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Investment in Internet Startups Appears to Slow in China

Investment in Internet Startups Appears to Slow in China

By Paul Mozur, The New York Times | Updated: 20 January 2016 15:48 IST

China's Internet companies, in recent years, have been the shining stars of growth, with Alibaba and Tencent rivalling in size some of their most formidable global competitors.

Inspired by their success and driven by huge buyouts of smaller companies by China's Internet giants, investors have poured money into new startups.

But new figures from the end of 2015 show that wave of investment may be coming to an end, or at least slowing.

In China, venture capital investment fuelling the growth of new startups fell 29 percent in the fourth quarter from the level in the third quarter, according to a new report from CB Insights and KPMG. The report, which calls the drop in funding a "crash," says it is linked to economic uncertainty in the region.

(Also see: Indian Startups at Risk as Investors Close Taps, Modi Fund Falls Short)

Among the contributors may be the Chinese Internet giants that have fuelled the boom. Hiring freezes at Alibaba and Baidu have signaled recent caution about spending, according to Mark Natkin, founder of the research firm Marbridge Consulting in Beijing.

"A year or two ago, VCs felt they didn't have to drive a company all the way to IPO for an exit because Baidu, Tencent and Alibaba were rolling down the aisles with their shopping carts," he said, referring to venture capital firms. He pointed out that now those firms are less focused on smaller companies, and instead are preoccupied with consolidating more mature sectors like group buying and ride-hailing apps.

A looming question is how much recent market turmoil in China will affect private fund-raising in 2016. A major slowdown could dent Beijing's ambitions to continue the rapid growth of the Internet industry.

In recent economic plans, the Chinese Communist Party has identified Internet-related businesses as fundamental to the transition of the Chinese economy from one centred on infrastructure investment to one based on consumer spending.

The slowdown comes as total Asian venture capital investment hit levels last seen in 2013 in North America, before the most recent boom in investment there. Just last week China announced a $30 billion (roughly Rs. 2,03,935 crores) fund to help bail out struggling electronics makers and other tech firms, a potential indication that the recent slowdown and stock market turmoil could spill over into the strategically important tech sector.

The Chinese trend follows a broader pullback in global venture capital investment at the end of 2015. In the United States, deals fell for the second straight quarter to their lowest level since 2011, according to the report. In the last quarter of the year, the total amount of money funding private companies fell by 30 percent from the previous quarter.

Yet the drop-off in China and Asia comes amid a very different context than the drop-off in the United States. In Asia, the increase in venture capital funding rose much more sharply after 2013. Such investment in Asia jumped from just $2.8 billion (roughly 19,035 crores) in the first quarter of 2014 to $14.2 billion (roughly Rs. 96,539 crores) in the third quarter of 2015. In the fourth quarter it fell to $9.7 billion (roughly Rs. 65,947 crores).

Still, 2015 was a banner year for Asian venture capital investment, with deals totalling $39.7 billion (roughly Rs. 2,69,921 crores) in 2015, well above the $21.1 billion (roughly Rs. 1,43,463 crores) in 2014 and the meagre $6.4 billion (roughly Rs. 43,523 crores) in 2013.

The report said venture capital firms may be sitting out the latest investment rounds because they expect valuations to come back down to earth in the next year or two. In Asia, roughly one-third of investment in startups comes from large corporations, compared to just a quarter in North America.

Lyndon Fung, an analyst with KPMG's US capital markets group, wrote in the report that Chinese investors are also increasingly looking abroad.

"We are seeing Chinese VC investors and VC-backed companies shifting their focus to invest in the international market, where things are a bit more stable, to acquire complementary technologies to strengthen their ecosystem," he wrote.

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