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TECH PANO | Ten prime years of primary market investment in China

The paradox of big guys getting big cheques hands-down while financing in general is getting harder to come by in China.

Two Chinese tech giants, Bytedance and Didi topped the list of the world’s most valuable unicorns CBInsights published last week. Their anointment epitomized the venture capital-fueled success Chinese unicorn built in less than ten years.

In fact, of Didi’s 19 public fundraising rounds, 10 have raised more than RMB 1 billion (USD 145 million), while its single round financing record of USD 5.5 billion came in a 2017 strategic investment jointly from SoftBank China, Silver Lake, and others, as data from ITjuzi showed.

According to CBInsights, Didi’s valuation now stands at USD 56 billion, that’s even higher than its US peer Uber’s current market capitalization of USD 54 billion.

More and more unicorns are cropping up around China, including local life behemoth Meituan Dianping (HKEX: 3690) and rising cross-border shopping site Shein. More than 700 investment deals have exceeded RMB 1 billion (USD 145 million, hereinafter referred to as big investments) in the last ten years.

In addition to generating domestic and global headlines, a lot of these big investments have made a deep impact on China’s technology and business landscape, reflecting the changes in the consumer behaviors of some billion citizens, as well as indicating the future direction for primary market investment.

We looked through the primary market investment deals that exceed RMB 1 billion (USD 145 million) in China in the last ten years, data provided by ITjuzi to KrASIA, and here are some key findings:

Capital mania peaked in 2018

China had its first significant rise in big investment deals in the period of 2015 to 2017, coinciding with the launch of mobile-payment services Alipay and WeChat Pay, which allowed internet-based third-party services like food delivery, bike-sharing, and ride-hailing to tap into urban consumers’ demand for a more convenient life.

Backed by international private equity (PE) and venture capital (VC) institutes like SoftBank, Sequoia, and Warburg Pincus, as well as local internet tycoons like Alibaba (NYSE: BABAHKEX: 9988), Tencent(HKG: 0700), and Baidu (NASDAQ: BIDU), firms like Didi and Meituan become the first batch of internet corporates to benefit from the capital boom.

In 2018, the number of big investments peaked. By 2019, however, investment activity fell sharply, with ITjuzi pointing out that it is, “difficult to raise funds + funds are running out.”

The game between the internet giants

Between 2010 and 2020, except for ride-hailing app Didi, market leaders in their sectors are also frequently reported bagging big money. Automotive platform Chehaoduo, for instance, secured seven big investments in the past ten years. EV maker Xpeng, online real estate brokerage Beike, and computer vision developer SenseTime, all completed at least five funding rounds that each exceeds USD 145 million in the last decade.

Besides, enterprises spun off from the country’s tech giants will also receive huge market investments from the start. JD Logistics, for example, the courier arm of one of China’s biggest e-retailers JD.com (NASDAQ:JD; HKEX: 9618), received as much as USD 2.5 billion in its Series A round.

Ant Group, the fintech subsidiary of Alibaba, gained a minimum injection of USD 145 million in its fundraising history. Over the years, the smallest fundraising round of the Alipay operator still totaled USD 145 million.

On the flip side, it was also the internet giants themselves that are behind the fundraising frenzy.

Some industries, such as AI and electric vehicles, come with high barriers to entry and require a huge amount of capital support at the beginning, said ITjuzi. In the past ten years, many of the self-driving enterprises have received injections that worths more than USD 145 million before their Series A round.

Fewer deals, bigger ticket size

From mobile payments, sharing-economy to on-demand delivery, China’s markets and consumers adopted digitalization swiftly in the past decade. Coming to 2019, as investment mania cools down, the focus of the investors started to shift from low-cost high-frequency services like on-demand delivery and ride-hailing to some more sophisticated, business-facing sectors like AI, healthcare, and enterprise services.

“Many practitioners in the primary market have been having a vague feeling that early-stage investments have dwindled, and by 2020 the concept of a seed round is almost gone,” said ITjuzi in its latest report. “While the number of big cases has grown and the average amount raised has been breaking records”.

In the first quarter of 2020, as the coronavirus pandemic hammered business and investment activities, China saw 61% fewer equity investment deals than in the same period last year, but the average ticket size per investment reached a record high of USD 66 million, as KrASIA reported.