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  HOME | Business & Economy (Click here for more)

For Chinese Startups, an Economic Slowdown Brings “Freezing Winter”

BEIJING – China’s hard-charging technology sector, which has produced some of the world’s hottest public companies and unicorn startups, is experiencing something different: a slowdown.

An economic deceleration amid the trade fight with the United States is causing layoffs, reducing bonuses and shrinking the easy venture funding that fueled China’s thriving startup scene.

While not yet a meltdown, especially for big established companies, for many startups and smaller firms in a sector that barely existed a decade ago, this is the worst they have seen it. Investors, entrepreneurs and the media are calling it the Chinese internet’s “freezing winter.”

Bike-sharing startup Beijing Mobike Technology Co. and Douyu, a Tencent Holdings Ltd.-backed video-streaming company, have dismissed workers. At Beijing Bytedance Technology Co., the operator of popular short-video app TikTok, employees received smaller red packets, customary gifts of money ahead of the Lunar New Year.

“In 2019, the external environment is going to be even more difficult, complicated and filled with turmoil, and the challenges that we face are very great,” Bytedance founder Zhang Yiming said in a letter to employees last week.

All the belt-tightening is a new fit for a tech scene that in recent years seemed unstoppable, charged by a roaring economy, abundant capital and a cheerleading government. Startups proliferated on the back of eased business-registration rules and incentives for scientists to start companies. One startup that lets consumers order coffee via smartphones became a unicorn, a $1 billion valuation, in seven months.

Inncube, a Beijing-based co-working startup, raised millions of yuan from an individual investor during its first round of fundraising in 2017, said co-founder Kevin Qin. Other startups added themselves to the waiting list last summer to rent desks in the four co-working spaces that his company operates in Beijing, Shenzhen and Shanghai, he said.

Then, in September, tenants began breaking their leases, Qin said; some blamed cash-flow problems after expected funding fell through. Inncube’s average occupancy rate tumbled from 97 percent in October to 90 percent in November, then 82 percent in December.

For many small startups, “it’s become very hard to raise money,” he said. “That’s a fact.”

Investors who once poured money into venture and private-equity funds have been pulling back from the frothy tech scene as the economy flagged, stock markets drooped and a government campaign against risky financing bit.

Venture capital raised in China fell 13 percent to 302.5 billion yuan ($44.8 billion) in 2018 from a year earlier, according to research firm Zero2IPO. The number of investment deals sank 10 percent to 4,321. Likewise, the capital raised by private-equity funds plunged 30 percent to one trillion yuan, with total investment into the market falling 14 percent to 852.7 billion yuan.

Vickers Venture Partners, an early-stage investor in startups, only invested about half the capital it had allocated for China last year, Vice Chairman Jeffrey Chi said. Startups, largely unaware of the worsening economic picture, were still asking for funding based on overblown valuations in the first half of 2018, he said, before reality set in.

Now, startups that aren’t among the top three competitors in their sectors, or those without revenue are having a more difficult time raising money, according to startup founders and investors.

“The party is over and it’s back to the fundamentals,” said Bob Bogaert, co-founder of Shanghai-based Portfolio.io, a platform that enables individual investors to trade a variety of cryptocurrencies. He said investors are waiting for his startup to officially launch before deciding whether to invest, a change from the easier conditions of recent years.

Tighter financing is hitting companies that relied on burning through cash to subsidize services and grab market share. The bike-sharing services ubiquitous in urban China are among the hardest hit, including Mobike, the industry leader.

Hundreds of employees have left the company in recent months, either voluntarily or through layoffs, according to people familiar with the matter. Acquired by online-services company Meituan Dianping last year, Mobike is abandoning its stand-alone app in China and is set to rebrand as Meituan Bike, according to an internal memo in January. In a written statement, Mobike said some positions had been “adjusted” as part of two restructurings in the second half of 2018. The company didn’t specify which positions.

Meituan Dianping, which offers food-delivery and other lifestyle services, has laid off employees, according to users of an online job-search platform. A spokesman said the company is conducting a normal business restructuring and that it has laid off less than 0.5 percent of its total employees, which would be about 260, based on company figures.

Employees at e-commerce company JD.com Inc. said layoffs have hit some departments; the company said it regularly evaluates employees and will make adjustments for poor performance. Ride-hailing firm Didi Chuxing Technology Co., which has been under regulators’ scrutiny after the murders of two passengers, cut year-end bonuses by half for employees and offered none for executives, people familiar with the matter said.

Some firms are taking advantage of the sector’s chills, especially companies in the tech areas the government wants China to dominate. Vincross Inc., a robotics startup based in Beijing that enjoys generous tax breaks, has been recruiting employees that have left other tech firms.

Andy Xu, chief operating officer, said Vincross plans to hire about 20 employees this year as it prepares to launch a product, after a successful round of fundraising over the past few months. The company currently has about 30 employees.

“A lot of people’s end-of-year bonus has been cut,” he said. “That makes our recruitment easier.”

 

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