Monday, May 1, 2017

"Venture-Capital Quandary: Too Much Money Chasing Too Few Ideas"

From the Wall Street Journal, April 27:

Expecting a ‘deep winter’ of funding, China’s VC industry instead finds lots of cash sloshing around
After a frenzied 2015 when venture money gushed into apps providing on-demand home services from meal delivery to massages, funding for startups was supposed to enter what industry insiders called “deep winter.”

For some of those darlings, capital did freeze up, forcing them to fold, shrink or merge with competitors. But funding is anything but short. China’s venture-capital industry is suffering a different headache: too much money and too few solid prospects to bet on.

It is “more like a drought of assets than a ‘deep winter’ of funding,” says Fang Zhan, an analyst with investment database, which is run by Zero2IPO Research in Beijing.
Money has rushed into the tech sector because of dwindling investment returns elsewhere and policy decisions by Beijing, which opened the credit taps last year to spur slowing growth—and has steered money toward “innovation” in hopes of creating new economic drivers.

Last year 2,438 new venture-capital and private-equity funds raised 1.37 trillion yuan ($198.8 billion), up from 784.9 billion ($113.9 billion) in 2015, according to research by Much of that money came from 323 government-led funds created last year, the research found.

Established firms created larger funds last year than previously—raising billions and tens of billions of yuan per fund, rather than the hundreds of millions in years past, says Ms. Zhan of
So much money is sloshing around that China last year fielded a record herd of “unicorns”—startups valued at $1 billion or more—with 70 new entrants. All told, China’s Ministry of Science and Technology counts 131 unicorns. That is 30 more than the U.S., according to data company CB Insights.

Nobody in the industry wants to use the “B” word—bubble—on the record. Privately, many say that the valuations are crazy.

Look at two of the most chased-after investment targets now: startups that offer the use of bicycles or power banks for charging smartphones, for about 1 yuan (15 cents) an hour.
A leading bike-sharing operator, Ofo, announced Sunday that Ant Financial, the financial-services affiliate of Alibaba Group Holding Ltd. , had placed a strategic investment. Though the amount wasn’t disclosed, the founder of the three-year-old company told CNBC last week that Ofo is worth over $2 billion.

Its biggest competitor, Mobike, was declared a unicorn by its investors early this year.

And those are just two of dozens of operators flooding major cities with bikes—making them so ubiquitous in some places that they’ve become sources of annoyance and targets of vandalism.
To win users, the companies offer subsidies and sometimes free rides, a strategy that requires lots of cash while generating little revenue.

“Don’t ask me how the business model might work,” says one early Mobike investor. “I don’t know any longer.”...MUCH MORE
Another Beijing pileup, this one damaged Ofo bicycles awaiting repair. Photo: Kevin Frayer/Getty Images 

Relatedly at Bloomberg, also April 27: 

Ex-Google Engineer Builds $1.5 Billion Startup in 21 Months
Ex Googler Colin Huang created Pinduoduo, a fast-growing Shanghai unicorn that lets people shop together online and earn group discounts.... 

Yes, a sort of Facebook/Groupon unicorn meld.