The country’s getting the virus in control and VCs are cashed up. So Chinese startups may see the clouds lifting.

It’s a painful observation, but venture capitalist firms with plenty of dry powder are looking at Chinese startups as potential multi-baggers. After the disruption of the coronavirus, startups confront difficult fundraising, lower valuations, and tighter performance expectations from VCs. But things may be turning. (South China Morning Post)

The coronavirus has changed the Chinese VC environment

The coronavirus severely impacted deal volume during the first quarter of this year. Deals were down 39% to 495 compared to the previous quarter.

The massive correction in stock prices also negatively affected the valuation environment of startups. Therefore, startups will have to lower their expectations of valuations – these will likely be much lower. Already, there are reports of several ‘down’ rounds.

Additionally, negotiations will be harder and fundraising will take much longer. FOMO no longer afflicts VCs. They are now much more concerned about the profitability of the Chinese startups they invest in. The recent US$310 million scandal at Luckin Coffee has made investors even more cautious, and reportedly many are considering forensic investigations.

Operations at startups are still far from normal, with airlines, travel and the restaurant industry badly damaged from the impact of the virus. Many of the Chinese startups in these sectors would be desperate for an immediate infusion of funds, but VCs may have to choose. Not all will survive.

But things may be turning around

On the plus side, China was the first to be hit by the virus and is amongst the earliest countries to bounce back.

Chinese VCs and startups are therefore emerging from the long hiatus and offices are resuming normal operations. The days of due-diligence-by-Zoom may soon be a memory.

Further, deal momentum is seen to be picking up. According to data from PitchBook, VCs entered 66 deals during the week ended March 28, the best weekly showing during this year.

VCs bulking up on cash

As of mid-2019, VCs were sitting on US$188.7 billion in funds waiting to be deployed. Nevertheless, firms such as Qiming, IDG Capital and ByteDance Venture Fund are amassing fresh China-focused venture funds in the billions.

The sheer weight of the dry powder will force VCs to step up deal-making.

Biopharma, medtech, diagnostics, health care services, information technology, artificial intelligence, enterprise services, consumer internet, and e-commerce could be the favored sectors.

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