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China's tech funding rut shifts power to investors

[HONG KONG] There's a power shift underway in Chinese tech. Startup whizz-kids have plenty to moan about at a Hong Kong get-together this week: fewer venture deals in the mainland, lacklustre initial public offerings and a trade war to boot. For those investing, however, it's a chance to be a little more demanding.

At last year's edition of the Rise conference, there was more than a touch of exuberance among venture capitalists and tech hatchlings. Chinese startups had raised a record US$41.3 billion in the three months leading up to the event, data provider Preqin reckons, and issuers took full advantage. When raising US$14 billion last year, Ant Financial, e-commerce titan Alibaba's US$150 billion financial affiliate, barred would-be investors from backing some of its rivals, The Wall Street Journal reported at the time.

That's changed. Takeaways-to-taxis outfit Meituan Dianping, which listed in 2018, is trading below its offering price, while smartphone-maker Xiaomi has nearly halved in value since going public. Backers at this week's shindig said they were asking tougher questions on how fast companies can stop burning cash, and start to turn a profit; they are demanding more innovation too.

"Gone are the days when you just looked at growth and top-line numbers," said GGV Capital's Jixun Foo. The numbers reflect that increasingly selective approach - plus the growing appeal of other regions, like South-east Asia. Chinese deal flow in the second quarter fell 77 per cent to US$9.7 billion.

Investors can afford to seize the moment. That should mean pushing for bigger stakes where desirable, more protective clauses - like guarantees to ensure shareholders can recover all or part of their money on exit - and more options to buy into future growth, perhaps at a pre-agreed price. There should be more time for due diligence too, encouraging backers to be even pickier in their search for the next big thing. Booming sectors like fresh grocery delivery, cloud computing and healthcare should benefit more than others.

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China's startups have had a good run dictating terms. Investors may now get a turn.

The Rise conference is being held in Hong Kong on July 9 to 11.


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