Coronavirus sees Chinese VCs retreat to safer deals

 Coronavirus sees Chinese VCs retreat to safer deals

The coronavirus pandemic has seen Chinese venture capital investors retreating to the safety of big names in favoured sectors, thinning the ranks of tech start-ups in China, in a trend that is likely to continue this year.

The number of early-stage financing deals fell 45 per cent in 2020, halving the new tech start-up count from the previous year to 3,131, according to data from ITjuzi, a Chinese business information provider.

China’s tech sector has been chilled by a “capital winter” that began in late 2018 as a venture capital boom deflated. Last year, the number of investment deals fell for the fifth consecutive year, though start-ups’ cash haul ticked upwards, rising 12 per cent to Rmb815bn ($126bn).

China start-up investments over the past 10 years

“It’s partly because potential founders are staying put in what are secure jobs, instead of taking the leap of faith,” said Zhao Chen, managing partner at start-up accelerator Plug and Play China.

Mr Zhao added that while there were fewer new ventures than five years ago, quality had improved as investors had become more discriminating. Companies “definitely have something if they [were] going to start in 2020,” he said.

Semiconductor, online education and healthcare start-ups found the most favour with VC investors. Spurred by Beijing’s multibillion-dollar plan to build a self-sufficient chip industry in response to US sanctions, private market funding for semiconductor start-ups rose more than 500 per cent last year to Rmb80bn.

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

Chinese startup investments by sector

The government’s funding push — dubbed the “Great Semiconductor Leap Forward” by state media — prompted more than 13,000 companies to enter the industry in the first nine months of last year, many with no previous experience and coming from sectors such as seafood and auto parts.

Capital has also gravitated to online education, which has boomed as the pandemic has kept students from attending school in person. Start-ups Zuoyebang and Yuanfudao raised about $6bn last year, accounting for about two-thirds of the capital that flowed into edutech, according to ITjuzi.

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

Meanwhile, large tech companies looking to build out their ecosystems and hang on to users have stepped up dealmaking. Last year, strategic investors participated in a record number of deals, with Tencent alone doing 113, ITjuzi data showed.

Bar chart of Number of investments showing Top 10 corporates investing in start-ups in 2020

“Big tech companies used to be making later-stage investments into our portfolio companies; now they are starting to come in earlier,” said Charles Zhang of Lightspeed China, a venture capital firm.

“Also, there is comparatively less M&A in China, so minority investments give them the access they want to up-and-coming start-ups,” he said.

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