Shulou(Shulou.com)06/02 Report--

Venture capital in Asia has plagued the tech world over the past year. Although there has been a cold winter of capital, investors and companies have pumped seemingly endless money into fast-growing private companies.

Among them, Chinese mainland is the most obvious. In the third quarter of 2018, Chinese mainland once again dominated the investment pattern in the Asia-Pacific region. In addition to accounting for 71 per cent of the total known venture capital in the region, investment in mainland start-ups also accounts for more than 66 per cent of the total known venture capital in the region.

There is no big secret about why China dominates venture capital, simply because it is an attractive market for both companies and investors. China's huge population base leaves plenty of room for market growth, and government support for science and technology has also helped to promote the experiment. But what about China's investment environment in the past few months because of Trump's trade war and geopolitical and cyber security issues hanging over US-China relations?

Venture Capital Environment in China

At first glance, the chart may be misleading: China's total venture capital fell by 26 per cent from the second quarter to the third quarter of 2018. However, this decline needs to be explained in more detail-some anti-China Trump tweets have not caused such a big drop.

However, if you still remember, you will remember that Ant Financial Services Group, the financial technology subsidiary of e-commerce giant Alibaba, received a huge financing of $14 billion in the second quarter of this year. If we look closely, we will see that dollar trading volume fell by 26% from the second quarter to the third quarter, which can be attributed to this round of large financing. Without Ant Financial Services Group's round of financing, dollar trading volume would have increased by 19 per cent from the second quarter to the third quarter.

The number of deals also increased between the second and third quarters, while total venture capital increased, excluding the unusual round of financing by Ant Financial Services Group.

The number of individual transactions in seed wheels, early rounds and late rounds increased by about 27% from the second quarter to the third quarter. Even if Ant Financial Services Group is excluded from this round of financing, the growth of dollar trading volume is also far lower than the growth of overall trading volume. As a result, even without a sharp decline, the number of seed wheels and early deals has increased significantly. And the relevant data also confirm this, the data show that the seed stage and early trading volume increased by nearly 53% and 18% respectively.

As a result, China's venture capital continues to push its limits. These overall investment data have brought huge returns for Chinese enterprises.

Excessive financing is prevalent.

Once again, China has received a huge round of investment. July is a record month for global capital injections of $100 million or more (we call it a "super ship"). Chinese companies accounted for 60% of the world's largest rounds of deals that month, according to Crunchbase News.

In the third quarter of 2018, there were 54 super round financing in China. Half of these raised more than $100m, and the total value of the five deals exceeded $1 billion. It was an impressive large-scale investment, but it was actually slightly lower than the 57 super-large rounds recorded in the second quarter of 2018. In spite of this, huge financing is not common in the Chinese market in the first quarter of this year, with only 36 rounds raising more than $100 million.

Over the past year, these huge amounts of financing have become popular around the world, slowly changing the way we define funding for each stage. In China, even seed round investment has reached a very high level, because stubborn investors invest heavily in young start-ups.

Investment in the seed stage

The volume of seed dollar transactions increased by 204% from the second quarter to the third quarter of 2018. The growth benefited from two large deals, including a very large deal in the "Pre A round".

China's largest "seed" round of financing is a $294 billion investment in electric carmaker Dearrc. In recent years, China's electric vehicle field has ushered in a large number of start-ups and financing activities. As early as 2010, China began to vigorously develop new energy vehicles, promoting investment in China's electric vehicle market. This effort is supported by government subsidies and tax exemptions, and China is now beginning to scale it down. Some investors expect only 1% of china's hundreds of electric car companies to survive, according to Bloomberg.

Notably, Weilai, considered to be the Chinese version of Tesla, went public in the third quarter, raising $1 billion on its first day. However, the company had sales of just $7 million in the first half of 2018 and a total loss of more than $500m. By the time the application was submitted, the company had delivered only 481 cars, despite thousands of orders.

Early stage investment

Like this interest in electric cars, capital is common in early investment by Chinese companies. Xiaopeng, founded in 2014, has raised $1.3 billion from investors such as Alibaba, GGV Capital, Morningside Capital and Foxconn.

Apart from electric cars, JD.com Finance was the largest recipient of first round financing in the third quarter. The company announced that it was valued at about $20 billion and raised nearly $2 billion in August.

The company is another example of a spin-off subsidiary of a Chinese listed company that has successfully attracted a large amount of investment. Ant Financial Services Group, Alibaba's financial technology subsidiary, and (now listed) Tencent Music both benefit from this affiliation. The broad market influence of its former parent company may be a driver of investor confidence in the spin-off platform.

Investment in the later stage

China's largest late-stage deal is driven by corporate partnerships and investment by China's existing heavyweights.

The biggest investment went to ele.me, an online food delivery service. Alibaba previously owned 43 per cent of the company and bought the rest from Baidu for $9.5 billion in February 2018. The $3 billion round of financing came from Softbank Corp. and Alibaba, bringing the total financing of the food distribution company to $6.3 billion and raising Alibaba's foothold against Tencent-backed Meituan Dianping in the food delivery market.

Similarly, focus Media, an outdoor digital marketing company, received a $2.23 billion investment from Alibaba. Another company backed by Alibaba, online used car trading platform Dasouche, has also received a huge investment of $578 million. Meanwhile, Alibaba's competitor, Dada JD.com, has received $500m in corporate investment from Wal-Mart.

Deep-pocketed companies and investors have clearly shown their willingness to bet on growing Chinese companies, and they are likely to bet on the momentum into the fourth quarter.

What is the future development?

Despite the precarious relationship between China and the United States, China's investment environment is still relatively strong. Investor confidence in large funds such as Sequoia Capital and Softbank Corp. suggests that investment in Asia may not slow in the near future. As more early-stage and seed-stage companies join the portfolio, and the market continues to mature, this could pave the way for larger, more competitive investments.

Source: Cruchbase

Zhang Suyue

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