China Deal Review: Startup funding suffers steep fall in Feb as virus slows dealmaking

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Venture capital deals in China suffered a steep 44.21 per cent decline in transaction value in February 2020 largely on account of the impact of the novel coronavirus outbreak that has thrown business activity out of gear and far fewer big-ticket funding rounds. The first coronavirus case was reported in China’s Wuhan province on December 31, 2019.

According to proprietary data compiled by DealStreetAsia, Chinese startups have raised an aggregate of $901.25 million in the past month, down 44.21 per cent compared to the $1.62 billion recorded in January 2020. Despite the sharp decline in deal value, transaction activity in volume terms at 34 in February continued to match the momentum set in the first month of 2020 at 33 deals.

Investors operating in the local market, however, believe that the coronavirus outbreak could not be singled out as the only reason for the decrease in total deal value.

“A fundamental change has emerged in the Chinese investment market in the past two years. It has become particularly difficult for general partners (GPs) to raise capital since 2019, so the number of funds closed last year slashed by a half [compared to the year before]. Investment firms have grown more cautious, leading to a nearly 50 per cent decrease in the total funding raised by Chinese startups in the year,” said Guo Ruyi, founding partner of Chinese investment bank TH Capital.

“The epidemic only serves as ‘a catalyst’ to intensify the trend,” he said.

According to an internal survey conducted by TH Capital, over 70 per cent of USD-denominated funds and middle-to-late-stage investment institutions have shifted their focus on parameters like business scale, growth, and gross merchandise volume (GMV) to profitability/potential to break even, and cash flow since 2019.

“Investors showed an increased tendency to evaluate a private business using indicators usually adopted in the secondary market,” said Guo.

In our monthly analysis, we have put together detailed charts and dissection of prominent deals, active investors, deal stages and the most attractive sectors that have garnered the maximum venture dollars in the Greater China region between February 1 and February 29, 2020. [Note: We have considered VC deals worth $10 million and over].

Startups at Series B round remain attractive

Chinese startups at Series B round remained the most attractive portfolio for investors in February, since they closed a combined $371.75 million across 13 deals. Companies at Series A round and before (angel & seed round) came second in terms of the deal volume, with 10 transactions gathering $151 million in total.

Investors still maintained more interest in growth-stage startups than their domestic peers who previously closed only one funding round. Growth-stage startups, defined by companies at and post-Series B round in the report, collected an aggregate of $750.25 million – about 83.25 per cent of the total deal value in the month – through 33 investments.

Unlike the previous months when venture activities of companies at Series D round usually accounted for a sizable chunk, only one deal happened at the development stage in February, which was also the only mega-deal worth over $100 million in the month. In comparison, six companies raised investments worth at or over $100 million in January. The total value of the six mega-deals stood at $917 million.

Shanghai-based logistics solutions provider Yimi Dida Supply Chain garnered nearly 1 billion yuan ($143 million) in a Series D+ round, said investment bank China Renaissance, the exclusive financial advisor of the deal, in a WeChat post. Post-money valuation and investors of the Series D+ round remained undisclosed.

The company was valued at approximately 8 billion yuan ($1.14 billion) after a strategic investment in June 2019. In January 2019, the firm also raised 1.8 billion yuan ($257 million) in a Series D round led by Chinese private equity firm Boyu Capital, which counts Alvin Jiang Zhicheng, the grandson of former Chinese president Jiang Zemin, as a partner.

Cathay Capital emerges as the most active investor

Based on publicly available information collected by DealStreetAsia, Cathay Capital emerged as the most active and deep-pocketed investor in the Chinese VC market in February with participation in four deals worth a combined $152 million.

The French-Chinese private equity company, which primarily makes cross-border investments in North America, China and Europe, co-led a 600-million-yuan ($86 million) Series B round in Shanghai-based Universal Medical Imaging Diagnostic. The company, incorporated in 2011, partners with domestic hospitals to offer imaging devices for precise disease detection.

In another larger deal backed by Cathay Capital, Beijing-based AI and automation startup Laiye Technology received $42 million in a Series C round. Cathay Capital participated in the deal, following two lead investors, US venture capital firm Lightspeed Venture Partners and its China team, Lightspeed China Partners.

Most active investors in China’s VC market

Expand Table

Investment CompanyDeal VolumeTotal Value of Participated Deals (Million USD)
Cathay Capital4152
Cowin Capital344
GGV Capital2100
TrustBridge Partners294
Vision Knight Capital260
Addor Capital228

In terms of the deal volume in February, Chinese private equity firm Cowin Capital came second by injecting a combined $44 million into three deals. All three investments were relatively small with the capital involved less than $20 million each.

Cowin Capital, founded in June 2000, has backed more than 400 firms including 62 listed companies, shows the company website. Cowin Capital recorded initial public offerings (IPOs) of 13 portfolio companies in 2019.

China-focused investment firm TrustBridge Partners that made two investments in the month served as the lead investor in both transactions, including a $66 million Series C+ round in Kaishu Story, a Chinese online children storytelling brand backed by Baidu, and a 200-million-yuan ($28 million) Series B round in rural tourism solutions provider Xband.

Investment interests in China remain strong: Sequoia, GGV

Against the backdrop of a domestic economic slowdown and the coronavirus epidemic, investment companies such as Sequoia Capital China and GGV Capital, which were previously ranked among the top 10 active investors, are not walking away from investment opportunities in Greater China.

