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Chinese Investment: the Capital Winter Catches a Virus


2020 is certain to be an arduous year for VCs around the globe; however, investors in China will emerge from the pandemic with a unique opportunity to invest in innovative companies at a discount. While China’s capital winter and coronavirus outbreak have shuttered the doors of countless startups, those resilient enough to have survived are likely to be positioned well to extend their industry influence and consolidate market positions.

With the pandemic and lockdown keeping people indoors, there has been a marked impact on investment activity in an industry driven by face-to-face interaction. In Q1 2020, total global venture capital (VC) investment volume decreased by 17% from Q4 2019, while the number of initial public offerings decreased by approximately 50% year-on-year.

Chinese startups have been hit particularly hard, weathering an arid 2019 best described as a ‘capital winter’ within the Chinese investment community and a Q1 2020 with multi-year low investment totals due to the coronavirus pandemic. ITjuzi, the Chinese startups database and business information company, reported only 634 investments in the domestic market for Q1 2020 with total deal activity sinking to CN¥119.1b (US$16.9b), representing year-on-year decreases of 44.5% and 31.4%, respectively. Furthermore, in March 2020, nearly 40% of total domestic Chinese investment came from a US$1 billion G-series investment in the online education company Yuanfudao (猿辅导). Without Yuanfudao’s capital raise, Chinese investment totals in Q1 2020 would have trailed many markets around the globe.

China’s Capital Winter through Q1 2020

Sources: 资本侦探, IT桔子, The China Guys

More than 460,000 Chinese companies declared bankruptcy in Q1 2020. Many of these operated within the heavily impacted entertainment and travel industries; however, for others like the online education company Mingxi Dayuwen (明兮大语文), the pandemic exposed operational vulnerabilities that may have been manageable in a friendlier economic environment. Despite the online education industry doubling revenues between 2015-19, mismanagement of Mingxi Dayuwen’s growth and retracted investment ultimately led to the company’s bankruptcy.

Two prevailing trends have emerged in the wake of the coronavirus. First, with an increasing amount of competitors shuttering doors, industries may be ripe for consolidation. Strong startups have been presented with an opportunity to focus on their fundamentals and extend industry influence while institutions with unallocated capital now have a chance to invest in cash-strapped innovative startups at significant discounts. Second, many investors in China have been overly-liberal with their capital deployment. While the VC industry is generally characterized by a low rate of success, Chinese investors have seen rising quantities of failed startups in recent quarters and, in response, are adjusting their priorities to seek efficient companies that can prove their ability to maintain a positive cash flow.

The founder of Unity Ventures, Wang Xiao (王啸), mentioned in an interview with The Beijing News, “My advice to entrepreneurs is to pay attention to the strength of their companies, to guarantee that they can survive. Increase efficiency, be more precise with the business, don’t overspend your means. In addition, companies must increase their sales ability and focus on businesses that can create cash flow, you don’t want to be flushing money down the toilet.” Investors in China have realized the need to be more conservative in their approach to investing and many institutions are now reserving cash to prepare for the return of a stronger economic environment when they can make prudent investments that align with their strategic direction.

Prepare Today for the Opportunities of Tomorrow

The common adage ‘cash is king’ has proven true among China’s capital winter and coronavirus-induced economic collapse. Instead of leveraging capital to add new portfolio positions, many corporate venture capital divisions have adopted a comparatively conservative approach and have instead chosen to fundraise over past months. 

Institutional investors are using this period to prepare for post-recovery opportunities in Q2 2020 and beyond. Qiming Venture Partners recently finished raising a US$1.1 billion fund focused on healthcare and biotech as well as technology, media, and telecom. Similarly, despite raising concerns of the coronavirus pandemic as a ‘black swan’ event, Sequoia Capital also pursued a US$7 billion fundraise to invest across China, India, and the US.

