The coronavirus outbreak has dealt a severe blow to the Chinese startup industry.

The flow of funds to Chinese startups has been severely constricted after the coronavirus outbreak. Venture capitalists rely on mutual contacts, conferences and field visits to monitor progress at startups they finance. The virus has put paid to all that, with executives staying put at home, working remotely, or video-conferencing. (Bloomberg)

Consider this: The aggregate VC funding for Chinese startups has fallen 60% year-on-year in January. Further, the number of deals has similarly plunged 61% in the same month, according to data from Preqin.

“This hasn’t been the start to the year of the rat that China was hoping for,” said Ee Fai Kam, head of Preqin Asian operations to Bloomberg.

Chinese startups get a one-two punch

The blow from the virus only compounded the troubles Chinese startups faced all through 2019. The US-China trade wars, a slowing Chinese economy and the fallout from the WeWork fiasco all queered the pitch for them. In 2019, the ‘music stopped’ for the seemingly endless stream of skyrocketing valuations and the burgeoning number of unicorns in the industry.

Further, the US led an offensive against Chinese tech giants such as Huawei and others. That only vitiated the normally ebullient atmosphere surrounding VC in China.

The quarantine measures in force across China to fight the virus are also affecting operations at startups. Business shutdowns, flight cancellations, and a forced Chinese New Year holiday extension for employees are hampering the functioning of their businesses. Meanwhile, malls, roads and office blocks are empty while the casualty figure from the virus mounts steadily.

Virus: VCs warn of the worst

Will Wang, managing director of Bertelsmann Asia Investments, told startups last month to rely on their own cash flow for at least a couple of quarters as financing activities would be delayed.

Unfortunately, Zhao Chenxi, a partner of SB China Capital, went further. He warned that startups need to prepare for a doomsday scenario. There could be no venture capital fund available for all of 2020.

However, Neil Shen, the founding partner of Sequoia Capital China, and a prominent tech investor, offered moral support.

“As an entrepreneur who went through SARS in 2003, I fully understand the challenges entrepreneurs face,” he said in a statement. “We will fully stand by to provide help and support to the companies we backed in any way possible.”

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