Will China’s Unicorns Become Extinct?

Will China’s Unicorns Become Extinct?

Why you should care

Because hard times for Chinese startups signal a broader concern.

China’s ability to produce valuable new startups, or “unicorns,” has plummeted compared with last year, according to research, as a deepening economic slowdown hits the country’s tech heartland and venture capital fundraising dries up.

In the first six months of 2019, only 36 new startups with a valuation of at least $1 billion were fostered in China.

That’s according to Shanghai-based research company Hurun Report, and it represents a 30 percent fall from the same period in 2018. It’s also a stark climbdown from last year, when Hurun data showed Chinese unicorns were being created at a rate of one every 3.8 days.

China has been home to some of the world’s biggest unicorns over the past several years, including ByteDance, Didi Chuxing and Alibaba’s Ant Financial. But the startup frenzy that gripped the world’s second-biggest economy has begun to cool, coinciding with a fundraising “capital winter” that has seen the number of venture capital deals falling by roughly half in the third quarter to 702, the lowest quarterly count since 2014, according to data from research company Preqin.

“Before, the VC industry in China was really hot, everyone wanted to get in and invest, but now that’s pulled back and every sector is pretty quiet,” says Wang Qingrui, an independent internet industry analyst.

There was too much money floating around and this is a good thing because we are now seeing more discipline.

Nisa Leung, managing partner, Qiming Venture Partners

As financing has been hit, driven by a government crackdown on risky lending and the bursting of a funding bubble, entrepreneurs who had been wary of cutting valuations to raise money have been forced to lower their expectations, says Wang. “First off, they have to survive, and financing is the basis of their survival,” he says.

Local venture capital firms that raise money and invest in renminbi have been hit hardest, says William Bao Bean, a partner at SOSV Investments in Shanghai.

“Almost all those VCs didn’t get a return … and a lot of funds have gone out of business,” Bean says, noting that while dollar investment from traditional VC funds has cooled, it hasn’t been hit to the same extent.

Many newer funds that took advantage of the 2017–18 funding boom have seen their startups fail this year, according to Nisa Leung, managing partner at Qiming Venture Partners, one of China’s biggest venture capital firms.

“There was too much money floating around and this is a good thing because we are now seeing more discipline in terms of due diligence,” Leung says. “Eighteen months ago it used to take two to three months to close a deal, but now it takes nine months or longer to close a fundraising round.”

Leung says companies with robust business models could still succeed despite the drop-off, adding that three of Qiming’s tech companies successfully raised money at higher valuations in the past month.

Hurun Report noted that even though the pace of creation of unicorns has slowed, China still leads the world, with 206 unicorns to the United States’ 203.

But the Chinese economy is now growing at its slowest pace in three decades, a worrisome trend that is twinned with a rocky stock market and concerns about the sky-high valuations for startups. “It’s another Chinese winter, since basically last September everyone on the local side, investing renminbi has been on vacation,” says Bean.

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