China VCs tell start-ups to focus on sustainability - AVCJ Forum

"We haven't seen many companies have raise down rounds," James Mi, co-founder of Lightspeed China Partners, an early-stage investor, told the AVCJ Forum in Hong Kong. "But for companies at growth and later stages, when they ask investors for funding at a certain number, the number will drop after a few days, or drop even further after a few weeks. They might not raise down rounds, but their existing shareholders are selling their shares at discounted prices. That's the reality."

Xing Liu, a partner at Sequoia Capital China, said he has seen some Chinese start-ups raise down rounds, but he does not expect it to become a widespread phenomenon given new sources of capital are entering the market. The likes of investment entities tied to Chinese insurance companies and asset management firms are willing and able to write large checks for later-stage rounds. Government-backed VC funds and A-share listed companies are also interested in start-ups.

Nevertheless, Liu is advising CEOs to "be practical" and focus on building sustainable businesses. These sentiments were echoed by Jenny Lee, managing partner at GGV Capital, although she noted that high quality companies are still able to raise sizeable pools of capital at increased valuations. Ride-hailing app operator Didi Chuxing is a case in point, with global investors such as Apple coming into its latest round.

"Companies in China are addressing a huge market, which still requires a lot of capital. Nowadays these companies will not just be funded domestically. They aren't restricted to venture capital; they are going beyond that to look for strategic capital or private equity funding. When you're in a large market, you see diversity in the investor base," Lee said.

While there are concerns regarding some segments of the market, the broader venture landscape is healthy and showing signs of maturity - the proliferation of micro VC funds in China, with corpuses of $10-75 million, are cited as evidence of this. These micro VC players are expected to bring in strategic investors like Foxconn Technology or established VC firms as co-investors in deals, according to Charles Pan, chief strategy officer at social media platform Migme and formerly a member of Foxconn's investment team.

"In the US, you have large angel investor networks, but not in China," added Lightspeed's Mi. "Now, Chinese entrepreneurs have generated wealth through their companies doing IPOs. They are trying to invest in the industry and creating more deal flows. Of course they aren't all high-quality. But it was something missing in China before, and [the emergence of micro VC] is actually healthy."

The AVCJ Forum is being held in Hong Kong on November 15-17. For more information, go to www.avcjforum.com.

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• Topics
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