Furthermore, Hillhouse Capital announced the creation of Hillhouse Ventures on February 24, 2020. The new dual currency fund will have a scope of CN¥10 billion (US$1.4b) to invest across four main industries: pharmaceuticals & medical equipment, software, e-commerce, and consumer goods. Hillhouse Capital founder Zhang Lei (张磊) is ready to place his bets on China, having recently expressed to Blackstone Capital founder Steve Schwartzman that “the greatest investment opportunities are in China, and under current conditions, right now is the best chance you will get to invest.”

However, following the hard lessons learned from failed positions throughout the pandemic, investors are likely to be more cautious when deploying capital throughout the remainder of the year. The founder of Hike Capital (山行资本) Xu Shi (徐诗) recently expressed that “fundraising and investing is facing some short-term pressure. As the global turning point for the pandemic is unclear, fundraising for dollar denominated funds will be especially impacted. This will cause a chain reaction, reflected in much more cautious investors while looking at projects.” It is still unclear to what degree increased conservatism will affect the pace of innovation in China; however, it can be anticipated that the investment industry over the coming months will be characterized by fewer deals at higher totals rather than a wide array of smaller deals.

Deal of the Day: Resilient Startups at a Discount

Top VC Investors in China, Jan. 1-Apr. 16, 2020. Sources: East Money, IT桔子, The China Guys

Tencent Investments (腾讯投资)

While many investors prepare for the future, others look to the present. According to Tencent’s 2019 year-end financial reports, the firm’s cash and cash equivalents increased by approximately CN¥34 billion (US$ 4.8b) year-over-year. Increased liquidity has allowed Tencent to enter the market and acquire resilient companies at significant discounts. From the beginning of the year through April 16, 2020, Tencent has made 34 investments in domestic and foreign firms across the gaming, e-commerce, entertainment, professional services, and education industries. 

Tencent recently increased its investment in the e-commerce platform Pinduoduo to 790 million shares, or 29.2% of total outstanding equity, and secured its position as the e-commerce platform’s second largest shareholder. Pinduoduo is China’s third largest e-commerce platform and greatest challenger to and Alibaba. On the same day as the Pinduoduo release, the livestream gaming platform Huya (虎牙) announced that Tencent-controlled Linen Investment Limited was buying 16.5 million B shares, raising Tencent’s total ownership of Huya to 50.1% and becoming its largest shareholder. Through its investments in Pinduoduo and Huya, Tencent has been able to establish a strong foothold in strategically significant industries at discounted prices to strengthen its position in the fierce battle against its largest competitors, and Alibaba.

Sequoia Capital China (红杉资本)

Sequoia Capital China has been the second most active investor in China in 2020, having made 29 investments including seed, venture, and private equity rounds. Sequoia’s investments were allocated across many of the most popular industries over the past year, particularly in professional services, fintech, and healthcare. Notably, Sequoia took a significant position in the cross-border financial start-up Airwallex at $160 million in a Series-D funding round. 

Sequoia further announced a partnership with Starbucks to explore opportunities to harness the power of data-driven analytics, modeling and decision-making by embedding digital technologies across all dimensions of its retail business. The strategic collaboration is intended to bolster Starbucks’ position in the Chinese market at a time when its key competitor, Luckin Coffee, is being investigated by Chinese officials and the SEC for falsifying sales data in 2019.

Hillhouse Capital (高瓴资本)

In addition to its recently announced dual currency fund – Hillhouse Ventures, Hillhouse Capital has made 17 investments through mid-April 2020. The institution has taken positions in popular Chinese companies like Yuanfudao, the online education company; Hey Tea, a large chain of mainstream tea shops; and Beike Zhaofang, a house/apartment finder app. In Beike Zhaofang’s Series D+ round, Hillhouse was joined by Sequoia and Tencent Capital in raising over US$2.4 billion for the company behind the app to hire top talent, continue R&D spending, and further develop their operational infrastructure. 

