Venture Capital slows down across the world now, not just in the USA. Aivars Lode
Entrepreneurs report growing investor scrutiny, protracted fundraising talks and falling valuations
Juro Osawa, Newley Purnell, and Sean McLain
In early February, Yin Sang, a prominent Chinese entrepreneur, sent an email to all 600 employees at his karaoke-booking startup: His firm was running out of money after failing to raise funds and wouldn't be able to pay staff salaries.
“Our cash flow is almost zero,” the 23-year-old chief executive of Yiqi Chang wrote in the email, reviewed by The Wall Street Journal. “Our company is in a crisis.”
A year ago, Mr. Yin’s Shanghai-based startup was valued at more than $100 million and, in 2014, he made Forbes China’s list of the 30 most successful Chinese entrepreneurs under the age of 30.
The reversal of Mr. Yin’s fortunes underscores a new reality for many startup founders across Asia: venture capitalists are hitting the brakes on funding. In recent years, investors flocked to Asia—home to the world’s biggest number of mobile users—as its startup scene boomed. Now they are spooked by weakness in the global economy, volatility in China’s stock market and slumping investments in Silicon Valley amid talk of a tech bubble.
The result for founders is growing investor scrutiny, protracted fundraising discussions, and downward pressure on startup valuations, entrepreneurs and venture capitalists say. Some startups are shutting down altogether while others are laying off workers, cutting costs and moving away from business models that burned through cash to attract users.
Venture-capital investments are typically risky, and success for startups, even during good times, isn't guaranteed. The latest pullback is accelerating a global shakeout.
The slowdown is most prominent in China and India. Venture-capital investments in China’s technology startups fell 28% to $1.8 billion in the first quarter from $2.5 billion a year earlier, according to Hong Kong-based AVCJ Research. In India, venture capital investors in the first quarter of 2015 pumped $891 million into tech startups. That number was off 17% at $736 million for the first quarter of this year. And in South Korea, venture capital investments fell 37% to $45.8 million in the first quarter from $72.2 million a year earlier.
This year, investors will more carefully distinguish worthy potential unicorns—or startups valued at $1 billion or more—from others that lack sustainable business models, said Tom Tsao, managing partner at Shanghai-based venture-capital firm Gobi Partners.
“Only the toughest, most resourceful founders will make it through,” Mr. Tsao said.
For Pei Qiao, co-founder of Weichaishi, a Shanghai-based startup that runs an online crowdsourcing platform for corporate clients, the tougher environment has meant cutting even small expenses. Snacks and beverages for employees are out, along with expensive branding campaigns.
After raising $3 million in September 2014, Weichaishi treated all of its employees to a trip to Thailand, where they stayed at a five-star hotel and rode elephants, Mr. Pei said.
But now the startup just holds a monthly birthday party for employees, providing a small cake.
“We are becoming more practical and looking for tangible results,” said Mr. Pei.
In India, Oravel Stays Pvt.’s Oyo Rooms, an online aggregator of mom-and-pop hotels, recently declined funding from new investors to avoid a drawn-out discussion over the company’s valuation, said people with knowledge of the matter.
To avoid running out of cash before the end of the year, the startup is also cutting costs and no longer loses money on each hotel room it books, the people said.
Oyo Rooms, once thought to be well on its way to a billion-dollar startup, is now tapping existing investors such as Japan’s SoftBank Group and U.S. venture-capital firm Sequoia Capital, and will receive less than $100 million at or slightly above its current valuation of $400 million, one of the people said.
“We are seeing definite interest from investors, but compared to earlier the valuations are saner,” said Oyo Rooms founder Ritesh Agarwal.
Singapore-based online grocery-delivery service RedMart Ltd. has also faced funding challenges in recent months, according to people familiar with the matter, forcing it to put on hold plans to expand overseas.
Chief Executive Roger Egan declined to say whether RedMart has struggled to raise money, noting it is still in the middle of its fundraising.
In Indonesia, fashion e-commerce startups Paraplou Group and PinkEmma have closed in recent months, with the former blaming the closure on a tight fundraising environment. PinkEmma didn’t respond to requests for comment.
To be sure, Chinese Internet giants such as Alibaba Group Holding and Tencent Holdings have been playing greater roles as deep-pocketed strategic investors for many startups in Asia, cushioning the blow. Chinese ride-sharing firm Didi Kuaidi Joint Co., backed by Alibaba and Tencent, is close to raising more than $1.5 billion from investors, according to people familiar with the matter.
Last month, Alibaba invested $1 billion in Southeast Asian startup Lazada Group. SoftBank is also on course to surpass its planned $10 billion investment in India over the coming decade, Chief Executive Masayoshi Son said in January.
Even so, many startups are making drastic changes in the harsher climate.
Mr. Yin, the karaoke startup founder, has cut his firm’s payroll from 600 to 200 in the past three months. Yiqi Chang, which means “sing together” in English, is trying to break even and now operates in just six cities, compared with 20 in January, he said in an interview. The company has also secured some loans.
“A year ago, we thought we could always raise more money,” Mr. Yin said. “Now, we have to survive on our own.”