China’s harsh startup-financing winter may soon relent: VC

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Since last year, tech funding in China has undergone a ‘capital winter’—referring to the significant slowdown in investment and fundraising activities. However, areas such as cloud, AI, and blockchain, are still generating excitement among investors, representatives from multiple domestic venture capital firms told TechNode at TechCrunch Shenzhen on Monday.

“This year’s capital winter is colder than usual, but the cycle will likely soon pass,” said Duane Kuang, founding managing partner of Qiming Venture Partners, during a fireside chat at the event. Kuang explained that venture capital funding in China’s tech space has always followed the natural cycles—cooling, freezing, heating up, and overheating. But each cycle is becoming shorter. The Shanghai-based venture capital firm is a prominent backer of Chinese tech giants including Xiaomi, Meituan Dianping, and Bilibili.

The current capital winter can be attributed by factors in the current macro environment—the economic slowdown and the US trade tensions. On a microscopic scale, however, the past few years have seen a huge flow of capital into the tech startup space with many companies securing substantial sums. These results of these investments will take time to emerge, he said. “We are at a place where the advancements in technology will continue to gradually seep into the previously more developed and mature applications.”

Despite the slowdown in tech startup funding, investors have still been drawn to some areas, including social networking, enterprise software, education technology, as well as cutting-edge technology like artificial intelligence (AI) and blockchain, Kuang said.

He pointed out that Chinese companies, in general, have been slower to adopt enterprise software technologies partly because many choose to invest their resources into expanding their offerings instead of investing in software to optimize the existing business operations, but they are catching up.

Liu Erhai, founder and managing partner at Joy Ventures, shares similar optimism toward China’s tech startup space.

There are many opportunities for tech startups with traditional industries, such as food and beverage and mobility, and this opens up many opportunities for startups, Liu said during his fireside chat on investment and entrepreneurship in the era of the “new species” of tech firm. This group refers to those startups that have emerged from the rise of technology infrastructures like mobile internet, mobile payments, and the internet of things (IoT). For example, startups like Luckin and Mobike are the “new species” in their respective industries that operate more efficiently.

Qiming’s Kuang is also paying more attention to the developments in China’s blockchain space, which he believes have the potential to fundamentally change a lot of industries. “Although blockchain technology is used universally across different countries, in China, its applications will likely adopt strong Chinese characteristics,” said Kuang.

Blockchain’s promise of decentralization has a strong appeal in other countries, but perhaps less so in China where the focus is more on encryption, immutability, and facilitating the exchange of digital currency.

However, there remains a lot of challenges, said Liu. “Startups not only need to know how to attract decent traffic but also understand their products and services. Not a lot of entrepreneurs can manage both,” he said.

Speaking about emerging markets that have attracted more attention among investors. “I would attribute the increasing attention from Chinese VCs to that region less so to the slowing of the Chinese investment space and more so to the increasing opportunity [in the region],” Kuang told TechNode in an interview on the sidelines of TechCrunch Shenzhen.

Rightly or wrongly, he said, a lot of Chinese investors are seeing certain patterns repeating in Southeast Asia—rising middle classes, as well as rapid mobile internet penetration. This could be an advantage for China-based VCs to deploy capital in new and emerging markets or help Southeast Asian and Chinese firms find success in China and overseas.

With contributions from Coco Gao.