SA国际传媒

From yellow bicycles and facial recognition to ridesharing superapps and vegetable delivery, new waves of capital fueled the Chinese startup market in 2018. Data and venture experts explain, however, that China鈥檚 less impressive finish to the year may lead to a more measured 2019.

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In this venture report on Asia Pacific, we鈥檒l look at how the region fared in an increasingly unsure economic climate, taking an up-close look at its driving force: Mainland China.

The Numbers

Before we get to the doom and gloom, let鈥檚 look at how the Asia Pacific鈥檚 fourth quarter and full-year 2018 venture results compared to their predecessors.

According to SA国际传媒 data, which is indicative of industry trends, venture capitalists invested roughly $138 billion in Asia-Pacific startups last year. 1

According to the chart above, which includes preceding years, 2018鈥檚 figure is more than 100 percent increase from 2017鈥檚 own venture total. On the deal end, more than 5,000 known rounds were reported, a nearly 50 percent year-over-year increase in deal volume in the region overall.

With rounds up half and dollars up double, there were some big rounds to contend with. In 2018, supergiant deals鈥攖hose worth $100 million or more鈥攇rew by around 75 percent year-over-year to 237.

While it鈥檚 clear that 2018 was a watershed year for the region, let鈥檚 take a closer look at how it panned out on a quarter-by-quarter basis:

While our first chart paints the picture of a booming venture capital economy, the second depicts a markedly different environment. Venture deal and dollar volume decreased by almost 30 percent from Q3 to Q4 2018, nearly shrinking to its year-ago quarter totals.

Don鈥檛 think that the chart shows that the startup markets of Asia Pacific are falling in sync.

China represented more than 60 percent of the total venture dollar and deal volume in the region in Q4 2018, according to SA国际传媒 data. That made it heavily influential in shaping the data above. For example, known deal and dollar volume in Southeast Asia (which doesn鈥檛 include China) increased over the quarterly periods detailed above, including a massive for Indonesia-based Go-Jek spiking the region鈥檚 Q4 total to around $4.1 billion.

Next, let鈥檚 observe how China, specifically, performed on a quarterly basis in 2018.

It鈥檚 important to note that the Q2 2018 known dollar volume total for China was significantly boosted by a banked by (the fintech arm of Alibaba).

Let鈥檚 dive more deeply into China, as its venture results drive the region鈥檚 own.

Breaking Down The Deals

In Q4 2018, seed, early, and late-stage deal volume all decreased quarter-over-quarter. Seed-stage deals represented about 38 percent of deals of known type while commanding just 3 percent of the VC dollar volume of deals of known size and type.

Meanwhile, early-stage deals, like the for Hangzhou-based electric vehicle maker , or the $200 million deal for Starbucks鈥檚 quickly growing competitor , represented about 50 percent of all deals of known type, raking in about 33 percent of the dollar volume among deals of known size and type.

Late stage deals represented the remaining 12 percent of deal volume and a staggering 64 percent of dollar volume for deals of known type and size. The average late-stage round totaled about $167 million. That represents a slight increase over Q3 2018鈥檚 $140 million average, and a decrease of nearly 30 percent from Q2 2018鈥檚 high of $217 million if the Ant Financial round is taken out of consideration.

Keeping a tally of the number of supergiant rounds, SA国际传媒 recorded 39 of more than $100 million rounds in Q4 2018. In both Q2 and Q3 2018, 56 rounds of over $100 million were recorded, while China made off with 38 supergiant rounds in Q1 2018, and 39 in Q4 2017. Here, again, we see a peak in the middle of 2018, and a slope down to the year鈥檚 end.

There are signs that efforts to curb the potential effects of a slowing economy will further that trend.

Looking Forward

Consumer , rising , and 鈥攖hose are just a few metrics that have contributed to a among individuals, entrepreneurs, and investors in China.

A government-encouraged push for entrepreneurship and startup growth led to a surge in the interest of banks and other state-owned institutions in playing a hand in the venture scene in recent years. But, as and others have reported, that encouragement brought a spike in fundraising for possibly inexperienced venture fund directors.

Under-regulated shadow banks, , and noticeably high valuations鈥攃ombined with other pressures like rising debt in the country鈥攍ed the government to more stringent financing and asset management last year.

, the VP of investments at the , told SA国际传媒 News that he believes the shift that occurred in 2018 was likely the result of those financing policies.

鈥淒ue to the tightening of financing policies for the [private equity and] VC industry, many RMB funds encountered difficulties in raising money from LPs [like] banks and financial institutions in 2018,鈥� Yu wrote in an email, adding that the 鈥渟cale back鈥� will likely continue in 2019.

Further, he noted that the combination of those policy changes along with expectations that global stock markets may continue to underperform this year will make it difficult for VCs to afford such high valuations.

鈥淗eavily funded [or heavily] valued startups will still be able to live up to their previous valuations,鈥� Yu wrote. 鈥淏ut it will be more difficult to ask for a higher valuation in their next rounds of financing.鈥�

If there鈥檚 a smaller pot of gold and anticipation that returns through a public exit will be less lucrative, that means that supergiant rounds like those mentioned above will likely be less common. And in an atmosphere that has been referred to as a funding winter, consolidation of industries may continue. This is particularly the case for those in the electric vehicle industry, where government subsidies that have warmed investor and entrepreneurial interest have started to scale back.

And if the stock market in China keeps significant pressure on China鈥檚 big tech market caps, it could be the case that now-infamous large corporate investments by players like Baidu, Alibaba, and Tencent in startups in China become less common. , managing partner at Beijing-based , told SA国际传媒 News that she believes revenue interests may occupy corporate attention.

鈥淲e are likely to see less investment activities across the board this year in China not just due to the falling share prices of tech giants but also the slow growth of the macroeconomic condition,鈥� Cheng wrote in an email. 鈥淐orporations will need to improve their bottom lines and will have less to spend on investments as a result.鈥�

That slowing economic condition could also mean that the companies may scale back from pursuing global growth through investment in startups in emerging economies in Southeast Asia and India. However,, general partner at in Singapore, told SA国际传媒 News that while VCs are scaling back in China, he believes fluctuations in venture capital funding in emerging markets like Southeast Asia will likely be short-lived.

鈥淢ore capital is being reallocated out of traditional asset classes into alternatives, and within alternatives, from hedge funds into [private equity] and VC,鈥� Harnal explained in an email. 鈥淚n Southeast Asia, most family office wealth is significantly over-allocated stocks, bonds, and real estate, but that is quickly changing as they familiarize themselves with VC as an asset class and increase their exposure.鈥�

China has helped lead the world of tech and VC in 2018 that brought major venture capital gains, but a slowing economy, ongoing trade tensions, and stumbling global markets foreshadow a less optimistic future. China鈥檚 government has a history of addressing domestic issues with precipitous policies that have engendered long-term . If the country is challenged by a recession, we鈥檒l have to see if 鈥渃apitalism with Chinese characteristics鈥� will keep its economy afloat, or whether the venture community and the country鈥檚 2025 goals will drown with it.

Methodology Notes

Companies considered in this section only include those that have listed geographical locations on SA国际传媒. Companies in the Asia-Pacific include Mainland China, Hong Kong, Macao, Taiwan, South Korea, North Korea, Japan, Mongolia, Philippines, Indonesia, Myanmar, Laos, Thailand, Cambodia, Singapore, Malaysia, Vietnam, Australia, New Zealand, Bhutan, Bangladesh, British Indian Ocean Territory, Indonesia, Maldives, India, Nepal, Pakistan, and Sri Lanka.

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