Wave of investments in China Web startups seen slowing

Hong Kong

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 per cent 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.

Among the contributors may be the Chinese Internet giants that have fuelled the boom. Hiring freezes at Alibaba and Baidu have signalled 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 such as group buying and ride-hailing apps.

A looming question is how much recent market turmoil in China will affect private fundraising 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 US$30 billion 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 US, 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 per cent from the previous quarter.

Yet, the drop-off in China and Asia comes amid a very different context than the drop-off in the US. In Asia, the increase in venture capital funding rose much more sharply after 2013. Such investment in Asia jumped from just US$2.8 billion in the first quarter of 2014 to US$14.2 billion in the third quarter of 2015. In the fourth quarter it fell to US$9.7 billion. Still, 2015 was a banner year for Asian venture capital investment, with deals totalling US$39.7 billion in 2015, well above the US$21.1 billion in 2014 and the meagre US$6.4 billion in 2013.

The report said that 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. NYT