Sequoia Capital China, widely viewed as a bellwether for Chinese tech investment, told DealStreetAsia that it completed investments in 25 companies* in February, most of which have operations in China.

(* Most of these investments were not recorded by DealStreetAsia because the company did not disclose more detailed information, and some of them were not raised by companies headquartered in Greater China.)

The company declined to disclose the investment amount but revealed in a WeChat post on Monday (March 2) that the investments were made into companies ranging from seed round to growth stage in the fields of TMT, consumption service, healthcare and industrial technology. It claimed to have closed more deals in February 2020 than February 2019.

Earlier in February, Sequoia Capital China moved its investor-startup matchmaking event online for the first time in a bid to mitigate the fallout from the epidemic. The company said that a couple of two-hour teleconferencing sessions attracted over 50 investment companies to connect with nearly 30 of the fund’s early-stage portfolio companies.

In comparison, the global venture capital firm GGV Capital made two investments in China in February. The company’s investment pace relatively slowed down but was not stopped by the virus.

“In the following three months, the epidemic will influence the research efficiency of VC investors since we cannot meet entrepreneurs and company executives in person, nor can we pay visits to their offices and better understand their client conditions,” said Foo Jixun, managing partner of GGV Capital. “The investment efficiency will be more or less influenced and we will leave more time to decide an investment, but good enterprises will survive and stand out.”

“Venture capital is essentially an industry accustomed to working remotely… GGV Capital has more than 80 colleagues across five offices worldwide. We have been using products like WeChat and Zoom to discuss work issues,” said Foo.

Apart from its investment in China, the company also poured money into two Indian startups in February through the participation in a $60 million round in Rupeek, an online lender that dispenses loans against gold jewellery and heirlooms, and a $24 million round in interactive online tutoring platform Vedantu.

Health tech, edtech see good traction

As people are forced to work from home and schools extended the closure duration due to concerns over coronavirus, tech-enabled online education startups – as expected – became much more attractive than ever in February. Companies in the space gathered a combined $156 million across six deals, half of which were larger than 100 million yuan ($14 million). Here is a look at the top deals in this space:-

  • Kaishu Story, an online children storytelling brand backed by Baidu, raised $66 million in a Series C+ round led by China-focused private equity firm TrustBridge Partners. The deal, which was advised by TH Capital, saw the participation of Singapore’s state-owned investment firm Temasek Holdings, and Shanghai-based private equity company Loyal Valley Capital.
  • Snapask closed $35 million in an investment led by Singapore-based private equity firm Asia Partners, as the Hong Kong-based education technology brand aims to further grow its business in Southeast Asia. Intervest Star, a co-GP fund of South Korean Intervest and Kejora Ventures, as well as Snapask’s existing shareholder Ondine Capital also injected capital into the round.
  • 51CTO, an online IT technical training platform, received $20 million in a Series C round led by private equity firm Gaocheng Capital.

Companies in the health tech industry garnered an aggregate of $165 million – the largest fundraising amount in the month – across five investments. Two of the five deals were larger than 100 million yuan ($14 million).

  • Universal Medical Imaging Diagnostic, which offers a cloud-based resource-sharing platform, secured 600 million yuan ($86 million) in a Series B round led by Cathay Capital, CEC Capital-owned industrial fund, and Chinese investment firm V Star Capital.
  • Cyagen Biosciences, a Chinese subsidiary of the custom-engineered mouse and rat models provider Cyagen, raised 285 million yuan ($41 million) in a Series B round from investors including China Merchants Securities’ investment vehicle CMS Capital, as well as GF Qianhe and GF Investment, affiliates of China’s GF Securities.

The epidemic may speed up O2O, AI, among others

“Offline-based retail and consumer-related sectors are being affected more severely than any other fields,” said Li Feng, founding partner of Shanghai-based early-stage venture capital firm FreeS Fund, at a webinar on February 27.

That is indeed the case. But interestingly, four consumer brands still managed to close a total of $90 million in February driven by frenzied queues to buy convenient and tinned food since the coronavirus outbreak.

The largest of all was a $50 million Series B round raised by Guoquan Shihui, a convenience store chain that provides hot pot and barbecue ingredients to consumers. The company now operates over 1,700 shops to offer self-developed and third-party products for customers to cook at home. It claimed to have retained an over 400 per cent year-on-year growth in revenue since the start of 2020, and over 1,000 of its shops are still under operation.

“In the middle to long term, some offline-only retail businesses will suffer from great losses, and they might be wiped out eventually. However, companies involved in both online and offline integrated operations will experience a growth of efficiency,” said Li.

“Slightly over one-third of tech-enabled startups are seeing more and greater opportunities amid the epidemic than before,” he said, referring to an internal survey conducted among the company’s over 100 portfolio firms.

FreeS Fund also observed an increasing demand for industrial robots, smart city and logistics-related technologies, apart from medical-related applications. Above all comes the popularity of AI, said Li, who predicted that the AI adoption in China will be accelerated [to help identify coronavirus patients] in the wake of favourable government policies.

China’s VC deal worth $100m and over

Expand Table

StartupHeadquarterInvestment Size (USD)Investment StageLead Investor(s)Other Investor(s)Sector
Yimidida Supply Chain Holding Shanghai143D+--Logistics

Liya Su also contributed to this story.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.