Jan 15, 2020 09:30 AM

Tech Startups Go Hungry as Big Names Feast

Headlines at two ends of the fundraising spectrum lie at the heart of this week’s Tech Talk, spotlighting a simultaneous state of feast and famine that bodes poorly for the country’s high-tech startups in the upcoming Year of the Rat. At the same time, things look much rosier for well-capitalized fat cats like discount e-commerce specialist Pinduoduo and high-tech coffee purveyor Luckin, which have become investor favorites despite their money-losing status.

At the startup end of the spectrum, the headline that caught my attention said venture capital investment in Chinese internet companies plunged 51.5% in last year’s fourth quarter to $6.84 billion. The figures cited came from the government-supported Policy and Economics Research Institute of the China Academy of Information and Communications Technology, so they should be relatively reliable.

At the other end, the attention-grabbing headline came from, an e-commerce mammoth valued at $60 billion that until recently was profit challenged. That news saw the company announce plans to raise a cool $1 billion through a bond offering, its first such debt issue in three years. That was just the latest such major secondary fundraising by a large listed Chinese tech firm in the last year.

I’ll detail each of these developments shortly and take a look at what they might mean for China tech in the year ahead. But the bottom line does seem rather straightforward. Put simply, investors are gravitating toward the large, big-name high-tech firms, while increasingly avoiding the startups that could become the big names of tomorrow.

There’s also a domestic-versus-international dichotomy here, since much of China’s venture capital comes from local funding sources. By comparison, most of the major fundraising is occurring in global financial markets, often in the form of U.S.-dollar denominated share or bond offerings. That would seem to indicate some differences in investment activity from onshore sources versus offshore ones.

We’ll look first at some of the big-picture numbers that underlie the simultaneous feast-and-famine that now seems to be taking place. The government figures I cited at the top of this column are the latest signal of a famine for high-tech startups that dates back to earlier last year.

Crunchbase data from October through mid-November 2019 showed the value of venture funding in China plummeted to $4.1 billion for the period, from $10.9 billion a year earlier. The number of deals also fell by a similar amount, to 183 from 388 in the same period a year earlier. Bloomberg reported the slowdown occurred even earlier in the year, saying China venture investments plunged 77% year-on-year in the second quarter to $9.4 billion, while the number of deals roughly halved.

I asked one of my former students who works in the local venture capital industry, and he confirmed that things are indeed tough right now. He said he knows of a number of venture investors that closed up shop last year after failing to attract money for their new funds.

Feasting on Wall Street

Then there’s the side of the equation. The e-commerce company’s $1 billion fund-raising didn’t seem to raise too many eyebrows, probably because it was only the latest in a sizable string of such secondary fundraisings over the last year. The largest of those came in November when rival Alibaba raised nearly $13 billion through a secondary listing in Hong Kong, complementing its 2014 listing on the New York Stock Exchange.

While both Alibaba and are currently profitable, the money-earning factor doesn’t appear to be fazing offshore investors when it comes to the latest fundraising by big China tech. The massively money-losing Luckin, which likes to compare itself to Starbucks, last week unveiled plans to raise around $800 million through a combination of selling new shares and convertible bonds.

Others that have undertaken similar secondary fundraising over the last year include discount e-commerce specialist Pinduoduo, which raised $1.4 billion in February; and electric car startup Nio, which raised $650 million a year ago not long after its $1 billion IPO on Wall Street. Like Luckin, both Pinduoduo and Nio are losing big money, thought that didn’t seem to deter investors.

So what’s going on here?

In a nutshell, investors seem to be blowing off China’s high-tech future in favor of feasting on its more mature present. That’s probably not too surprising given the many uncertainties surrounding China’s economy right now.

Growth is currently at its lowest levels in decades, and investors must have doubts about the ability of startups to weather such a downturn that could last at least several years. There also does appear to be less money sloshing around the system these days, which no doubt is compounding the funding shortage. By comparison, the bigger names like Alibaba and even Pinduoduo are already pretty well-grounded, with sufficient business and funds to weather this kind of storm.

Then there’s the international-versus-domestic factor, which also seem to be working to the big companies’ advantage. While China’s economy is slowing sharply, it’s still largely business-as-usual for the rest of the world. That means the usual Western bulls that like China tech are still willing to park their investment dollars in such firms, though perhaps they might be a bit more cautious these days due to China’s economic slowdown.

At the end of the day, China’s high-tech startups do appear to be looking at a funding winter ahead. Exactly how long that winter will last is the million-dollar question. I do suspect it could last at least a couple of years until signs emerge that China’s economy is back on more solid footing. Certain sectors favored by Beijing, such as artificial intelligence and blockchain, could fare better than others during the tougher times. But the bottom line is that the startups of today are far more likely to be out of business two or three years from now than their predecessors from headier times.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to

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