VCs Say “Ni Hao” To Chinese Startups

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Venture capital investment in Chinese startup companies is surging again.

After several years of a moribund market, investment in Chinese technology startups is en vogue again thanks in part to the soaring stock price of established players like Tencent, and the imminent listing of what could be the largest public offering in U.S. history when shares of Alibaba finally start trading.

Last week, China’s answer to Pinterest, Mogujie, confirmed a $200 million round which reportedly values the company at roughly $1 billion. Earlier this year the online education website TutorGroup raised approximately $100 million, as part of a clutch of tech companies that saw successful financing efforts in Asia.

In all Chinese technology startups have raised over $2 billion in financing in the first half of the year, according to data from Crunchbase — provided through a partnership with CTQuan, a venture-backed company providing investment data on Chinese startups.

The rejuvenation of China’s startup investment scene comes even as the economy is still pulling out of a downward slump that led to the nation’s worst economic performance in 24 years.

While the overall economy may be taking a dip, technology stocks have enjoyed a renaissance. For Stephen Bell, a managing partner at the seed stage investment firm TrilogyVC China LLC, the penetration of Tencent’s Weixin messaging platform has reshaped China’s startup marketplace.

“Tencent value has gone way up — enabling them to buy startups and invest in startups at high valuations and push the tech community,” said Bell. “Investors see all this going on — and pour money in.”

The rising tide, influences investment behavior among the other Chinese internet giants. “Both Alibaba and Tencent will be on a buying spree for the next two years or so. Driving higher and higher startup valuations in China [and] driving the number of deals higher,” Bell said.

New public offerings from Chinese technology companies are going a long way toward restoring investors’ confidence — in addition to the recovery among already public brand names like Baidu, Alibaba, and Tencent. So far, there have been eight Chinese public offerings on U.S. exchanges already this year, compared with none at all in 2013.

“Deals that were considered ‘dogs’ a few years back have somehow made it to the public markets and… there is a bit of irrational exuberance here, especially with the success of Tencent and Alibaba at well over $100Bn valuations,” said Rui Ma, a seed investor based in Beijing and a venture partner with 500 Startups. “From my very early stage (angel and seed perspective) there is quite a bit of over-valuation (relative to the Valley) going on. A lot of deals are being funded pre-prototype. Of course, the overall deal volume is still significantly smaller, but because of the double-sided lack of both seasoned entrepreneurs and angel investors I think that people are betting on luck more than probably the actual monetization most current products actually warrant.”

Investors like Hurst Lin, the co-founding general partner at DCM China — an Asian and U.S.-focused venture capital firm — see a boost coming from the impending Alibaba public offering. “Chinese technology stocks will make money off of Alibaba, because investors may want to put more money to work in Chinese companies,” he said.

Photo via Flickr user Dennis Jarvis.

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