Hillhouse founder, Zhang Lei, consistently seeks to invest in firms that leverage technology to innovate in lagging industries. This strategy has led Hillhouse to take a position in Zoom Communications, a startup that has reimagined the business conferencing space, and now directs his sights to the largely human interaction-driven real estate industry. 

A Return to Core Competencies

Other leading investors in the Chinese market have considerably slowed their pace in 2020. Between five top Chinese internet companies (Alibaba, Meituan Dianping, Jingdong, Baidu, and Xiaomi), the group has only made a combined 13 investments in 2020, with the majority of positions being strategic in nature and focused on strengthening existing business functions.


Xiaomi Q1 2020 Investments. Sources: Eastmoney.comIT桔子, The China Guys

Xiaomi is an internet company founded in 2010 that began by producing smartphones in China, but has since expanded its influence in the hardware space while developing significant headwinds in the IoT scene. In an effort to improve its competency in intelligent audio offerings, Xiaomi invested an undisclosed amount in QingtingFM, an internet-based radio aggregation service and intends to leverage this strategic investment to further advance its AIoT (Artificial Internet of Things) offerings.

Meituan Dianping

Meituan Dianping Q1 2020 Investments. Sources:, IT桔子, The China Guys

Meituan Dianping offers a digital platform providing local food delivery services, consumer products and retail services. The company has invested in three startups in 2020 thus far, with two notable transactions – Wangjiahuan (望家欢) and Yihao Shipin (壹号食品). Wangjiahuan is a logistics company with a focus on agricultural produce while Yihao Shipin is a well-known high quality agricultural produce brand. As recently explained by Zhu Yonghua, a partner at Meituan’s venture capital division, “The scale of the fresh produce industry is over CN¥4 trillion (US$566b), and is the core of the food category, therefore making it our main focus going forward.”

While Meituan Dianping already holds a commanding position through its strong delivery network, an increased focus on fresh produce and enhanced logistics network will serve to bolster the company’s leadership in the food delivery services industry while providing a complementary value-added service to its existing offerings. Meituan Dianping’s investments are likely to pay dividends as Chinese consumers continue to demand delivery-based food services over the coming quarters – particularly as fresh produce grows in popularity and restaurants begin resuming normal operations.

Where Will VCs Invest Over the Remainder of 2020?

As the original epicenter of the pandemic, China’s ability to quickly return to full work capacity is still uncertain. As a result, leaders around the globe will be watching China’s investment activity closely as an indicator of economic recovery. Q1 2020 investment statistics have already revealed which industries may be popular for the remainder of 2020; as expected, healthcare – boosted by coronavirus-driven demand – is at the top. While coronavirus-related demand may be temporary, a central push by Beijing to prioritize healthcare innovation as a long-term sovereign economic driver further reinforces the institutional push for the industry to remain the most popular for investment in 2020.

2020 Q1 VC Transaction Activity

Sources: Sina Finance, The China Guys

Other popular industries for investment in Q1 2020, like AI and internet companies, had already attracted significant capital prior to the onset of the coronavirus. Despite institutions becoming more conservative in their approach to investing, high-potential players in these hotbed industries are likely to continue receiving the funding they need for development. Unfortunately, for players in severely affected industries like real estate, travel, and entertainment, 2020 is likely to continue testing their resiliency.

The list of ‘2020 Q1 VC Transaction Activity’ above also shows the value placed on government-backed industries. Initiatives like China’s Fintech Development Plan for 2019-2021 have enlivened the fintech industry as it recovers from decreased economic activity while the Made in China 2025 plan continues to revitalize the domestic high-precision technology manufacturing supply chain industry – a space also heavily impacted by the coronavirus epidemic.

2020 is certain to be an arduous year for VCs around the globe; however, investors in Chinese markets will emerge from the pandemic with heightened opportunities to invest in innovative companies at a discount. While China’s capital winter and coronavirus outbreak have shuttered the doors of countless startups, those resilient enough to have survived are likely to be positioned well to extend their industry influence and consolidate market positions.

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