‘Grav­ity’ takes hold

Can high val­u­a­tions of star­tups like the Didi ride-hail­ing app be main­tained?


In an­cient mythol­ogy, Chi­nese uni­corns are lucky, rare crea­tures that ap­pear to mark the ar­rival or death of a great leader, like Con­fu­cius. Today, China’s tech uni­corns — pri­vate com­pa­nies valued at $1 bil­lion or more— are far more com­mon­place and look in­creas­ingly cursed.

Four of the world’s seven most valu­able pri­vate com­pa­nies are now Chi­nese, all founded in the past seven years. Didi Chux­ing, the ride­hail­ing app, and Xiaomi, the smart­phone man­u­fac­turer, for in­stance, both have val­u­a­tions top­ping Airbnb and Snapchat. Five Chi­nese com­pa­nies have val­u­a­tions of at least $10 bil­lion, and 37 are valued at $1 bil­lion or more, ac­cord­ing to re­search firm CB In­sights.

The pace of uni­corn births has ac­cel­er­ated dra­mat­i­cally over the past three years. From 2010 to 2013, in­vestors valued no more than one Chi­nese com­pany each year at $1 bil­lion or more. Then China saw five new com­pa­nies deemed uni­corns in 2014— and an eye­pop­ping 19 foaled in 2015. In the first 10 months of 2016, in­vestors crowned an­other 10 newu­ni­corns.

Chi­nese com­pa­nies are now of­ten viewed as po­ten­tial global con­querors. But, there’s grow­ing skep­ti­cism about how valid some of their sky­high val­u­a­tions are.

In­vestors and an­a­lysts are whis­per­ing doubts about star­tups’ abil­ity to main­tain such lofty num­bers when they try to raise fu­ture fund­ing or go pub­lic. Some fret the waves of cash pour­ing into China’s tech­nol­ogy in­dus­try may some­times swamp in­no­va­tion, not stir it.

“A pa­per uni­corn is just a pa­per uni­corn,” said Jenny Lee, Shang­hai-based man­ag­ing part­ner at GGV Cap­i­tal. “It’s noth­ing un­til you can show the value you’re pro­vid­ing to cus­tomers, and that con­sumers are will­ing to pay for it.”

Gary Ri­eschel, man­ag­ing part­ner at Qim­ing Ven­ture Part­ners, said star­tups are qui­etly be­gin­ning to ac­cept lower val­u­a­tions — and more un­pub­li­cized­down­rounds are on the way. “Grav­ity will even­tu­ally take hold.”

Af­ter Jack Ma-led Alibaba Group Hold­ing Ltd’s block­buster IPO in the US raised $25 bil­lion in 2014, in­vestors rushed to find the next Ma. Be­tween 2012 and 2015, the amount of ven­ture fund­ing in­vested in Chi­nese in­ter­net com­pa­nies quin­tu­pled, reach­ing $20.3 bil­lion last year — eclips­ing the $16.3 bil­lion in­vested in US in­ter­net com­pa­nies in the same pe­riod, ac­cord­ing to Price­Wa­ter­house­Coop­ers.

Xiaomi, the Bei­jing-based smart­phone maker founded in 2010 by se­rial en­tre­pre­neur Lei Jun, was mar­ket leader for sev­eral months in late 2014 and early 2015. Three months af­ter Alibaba’s IPO, Xiaomi raised fund­ing that valued it at $46 bil­lion.

But, its po­si­tion in China tum­bled from first to fourth. Its cur­rent value may be $4 bil­lion to $10 bil­lion if it tried to raise more money now, es­ti­mated Clay Shirky, an as­so­ciate pro­fes­sor atNYUShang­hai and au­thor of a book about the com­pany.

China’s Len­ovo Group Ltd, for ex­am­ple, holds about the same share of the Chi­nese smart­phone mar­ket asXiaomi and is valued at about $7 bil­lion. Len­ovo is also the big­gest PC maker in the world. “Xiaomi shouldn’t be six times Len­ovo,’’ Shirky said. Xiaomi de­clined to com­ment.

