Monday, August 8, 2022

Coronavirus sees Chinese VCs pull out for safer deals

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The coronavirus pandemic has seen Chinese venture capitalists retreat to the safety of big names in favored industries, thinning the ranks of tech start-ups in China, in a trend that is expected to continue this year.

The number of start-up finance deals fell 45% in 2020, halving the number of new tech companies from the previous year to 3,131, according to data from ITjuzi, a Chinese business information provider.

China’s tech sector has been cooled by a “capital winterWhich started at the end of 2018 as the venture capital boom was deflating. Last year, the number of investment deals fell for the fifth year in a row, although remittances from start-ups increased, rising 12% to 815 billion rmb ($ 126 billion).

“This is in part because potential founders are staying in what are secure jobs, instead of taking a leap of faith,” said Zhao Chen, managing partner of Plug and Play Startup Accelerator China.

Mr. Zhao added that while there were fewer new companies than five years ago, the quality had improved as investors became more discriminating. Companies “certainly have something if they [were] will start in 2020, ”he said.

Semiconductor, online education and healthcare start-ups have been the most popular among venture capitalists. Spurred on by Beijing’s multi-billion dollar plan to build self-sufficiency chip industry in response to US sanctions, private market funding for semiconductor start-ups increased by more than 500 percent last year to 80 billion rmb.

“It’s crazy; I don’t know what else to say,” said Nathan Ma, who arranges chip deals at Lighthouse Capital consultancy. “If you’re not trying to invest in semi drivers right now, it’s like you’re out of the investing game. ”

Chinese investments in startups by sector

The push for government funding – dubbed the ‘Great Semiconductor Leap Forward’ by state media – has sparked over 13,000 companies to enter the industry in the first nine months of last year, many with no previous experience and coming from industries such as seafood and auto parts.

Capital has also turned to online education, which has exploded as the pandemic has prevented students from attending school in person. Start-ups Zuoyebang and Yuanfudao raised around $ 6 billion last year, accounting for about two-thirds of the capital that poured in edutech, according to ITjuzi.

“In a world full of uncertainty, people are looking for returns, but they are also looking for safety, player number one or player number two; they’re probably too big to fail – return multiples may be lower, but safer, ”said David Wei, president of Vision Knight Capital, which doubled its capital spending last year.

Meanwhile, big tech companies looking to grow their ecosystems and hook up with users have stepped up trading. Last year, strategic investors participated in a record number of deals, with Tencent alone making 113, according to ITjuzi data.

Bar chart of the number of investments showing the top 10 companies investing in start-ups in 2020

“Previously, large technology companies would make subsequent investments in companies in our portfolio; now they’re starting to come in sooner, ”said Charles Zhang of Lightspeed China, a venture capital firm.

“In addition, there are comparatively fewer M&A in China, so minority investments give them the access they want to emerging start-ups,” he said.

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