s Rock Sparrow hutong. Inside the toasty members-only club, a long narrow table has been set up, blinds are drawn and about seven or eight small-business owners will try to interest investors looking for the Next Big Thing.

Welcome to start-up pitching, China-style.

Things, however, are noticeably slower this afternoon, according to Zheng Linghui, owner of the teahouse and organiser of the weekly meetings by Jianyihui, a community for private equity and angel investors. It is two weeks to the year-end and many investors have closed their books and in holiday mode.

Of the seven companies that took part in the meeting, one pitched a high-quality tampon with a “silky feel”, another presented its roller-skating lessons, and yet another was engaged in wilderness survival training for companies looking to build team camaraderie among their employees. This session’s theme was consumption. Other weeks, it could be technology or some other sector.

Questions from the investors, mainly from smaller venture capital firms, centred on operating numbers and how the start-ups differentiate themselves from what is in the market. Each session takes around 30 minutes and the event ended at about 5pm.

The weekly session is one of hundreds of similar meetings that take place each day in China as start-ups seek funding and investors try to predict the next unicorn, or privately held company with a valuation north of US$1 billion.

More start-ups in China succeed in getting funding, but investors are becoming choosy

Starting one’s own business – and investing in them – has reached fever pitch in China in recent years as the tech boom mints a new generation of billionaires who are involved in online shopping, mobile gaming or artificial intelligence rather than real-estate development or financial services.

The government has encouraged the entrepreneurial vein as it seeks to ensure enough jobs for the world’s most populous nation, while steering the economy away from the old, foreign investment-led manufacturing model to one that is grounded in internet-related technologies.

Dubbed by some as the fourth industrial revolution, this trend supports advanced automation through hi-tech developments such as the internet of things, big data analytics, cloud computing and machine learning. Artificial intelligence, for example, was given prominent attention at the latest Communist Party leadership congress.

Investors have responded by pouring billions into ideas from ride-hailing to bicycle-sharing to self-driving cars. Some start-ups, such as ride-hailing company Didi Chuxing, bike-sharing service operator Mobike and internet media firm ByteDance, carry valuations exceeding that of bricks-and-mortar companies, while internet giant Tencent Holdings recently grabbed headlines when it crossed US$500 billion in market value.

In December alone, bike-sharing start-up Hellobike raised a combined 3.3 billion yuan (US$504 million) from investors including Fosun Capital, GGV Capital and Ant Financial Services Group.

The gold rush, however, is tapering, according to Zheng. It is getting tougher for start-ups to raise money as the era of silly money pouring into half-baked ideas comes to an end, he said. A former private equity investor, Zheng founded Jianyihui, a community for private equity firms and angel investors, in 2011 to help match start-ups with financiers.

China takes gold in race to develop billion dollar start-up ‘unicorns’

“Previously, making a profit could wait. But start-up founders are getting more realistic as it’s harder to locate new capital,” said Zheng. “Investors are now asking for sound figures, and a clear and healthy business model.”

For Wang Cen, a partner at Sequoia Capital China, the keen interest in starting up companies is giving him of lots of prospects – both good and bad – to sieve through.

“Founding a business is a marathon and it’s important to invest in those fit for running 42km,” Wang said before attending a separate event for start-ups in Beijing. “But the truth is that in China, start-up founders change track too easily. The majority can only do 3km.”

It takes an average of four years for a start-up to achieve unicorn status in China, compared with seven years in the US, according to a report by Boston Consulting Group in September.

China had more than 64,600 private equity funds as of the end of November, managing a combined 10.09 trillion yuan, compared to 1.49 trillion yuan just three years ago, according to statistics from the Asset Management Association of China, an organisation that represents the country’s mutual fund industry.

The truth is that in China, start-up founders change track too easily.
Wang Cen, a partner at Sequoia Capital China

The road is also littered with casualties. At its peak, China had almost 5,000 group-buying companies, 3,500 peer-to-peer lenders and over 300 live-streaming platforms, according to the BCG report. At present, there are a few dozen at most with enough scale to survive the competition in each of those sectors.

At the Beijing teahouse that December afternoon, Liu Ying, the investment director of tampon start-up Alffany, was encouraged by the response from several investors, who asked for the company’s business proposal after her presentation. One, in particular, asked for more statistics and the company’s market assessment. Alffany introduced its first product, a high-end sanitary towel made from silk, a month earlier.

“I will likely visit Beijing again and follow up with the investor,” said Liu, who is based in Shanghai. “In the meantime, we’ll gather our three-month financial figures and pitch for an angel round of financing.”