Chinese Tech Sector Faces Capital Crunch

China, tech sector, capital winter, unicorns, valuation, investing, funding slowdown, venture capital,

Numerous unicorns were among the hundreds of Chinese tech firms that toppled in 2019 as the economy soured and startups went through piles of cash, The Financial Times (FT) reported on Monday (Jan. 6).

A “capital winter” — a significant funding slowdown and drop in fundraising activities — is bearing down on China, vexed by political strife and economic uncertainty. The tech closures come as a funding shortage has investors wrestling with the end of a venture capital (VC) boom. 

Business information provider ITjuzi said that 336 Chinese startups shuttered after raising Rmb17.4 billion ($2.5 billion) from investors. Among them were unicorns — companies valued at more than $1 billion.

A foreign investment law passed in March by Beijing leveled the competitive turf, although roughly 50 percent of the 20 priciest “new economy” startup busts in the past 20 years happened in 2019. 

Startups are expected to lose money initially, but competition and knock-offs in China often trigger aggressive spending to gain market share. Customer acquisition expenses in the country are among the highest in the world. William Bao Bean, a partner at SOSV Investments in Shanghai, calculated that app downloads cost an estimated $10 to $100 each.

Zhang Zhengping, the founder of the social eCommerce startup Taojiji, announced in early December that bankruptcy was imminent despite amassing 130 million shoppers. The company burned through $42 million raised from investors in 2018 — it also owes $230 million to suppliers.

“Me and other executives have received countless threatening calls, text messages and even threats to the safety of our families and relatives,” Zhang wrote in a letter to employees and suppliers, FT reported. The founder alleged that two investors backpedaled on financing, forcing the company into bankruptcy. 

The biggest failure in 2019 was peer-to-peer lender Tuandaiwang, which had been valued at $1.4 billion. Creditors stormed the company’s headquarters as regulators came down on its finances. 

Without the cash to repay creditors, both company founders turned themselves over to police on charges of illegal fundraising.

In November, China said it was looking to coax tech listings, following a failed attempt with mainland investors. New regulations will tackle complex matters that have been technological issues for Chinese startups and their investors.