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Investors assess impact of coronavirus on Chinese startups

Companies with an emphasis on online channels have a significant advantage.

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With the 2019-nCov virus sickening over 24,000 individuals in China as of Feb. 4, the epidemic has created unprecedented difficulties for China’s economy with business shutdowns, flight cancellations, and a forced Chinese New Year holiday extension for employees.

While large and established companies are better prepared to weather the financial impact, small and medium enterprises, with less cash on the balance sheet, are more vulnerable. Here’s what some investors have said about the effect of the virus.

Startups must rely on cash flow

Will Wang, managing director of Bertelsmann Asia Investments, told startups last month to rely on their own cash flow for at least one to two quarters as financing activities will be delayed due to various factors, via his Zhihu’s account.

Investors are normally very active after the Chinese Lunar New Year holiday, but this year they may only be able to meet founders as late as March, Wang wrote. After that, it will take at least two to three months to close a Series A funding round and about six to nine months to close a Series B stage, he added.

Startups in service sectors, including tourism and retail, might be especially hard-hit, Wang said, with the virus potentially effecting their whole-year performance and valuation. He added that investors may shift their attention to industries less affected or even positively affected by the virus, such as companies offering fresh produce delivery, home entertainment, insurance, health care, and corporate collaboration tools.

An emphasis on preparedness

Zhao Chenxi, a partner of SB China Capital, suggested that startups need to prepare for the worst—a situation when no venture capital fund will be available for all of 2020—according to an interview posted by the Cheung Kong Graduate School of Business on its official WeChat account on Tuesday.

She added that companies, especially those with negative operational cash flow, will have to postpone new business to cut costs and increase new revenue channels.

Wu Shichun, founding partner of Plum Ventures, said earlier this month that companies proving that they can survive hard times will gain favor from investors in the middle term, even when the number of funding deals is set to decrease in the next three months.

A “hell model” test

Wu named this period of time a “hell model” for small and medium-sized enterprises (SMEs) as many of them are not receiving income but still have to pay rent, salaries, and other costs. 

As more businesses gain revenues from both online and brick-and-mortar channels, investors may give companies a higher valuation if a large part of their revenue comes from online channels, he said.

Seventeen years ago, SARS devastated many companies, but some firms adjusted accordingly to survive, and many even created new services when all employees were quarantined at home, Fosun RZ Capital said Tuesday via its official WeChat account.

The venture capital investment institution added that Alibaba took its C2C e-commerce platform taobao.com online in May 2013, when the epidemic was still raging in China, and JD.com launched its e-commerce platform in January 2014, only a semester after July 2013, when the SARS outbreak ended in China, according to the World Health Organization.

Alibaba, set up in 1999, focused on B2B e-commerce before the SARS outbreak in China in early 2003. One of the company’s employees was confirmed to have contracted the virus, leading to a shutdown of all Alibaba’s offices. During that time, when people were told to reduce face-to-face contact, founder Jack Ma came to the realization that individuals would enjoy shopping online and decided to incubate Taobao.