FUND RAISING: China Venture Funding Deals Slow in Q2

By on

Bottom line: New data from 2 separate reports show the number of smaller venture deals is steadily declining in China, creating a cash crunch for startups as private sector investment slows sharply.

Venture investment deals slow in Q2

In a coincidence of timing, 2 separate consultants that track venture capital spending have just released second-quarter data that show very differing trends for China. China boosters will inevitably like the new figures from Venture Pulse, which showed that venture capital spending in China jumped 26 percent in the second quarter. Meantime, China bears will undoubtedly point to separate data from a Prequin Ltd report that show venture funding in the country plummeted by more than half in the quarter to its lowest level in almost 3 years.

We’ll review the individual data shortly, but first let’s try to make sense of how these reports could paint such radically diverging pictures. The primary factor appears to be the timing of mega-deals and when or even if these deals are officially counted in the quarterly figures. We’ve seen at least 2 or 3 such mega-deals so far this year in China, including a $3.3 billion funding for group buying site Meituan-Dianping and more than $7 billion for hired car services firm Didi Chuxing.

Such massive fundings can greatly skew results for this kind of venture investment tally, which more typically looks at much smaller deals in the $50-$100 million range. For that reason, many analysts prefer to look at trends on a yearly rather than quarterly basis. For example, both the Didi and Meituan-Dianping deals are far larger than the $400 million in overall second-quarter venture funding just announced in the report from Prequin.

All of that said, both reports do contain one common element that’s quite important, showing the actual number of venture deals is slowing sharply in sync with China’s own slowing economy. That fact is quite important, because it could seriously stifle development of new companies that will become future growth engines and industry leaders over the next 2-3 years. Separate macro-economic data reinforce this view, showing investment by China’s private sector has been dropping sharply this year.

Let’s take a closer look at these latest quarterly reports with very different results, starting with the Prequin data that show venture spending on Chinese companies totaled an anemic $400 million in the second quarter. (English article) That compared with much higher spending in the second half of last year, when venture investment topped $3 billion in both the third and fourth quarters before slowing sharply in this year’s first quarter.

Declining Deal Volume

While Prequin’s survey found that total deal value dropped by around two-thirds from a year ago, the actual number of deals was also down by a more mild 12 percent. The Venture Pulse report, whose writers include KPMG and CB Insight, reported the number of deals also dropped by a similar 20 percent to 74 in the second quarter. (English article)

Venture Pulse said total venture investment in China during the second quarter jumped 26 percent to $5.6 billion — more than 10 times the figure from Prequin. But Venture Pulse also pointed out that mega deals like Didi’s also skewed its results. Indeed, the $7.3 billion reportedly raised by Didi Chuxing at the end of June would actually equal more than Venture Pulse’s entire figure for the quarter.

All of this shows just how imprecise it is to measure venture capital, due to timing issues and also actual definitions. Prequin probably doesn’t consider any deal above $1 billion as venture funding, and I might agree that any company that can raise that kind of funds probably no longer deserves to be considered a start-up.

At the end of the day, probably the most important figure in both of these reports is the decline in the number of deals, which is relatively consistent at a 12-20 percent dip. That doesn’t bode well from China’s smaller start-ups, many of which are now starving for cash and laying off workers. It also probably reflects a Chinese economic slowdown that is hitting the private sector much harder than the state-run companies, which have a wealthy benefactor in the central government.

Related posts:

(NOT FOR REPUBLICATION)

(Visited 130 times, 1 visits today)