The year of 2019 is a so-called 'Capital Winter' for many startups in China. Looking at financing activities, both the deal count and deal value dropped drastically – a sharp decline of more than 40% compared with 2018's domestic investment data. In 2019, investors injected CNY 795.5 billion into startups and scaleups in different sectors, while 10 years ago the amount was only CNY 29.9 billion.

EqualOcean conducted an interview with China Growth Capital's Partner Wayne Shiong (熊伟铭) during WIM Salon X Beijing. Shiong claimed that China's VC marketing was over pumped in the past a few years, since the quality money for VC funds is consistent at around USD 10 billion per year, but when the market was pumped over USD 100 billion, the market overheated. 2019 is a year of cooling down and returning to normal.

Indeed, as the VC investment shrinks in China, the top players sit tight in their chairs – they keep attracting investors and scale up with strong financial backup. In 2019, China launched the STAR Market and the new bourse has attracted hundreds of tech-driven companies to file for initial public offerings.

China's stock market

Along with the development of the financing market, which is opening up and becoming more market-oriented, Shiong expressed an optimistic opinion on the Chinese stock market. He said that China has more than 700 small-medium enterprises (SME) companies that are qualified to be listed out of the pool of 40,000,000. Compared with China's total stock market cap of USD 6.3 trillion in 2018, the US' stock market cap was 5 times – USD 30.4 trillion – in the same year. China has the capacity to foster more public companies as it's the second-largest economy in the world – but it takes time.

China's hundreds of state-owned enterprises (SOE) are more favored by the main board. They outshone the millions of small-medium enterprises – the largest component of the Chinese private sector. China's stock market needs more players from the non-SOE side to be freer and more prosperous.

When talking about the STAR Market, Shiong took the launch as a good sign for investors and a chance for companies with strong tech backgrounds. The stock market called 'China's Nasdaq' for its piloting role in lowering the barrier to applications and reduced restrictions on stock performance compared with the main board. "Bring more companies on the stage and the market will figure out who is authentic, who is fake, who is the black horse and who is the clown," answered Shiong, when asked about concerns or potential crises around the opening up of the stock market. Shiong is a believer in the power of the market – in his eyes, good companies can always prove themselves.

Investment Trends in 2020

"The market will grow slowly, not in a rush, in 2020. Tech will still be the trend for investments", Shiong said. After a year of cooling off, the investment will continue the cooling-off process, investors will be more rational, especially after the mega VC fund Vision Fund's (or say SoftBank's) Waterloo in 2019. Uber, WeWork, Brandless, Wag, and others, one by one these undermined investors' confidence and awakened the rationality in VC: Does 'more' mean 'better'? Does 'bigger money' bring a 'bigger return'? Questions like these started to occur to all players in the game.

China’s VC will keep growing and will attract more foreign funds while the policy leans to opening up the market. "Top China VC like Qiming Partners will raise more dollar funds, and the next indigenous 'Sequoia' might appear," stated Shiong. Though China's new laws on foreign investment have been in effect since the first day of 2020, the first gold digger is yet to appear.

Comparing to investing in startups directly, foreign funds prefer to invest in domestic VC funds, who know their own market better. For foreign investors, political risk is a must-know before investing and looking for a local partner will be a more practical way to achieve this. Investors should do what they are good at and have a keen sense for front-end stuff.

"CGC does invest abroad, but China is our base - we know the market and are making bets locally," added Shiong.