Vancl, an on­line fash­ion re­tailer, be­came a uni­corn in De­cem­ber 2010 and com­manded 7.7 per­cent of China’s on­line ap­parel and footwear mar­ket in 2011, se­cond only to Alibaba, ac­cord­ing to the re­search firm Euromon­i­tor. Its val­u­a­tion hit $3 bil­lion. But the com­pany stum­bled in its ex­pan­sion and strug­gled to man­age in­ven­tory.

By 2015, Vancl’s mar­ket share had dropped to 2 per­cent. Its val­u­a­tion is well be­low its peak. A re­cap­i­tal­iza­tion a cou­ple years ago valued Vancl at about $200 mil­lion. Vancl de­clined to com­ment on its cur­rent val­u­a­tion.

The Bei­jing startup Wan­dou­jia hit the mag­i­cal $1 bil­lion val­u­a­tion in 2014, amidst the eu­pho­ria over China’s fast­grow­ing smart­phone mar­ket. The lead in­vestor was Ja­pan’s Soft­Bank Group Corp, the same­com­pany that­madeaf­or­tune from its stake in Alibaba.

ButWan­dou­jia’s busi­ness of sell­ing An­droid apps proved vul­ner­a­ble to com­pe­ti­tion and the on­line store strug­gled to stand out. In July, Alibaba ac­quired Wan­dou­jia for less than half its peak val­u­a­tion, ac­cord­ing to a per­son fa­mil­iar with the deal. Soft­Bank and Alibaba de­clined to com­ment.

Even some of China’s most valu­able uni­corns have seen their plans for world dom­i­na­tion in­ter­rupted. Lu.com is a peer-to-peer lender valued at $18.5 bil­lion and backed by some of the coun­try’s most pow­er­ful in­vestors, in­clud­ing the fi­nance gi­ant Ping An In­surance Group.

CEO Gre­gory Gibb had said in Jan­uary that he planned to take the com­pany pub­lic this year to raise ad­di­tional cap­i­tal. But those plans are off the ta­ble af­ter­month­sof tu­mult in the on­line lend­ing mar­ket.

China has no real prece­dent for deal­ing with the bust of a high-fly­ing startup, or sev­eral at once. Most do­mes­tic ven­ture firms were founded af­ter the last ma­jor down­turn 15 years ago. There’s no his­tory of pub­licly dis­clos­ing down rounds, or the de­crease in a startup’s val­u­a­tion— although in­vestors may pri­vately write down strug­gling com­pa­nies.

Provin­cial govern­ments have been wary af­ter they had to re­luc­tantly let some failed busi­nesses go un­der. They­may be even more fear­ful of tech startup fail­ures, which would elim­i­nate jobs and threaten fu­ture in­vest­ments.

China ven­ture cap­i­tal in­vest­ments surged from $6.6 bil­lion in 2013 to more than $50 bil­lion in the first nine months of this year, ac­cord­ing to re­searcherPre­qin. But in the third quar­ter, in­vest­ments fell almost 50 per­cent from a year ear­lier. Maybe that’s a re­lief, at least a fewin­vestors said.

“Some en­trepreneurs say they need all the money,’’ said Anna Fang, Shang­hai-based CEO of Zhen Fund. “But some peo­ple say, if you have too much money, you make mis­takes, or you make mis­takes for longer.”

Dun­can Clark, founder of Bei­jing-based con­sul­tancy BDA China, said: “How many of those 30-some uni­corns are re­ally worth a bil­lion? Prob­a­bly a few. The prob­lem is that when peo­ple ap­pear to be suc­cess­ful, ev­ery­one comes out of the wood­work to back them. That hap­pens in the US. But it’s more ex­treme in China.”

A pa­per uni­corn is just a pa­per uni­corn ... un­til you can show the value you’re pro­vid­ing to cus­tomers ... ” Jenny Lee, Shang­hai-based man­ag­ing part­ner at GGV Cap­i­tal


An em­ployee (left) as­sists a cus­tomer as she looks at a Xiaomi smart­phone in­side one of the com­pany's stores in Bei­jing.


The Didi Chux­ing app is dis­played on a smart­phone screen in Shang­hai.

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