China's venture capital boom shows signs of collapse

(Bloomberg) – China has experienced a five-year build-up of venture capital investments, which has helped launch a new generation of startups, from Republican giant Didi Chuxing to TikTok's parent company, Bytedance Ltd.

Venture capital operations in China fell in the second quarter as investors shrank from unpredictable trade talks and growing concerns about start-up valuations. The value of investments in the country fell by 77% to $ 9.4 billion in the second quarter from the previous year, while the number of transactions was cut in half to 692, according to the firm. Market research Preqin.

The second quarter of 2018 was the culmination of the joint venture agreements with China, with a total of $ 41.3 billion invested. This included $ 14 billion for Ant Financial digital payments giant, $ 3 billion for Pinduoduo Inc. and e-commerce, and $ 1.9 billion for Manbang's truck sharing service. (also called Full Truck Alliance Group). As a comparison, in the second quarter of 2019, the largest venture capital contract was a $ 1 billion investment in JD Health, the health care subsidiary of e-commerce provider JD.com Inc.

China has never experienced a widespread collapse, as was the case in the United States after the Internet technology boom, partly because of the country's new venture capital market. Years of steady growth in technology investments have resulted in predictable – and huge – profits. That the current downturn becomes a painful accident depends largely on how venture capitalists, contractors and regulators navigate on land they have never seen before.

"We are seeing real stress in the system for the first time," said Gary Rieschel, founding partner of Qiming Venture Partners, who has worked in China and the United States. "We have never witnessed a slowdown in the Chinese market. For 20 years, it was pretty much right. "

The explosion of Chinese venture capital started in 2014 when Alibaba Group Holding Ltd. has been introduced to the public for the largest public offering ever launched, clearly exposing investors to the potential wealth of the most populous country in the world. Risk transactions tripled that year to more than $ 17 billion and continued to grow each year until 2018, when the total exceeded $ 105 billion, almost as much as $ 30 billion. United States.

During the process, companies such as Qiming, Sequoia China, Tiger Global Management and SoftBank Group Corp. have launched some of the most valuable startups in the world. Bytedance, the strength behind the application of short videos TikTok and other addictive services, is worth $ 75 billion, the highest in the world according to CB Insights. Didi, the telephony service that ousted the Chinese company Uber Technologies Inc., was evaluated for the last time at $ 56 billion, the second largest.

But the rise of the Chinese technology industry has placed it clearly at the center of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidizing companies in strategic areas, including semiconductors, artificial intelligence and autonomous driving. In May, the United States blacklisted Huawei Technologies Co., preventing the telecommunications giant from acquiring US components, and plans to do the same with a large number of startups.

The trade war gives investors another reason for caution. The evaluations had already become dizzying. Prestigious startups such as smartphone maker Xiaomi Corp. and the shipping giant, Meituan Dianping, saw their shares collapse after their IPO, reinforcing the perception that private market valuations had become uncontrollable.

The so-called sharing economy start-ups have also tested the patience of their investors. Companies such as Didi, Meituan and the Ofo self-service bicycle supplier have made large subsidies to the market, allowing them to take market share from their competitors and compensate for their losses with Money of risk. At present, he is skeptical that many companies of this type are making money.

"You are really reaching the end of the shared economy – this idea of ​​leaving services for free and offsetting in volume," Rieschel said. "Some companies – Didi is the classic case – simply do not show any ability to become profitable."

A Didi representative did not respond to a message or e-mail requesting a comment.

Ratings have not fallen yet in China. The country's startups resisted the so-called bearish rounds, when they raise funds at lower valuations than those obtained in a previous round. "Chinese entrepreneurs, more than any other on the planet, will do unnatural things to avoid a fall," said Rieschel.

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