The rottenness of Chinese billion-dollar start-ups, so where should it be?

The “graveyard” area of ​​bicycles from Xiamen to Shanghai is filled with twisted cars, and the steering wheel is broken. Now it has become an unattractive symbol for hundreds of Chinese start-ups “booming” thanks to easy capital calls, “bracing” the work effort and the relatively open regulatory context. .

When the idea of ​​these startups started in 2015, bike rental companies promised that they would attract a booming middle class in China to invest billions of dollars, though they often Very low fees for renters or some cases do not use this service. Some, like Mobike or Ofo, quickly go abroad. However, both companies later reduced their overseas presence. Ofo’s founder, Dai Wei, warned that they were on the verge of bankruptcy. Wukong and Bluegogo have “come down”.

Currently, they have become a symbol for most failed technology start-ups in China, especially those that build ideas about shared economy. Companies have problems in many different areas, from food delivery, shopping sites to shipping applications.

Blossoming and dying

China’s technology sector has witnessed the development momentum of a series of businesses within 4-5 years. In 2018 alone, about 100 tech start-ups have become “unicorns”, according to Hurun research group. However, the sublimation too quickly decelerated in the last quarter of last year. The amount of capital is being gradually withdrawn or turned into deals in other markets in the region, the status of workers strikes and Beijing’s regulation in this area is quite loose. Many technology companies have suffered from the fact that they have to spend more money to attract customers than what customers bring to them.

While the United States is worried about China’s emerging technology potential – promoting trade wars and sanctions against Huawei, the reality is for many companies to be less good. The trade war has revealed the weaknesses of many companies. Shirley Xie, head of PwC Hong Kong and China, said: “Because of trade conflicts, the gaps between Chinese and American technological capacities have become clearer. And technology companies also completely see that. ”

Over the past few years, there seems to be a constant flow of capital into this area. This allowed a technology company like Ant Financial to raise $ 10 billion in the fund call last year, bringing the valuation to more than $ 150 billion. However, investors began to struggle. The total value of agreements in the Chinese IT sector in the second quarter of 2019 was 2.2 billion USD, while the same period last year was 26.4 billion USD, according to data from Preqin.

The “evaporation” of state-backed funds took place after US venture capital companies opted for a more cautious approach – the result of overpriced valuations and business models. not transparent of some technology companies. These companies have seen the capital inflated to “heavenly” prices, especially bluechips, such as Sequoia and Hillhouse, which raised $ 8 billion last year.

The impact began to become noticeable in the first quarter. Investors became concerned after a series of capitalization deals that priced start-ups lower than the previous round and a positive year of 30 start-up technologies listed. 2018.

The process of enterprise appraisal is more rigorous

In addition, the number of enterprise assessments on potential investment activities has increased significantly. Nisa Leung, a management partner at venture capital fund Qiming, said business assessments often take place after companies submit their investment terms (term sheets). She said: “The trend has changed. People are stricter when considering terms and spend more time evaluating businesses.”

This new watchful move is gradually shifting to both extended capital calls and “value adjustment mechanisms”. This marks a huge change. The banker interviewed by FT above said: “In fact, a sponsor – 9 months ago trying to participate in a deal, is now making a request for a value adjustment mechanism. This suggests that global investors are not interested in these companies. ”

The “victim” of this new rule is VIPKID – an online English center for children with native teachers who is currently struggling in the process of calling capital, and Megvii – one of Trung’s biggest AI companies. National. Megvii – gaining an advantage in the field of face recognition, has been “abandoned” by early investors as they continue their calling plan in May. Therefore, they must rely on the backing of the state-owned company and received a capital of 750 million USD.

The fragility, being pushed to a more stressful level is also due to the escalating trade war, continuing to “spill” into the public market – even when Chinese startups are eager to seek capital before Investors gradually withdraw from the technology market. Among Chinese technology companies listed last year, Uxin – a trading platform for used vehicles, saw flexible prices drop by 73%, while page shares Mogu clothing shopping web site decreased by 81% compared to the time of IPO.

Instability comes from within technology

The second “push” of technology comes from the industry itself, one of which is GitHub. The platform of online developers earlier this year has expressed dissatisfaction with the “996” working culture. Alibaba, JD.com and ByteDance are among the companies that have been named and carried out a campaign that attracted the attention of the “Chinese Youth” newspaper.

The continuous working hours can be popular from Silicon Valley to Shenzhen, but it is even more terrible in China because the terms of access have been changed when these startups find ways to cut costs and losses. The reward regime for employees is reduced, especially in the application development company Didi Chuxing car rental – all from the bowl of fruit to the gym membership card was cut down quietly.

“996” culture suffers from many “stone bricks”, but many founders, typically billionaire Jack Ma, see it in a different way. He said: “If you join Alibaba, you should be prepared to work 12 hours a day, otherwise why are you going to Alibaba? We don’t need people who just like to work 8 hours.”

Bursting leads to fierce competition

The complaints of employees and investors also mentioned a bigger problem: the growing number of start-ups is like a wave of default. From bike sharing and food delivery services to online English classes, companies have found that their consumer-focused business model is not effective due to the fierce competition. paralysis.

Pinduoduo, a shopping site, is the representative “representative” for the “burn money” model depending on the sale of large quantities of goods. The Shanghai-based company used $ 1.50 for every $ 1 of revenue they earned in the last quarter of 2018. Pinduouo inherited advantages from Alibaba and JD.com but later We have to compete with other competitors, like Xiaohongshu and Songshupinpin – these companies have made their own changes to the e-commerce sector.

Similarly, the English business companies’ business market is booming, one of which has to keep a reasonable price by not hiring native teachers or organizing classes instead of 1-1 tutoring.

Toby Mather, co-founder of CEO of Lingumi – an online education company in China and the UK, said: “As competition increases, especially in China, the cost of owning customers is raised to some companies carrying B2C models will benefit. ”

Alibaba and Tencent are leading companies in an initiative to cut customer ownership costs: focus on business results among companies, including small and medium-sized businesses. In Tencent’s reorganization campaign last year, a unit focused on business customers and established industries. However, this is a difficult process of change for smaller companies.

Serving corporate customers often requires greater spending for R&D, not a simpler proposition for customers through an application that fits all. It also requires different skills in distribution, products, services, personnel models and organizational structures.

An investor took the example of SenseTime – China’s largest AI start-up valuation of $ 4.5 billion after the latest round of fundraising, proving the fight to move up a higher hierarchy. SenseTime develops its business by selling face recognition services, including surveillance purposes in cities – mainly sold to government agencies. This person said: “They are engineers but do not have extensive experience in finding customer needs, because they develop with only one customer.”

Perhaps the most obvious sign of this difficulty comes from the ability of many companies to improve new product lines. At the China High Technology Fair in Shenzhen earlier this year, things didn’t seem to change much from the previous year: robotic arms placed in Oreo gear boxes, surveillance cameras installed around booths. and robots dance for people to take pictures.

Some tech start-ups before “shine” with new ideas when listing are now fading away. Meitu, listed in Hong Kong in December 2016, then resold the smartphone brand to its former rival Xiaomi and cut off personnel. When listed, this is a company producing smartphones and beauty applications, and now they are switching to skin care equipment business.

“But the skepticism is that this loss is dominated by a single trend. Three years ago it was a shared economy,” said a senior Chinese technology executive. Now it’s 5G and the internet industry is in a lot of things, so many companies are coming in. But no one knows what the business model for the internet industry will be, all confused. when thinking about the future. ”