VC in China P2P: Revert to the norm?
China venture capital goes through fads and phases. A business model – perhaps already proven in another market – is rolled out locally. This precipitates a flood of copycats, plunging the market into a period of cutthroat competition. Consolidation follows as those that have managed to achieve scale prevail at the expense of those that have not. VC investors count their victories and defeats.
This dynamic is most apparent in distinct niches, with group-buying the obvious recent example. Early mover Lashou was on course for an IPO in late 2011 only for the wheels to fall off six months later. As many as 1,000 sites shuttered during 2012, leaving less than 2,700 in operation. The number has since dwindled further.
Is online peer-to-peer (P2P) lending the latest bubble? Yes and no. There has certainly been a ramping up of investment in the space. AVCJ Research has records of 12 deals in the last 18 months but anecdotal evidence suggests this barely scratches the surface. According to one estimate, 71 of the 800 online lending platforms operating in China last year went bankrupt.
The industry already appears to be in consolidation mode, but there are two distinguishing features worth noting. First, the likelihood of a government clampdown - P2P lenders are behaving like banks but they aren't regulated - may give some investors pause for thought. Second, a number of industry participants have identified ways in which they can differentiate themselves from the masses.
CreditEase, for example, is China's largest P2P platform by virtue of cultivating a presence online and offline. Indeed, the bricks-and-mortar operation may reassure potential online users of the company's reliability and sustainability.
Others pour resources into risk controls. PPDai, which has received backing from Lightspeed China, Sequoia Capital and Noah Holdings, claims to conduct 2,000 dimensions of analysis to determine a borrower's default risk. Last week, Morningside Technologies joined Softbank China Capital in a Series B round for Yooli.com. The firm, which was started by a former executive at TPG Capital, uses third-party institutions to assess credit ratings and third-party guarantors to ensure lenders receive monthly returns.
The market opportunity of P2P is clear: online platforms are a bridge between individual lenders and small-scale start-ups; they can fill the funding gap left by banks that prefer to lend to larger enterprises. The industry is also at such a nascent stage that it is difficult to tell how big it could become and how many different business models it could accommodate.
One thing worth noting about group-buying, though, is that the survivors were able to fall back on broader businesses. Group-buying became an add-on rather than a single core function. The economics are different in online P2P lending but movements of the internet giants - which could feasibly bolt lending functions on to e-commerce or social media and software platforms - should be watched with interest.
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