HONG KONG (Reuters)
The pace of unicorn creation in China has fallen to a six-year low. Investors and venture capital firms shy away from early-stage funding, while the economic risk of the coronavirus epidemic is a portfolio concern.
Only four Chinese startups – valued at or above $1 billion – have reached unicorn status as of 13 May. The lowest for the same period since 2014, according to PitchBook data.
The slowdown comes as many businesses across the country suffer falling sales and tighter cash flow after the country’s paralyzed outbreak over two months from the end of January.
The slowing rate of infection has allowed the government to loosen the virus-busting business restrictions. Investors in China are not in a hurry to spend capital, as sporadic cases of new infections make it impossible to return to pre-virus activity.
Early-stage venture funding dropped with just 13 percent of fundraising going to “angels” and “seed” rounds as of April-end, down from the third five years earlier, Reuters’ calculations based on PitchBook data showed. Angel and seed funding usually help entrepreneurs get business ideas up and running.
For contrast, investment capital in the B round – with founders supporting start-ups to grow – accounted for nearly 29 percent of overall funding, compared to just 19 percent in 2015.
Venture investors in China are now seeking even more specificity and information in business strategies before investing early in the start-up said investor-turned-entrepreneur Zijing Wu; whose Moli Culture & Technology designs dolls and picture books and provides related online courses focused on inspiring female characters.
During the heyday of tech startups, a good business idea would already be valued at millions of dollars, and startups would burn cash while searching for ways to make a profit. Those days are gone.
According to data provider Preqin, the amount of venture capital contributions for the first four months decreased by 35 percent this year and the investment volume decreased by 6.6 percent.
The pandemic is not just a stress test for startups. It’s a critical, life-threatening moment for them.
Data from IT researcher Orange revealed that 27 start-ups have struggled so far this year, and only 170 were set up in the first four months-a decline from 1,980 at the same time last year.
Venture investors contacted by Reuters said they are actually more focused on helping portfolio companies escape the pandemic than on reinvesting. Those in offline businesses, such as retail, travel, and car rental, have been hit the hardest, they added.
David Tang, a partner at NGP Capital, said that most start-ups in his firm’s portfolio continue to cut expenses by decreased spending or redundancies because funding has been challenging.
He said portfolio education company Squirrel AI, which offers artificial intelligence-based teaching for primary and secondary schools, has suspended all offline activity during the pandemic. Another – a jobs website for blue-collar employees – struggled when China shut down factories.
All of their businesses have reached a state of emergency.
To be sure, Nisa Leung, Qiming’s managing director, said that there is already a lot of surplus cash in China and that online education and cloud computing portfolio companies were able to collect funds despite the epidemic.
It’s important for companies to be laser-oriented on what they’re doing best. You just need to save time to slash prices for businesses that have yet to build up a track record. It will only get harder and harder, she believes.