Here’s how China’s VCs view the stock market crash

(Photo by Aaron Goodman)

If you’ve been living under a rock, I’ve got some bad news for you: this has not been a great week for China’s stock markets. After a rough Friday that sparked global concerns, China’s market crashed hard on Monday, drawing comparisons to the 1929 crash that sparked the Great Depression. Stocks continued to tumble on Tuesday, by which point the steep downward trend had become global.

The pain has since eased slightly, and the Shanghai Composite actually ended Thursday trading on a strong upward trend. But worries remain, especially given that isn’t the first steep drop the Chinese market has experienced this summer. The Economist writes: “this week’s panic contains the unnerving message that the malaise in the world economy is real.”

The full repercussions of the market dive may not be known for some time. But how is all this going to affect China’s startup scene, in which VC money has been flying thick and fast for some time now?

William Bao Bean and Cyril Ebersweiler, SOSV

“Fundamentally, I don’t think there’s a huge change that happened,” said SOSV partner and Chinaccelerator managing director William Bao Bean. “The market was overbought and now it’s selling off; it’s a natural correction.”

William says that he doesn’t see the market crash as directly affecting startups – he sees no connection between the punters who lost their shirts betting on an overly-inflated market and the early-stage venture capitalists fueling China’s startup boom. But he does think things are going to change. “I’ve been telling our companies since the beginning of the year that in the second half it’s probably going to be a bit tougher to raise [funds],” he told Tech in Asia. “In the last year and a half we’ve seen valuations on the angel side quadruple […] so you’ll probably see things slow down a little bit.”

His SOSV colleague Cyril Ebersweiler, who is the founder of Haxlr8r, agreed. He said the market downturn “will simply correct the extreme behaviors of the last year in terms of financing and valuations, which will help founders focus on what really matters to their companies: building a great product people want.”

Rui Ma, 500 Startups

500 Startups China partner Rui Ma also sees winter on the horizon for China’s tech startups. But like William Bao Bean, she doesn’t see that as being the result of the A-shares crash. “I believe the domestic Chinese market is set up for a valuation correction in the pre-A stage, but this isn’t going to come as much from loss of capital as it will be from just the fact that normal attrition rates of startups will start hitting the early stage investment community – and they have started to already,” she told Tech in Asia.

There isn’t much overlap between the capital lost in the market and the capital that’s been pouring into China’s startups, she said. “However,” Rui told us, “with public market contractions, later stage funds will start to be more affected first, paths to liquidity/exits will be lengthened, and this will eventually trickle down to pre-A stages as well.”

“I’m just not convinced that this will be the main reason for lower valuations, even if I believe that will be the eventual outcome, let’s say, in a year or so,” she said.

Hans Tung, GGV Capital