China’s startups hit by dramatic funding slowdown

China’s tech companies attracted a record US$56.1 billion in disclosed investments in 2016, up from US$45.1 billion last year, according to the Tech in Asia Database.

Despite the blockbuster year, 2016 saw a rollercoaster in tech funding as early hubris was soon chastened by a dramatic slowdown.

The precipitous drop in the latter half of the year takes China back to 2014 levels of investments. (UPDATED three hours after publishing: The original graph was missing a few billion in Q2 2016. It’s now fixed.)

Bubble fears

It’s certainly not for a lack of cash. Indeed, quite the reverse is occurring: venture capital funds in China have more than doubled to 1,216 at the end of October, up from 552 at the beginning of 2015, according to data from the Asset Management Association of China (AMAC).

See: China expert warns of ‘disaster’ from tech investment explosion

“We are concerned about the consequence of massive flooding of capital from some institutions, including local government-backed policy guidance funds and fund-of-funds,” said Jia Hongbo, general secretary at AMAC, a self-regulatory body supervised by China’s securities regulator, speaking at an industry event earlier this month.

Series A and B rounds exploded.

In this topsy-turvy situation, the risk is that new and inexperienced VCs are putting cash willy-nilly into newly formed startups, while top-notch VCs keep their wallets in their pockets, balking at sky-high valuations for more established startups.

One major impact of the cash flood in the nation is that “second-tier fund managers are able to raise funds – and these managers fund lower quality startups,” explained William Bao Bean, partner at Shanghai-based SOSV, to Tech in Asia a few weeks back. “While they might have a lesser product, these tier-two startups’ ability to burn cash make it harder for tier one players to shine. Bottom line: you have inexperienced fund managers backing companies that don’t deserve it, and as a result, the entire market suffers.”

See: The 10 largest investments in China this year

Dial ‘M’ for monetization

That dire prophecy hasn’t yet come to pass in the midst of 2016’s sudden slowdown. Seed funding was down – just under half of 2015’s tally – while series A and B rounds exploded.