Major China VC to startups: raise funds now, a cooldown is imminent

In an open letter addressed to his portfolio companies, Matrix Partners China co-founder David Zhang warned that an investment cooldown is imminent in the country. The letter was published earlier this week and has since gone viral on Chinese social media.

This year, a flood of venture capital hit Chinese startups, and that wave is still swelling. But Zhang says startups shouldn’t get comfortable, because this sort of growth is unsustainable. He advised those thinking about raising funds to do so immediately and worry less about their valuations. Those who have recently received investment should use it sparingly.

Matrix Partners China has invested in 190 companies in China, and recently made its 45th funding deal this year. The cumulative value of venture capital investments in China’s tech sector has already surpassed the total value for all of 2013. 2011 holds the record, but it looks like this year will set a new high. Late stage investments in China have most recently been spurred by Alibaba’s record-breaking IPO.

The word “bubble” is tossed around in his letter on a few occasions, citing that the S&P 500 has risen beyond where it when the 2008 financial crisis hit, but still below where the 2000 tech bubble burst. Zhang did not give a definitive timeline for when the downturn might occur, saying it could be either less or more than 12 months from now, but prepare for a dry spell in 2015.

Zhang quotes Bill Gurley from Silicon Valley’s Benchmark Capital VC:

No one’s fearful, everyone’s greedy, and it will eventually end.

Zhang points to the sky-high investments and valuations recently given to many of China’s startups. Rui Ma, the greater China partner at 500 Startups, says she is seeing the valuation of Chinese startups surpassing their counterparts in Silicon Valley. This is due in some part to wealthy Chinese turning to tech investing as the countries broader economic slowdown cuts into their wealth.

Zhang says he still thinks now is the best time to be an entrepreneur in China, and in 10 years the country’s tech startups will make up a larger part of the national GDP. But the amount of financing available to startups will have to weather a period when financing is sparse. He alludes to Game of Thrones, “Winter is coming.”