Venture Capital: The Virus Deals A Body Blow To Chinese Startups

February 28, 2020 | News, Venture Capital

After the WeWork debacle last year, the pandemic makes it a double whammy for Chinese VC.

Chinese startups are facing a massive cash crunch following the coronavirus outbreak. With personal meetings placed on hold due to fears of contagion, it has become difficult for venture capitalists to assess the progress of projects and their funding requirements. (FT)

It’s got so bad that VCs have shelved even signed deals with committed capital. They prefer to wait until the situation becomes clearer.

Capital flows were already on a downswing after the venture capital market in China felt the repercussions from WeWork’s shelved IPO and change in ownership last year. The US-China trade wars and the standoff on Huawei only worsened the situation for Chinese startups. The booming conditions turned, on a dime so to speak, into a slowdown as VCs suddenly realized the importance of profitability versus breakneck growth.

Investment committees cooling their heels

China-focused VCs are not putting up new startup cases for approval to their investment committees in view of the epidemic. VCs are unable to make on-the-spot diligence studies, nor are they able to confer with founders and executives at prospective startups looking for capital.

“Evaluating a start-up in normal conditions is very different from evaluating a start-up during this disaster, or post this disaster,” said Zhao Chen, managing partner of the start-up accelerator Plug and Play China, to FT. “They need to re-evaluate the company, re-evaluate the market altogether once the dust settles.”

Data from Preqin shows the extent of the problem. During January-February 2020 the number of Chinese startup deals plunged 64% compared to the same period last year. The amount of funding dropped 66% in that same period.

Startups in dire straits, some rolling up sleeves

Chinese startups have reacted to the bleak funding conditions predictably. Employees have been laid off, or their pay reduced. Senior executives and entrepreneurs have also accepted salary cuts. Startups are slashing expenses to the bare-bones minimum, with even printing curtailed to the most essential.

Some companies are looking for a bailout from the government. Beijing invested $1.42 billion in troubled electric car company Nio after it agreed to shift its HQ to Hefei. The government has also agreed to postpone the collection of taxes for hard-hit startups.

“The market environment over the last year has fundamentally changed and the coronavirus has added to the challenges,” said Shen Peng, founder, and chief executive of Waterdrop Inc., a crowdfunding and insurance startup.

Related Story: Venture Capital: Chinese Startups On The Rocks As Funds Dry Up Following Virus

Image Credit: Coronavirus COVID-19 Global Cases by Johns Hopkins CSSE

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