Bubbles In The Silicon Valley To Burst While The Startup Scene In China Continues To Heat Up
摘要： China has an enormous capital pool but lacks good projects. In contrast to that, there are a lot of quality startups in the U.S where the market is currently in a depression. So what will break this situation eventually?
The market has its ups and downs. And unfortunately, we happen to be in the time when the market is experiencing a winter. In this case, going out of the woods is our priority at present.
Recently, the Silicon Valley, the very forefront of the startup world, witnessed a big valuation shrink of startup companies as LinkedIn’s share price plunged by 40% within a day, showing that the bubbles in the market are indeed bursting.
The U.S: A new round of adjustment is coming
In March 2009, NASDAQ’s former president Bernard Madoff was sentenced to life in prison for 150 years on the very same day that the index of NASDAQ was lowered to 1,265, the lowest in history. 7 years have passed and the index has risen to 5,231. In this bull market, the return rate of the investment on NASDAQ has been 25%, an appealing figure that attracts a mass of consumers to enter the stock market proactively. To put it in perspective, Warren Buffett’s annual return rate is stable around 30%. In contrast to that, the VCs in the Silicon Valley don’t have such ideal return rate. In 2012, the average return rate was only 5.3%.
The chaotic and skyrocketing stock market started to plunge in October 2015 and has declined to today’s 4,700(early March).
“This indicates that the capital market adjustment that occurs once every 8 years has come,” Liu Yong, partner of WI Harper Group, a global leader in cross-border investing between the United States and Greater China.
As a matter of fact, when looking back to 2001, the downfall of Enron Corporation was the blasting fuse that marks the beginning of the subprime crisis. And fast forward to 2016, the plunge of stock price of LinkedIn and the massive laid-off activities among startups in the Silicon Valley mark a new crisis. All these in some way indicate that the bubbles existing in the tech industry at the Silicon Valley would burst once every 7 or 8 years.
History always repeats itself. During the previous bubble-bursting period, the market adjustment result in 2008 and 2009 was the plunge of stock price, capital winter for non-listed companies, the continuous decrease of valuation of companies, the mass amount of startup project abortions and massive laid-off activities at the Silicon Valley. Similar issues have once again plagued the very Silicon Valley.
Entrepreneurs and investors at the Silicon Valley are hanging at the cliff
The winter has come. Many once-hot star tech companies in the past few years are now experiencing a very difficult period.
Founded in 2009, Pure Storage has always been working on seeking new financing, from the series A round to the F round. By August 2014, the companies completed its last round of financing and reached a valuation of USD 3 billion. On October 2015, Pure Storage went public. However, on the very day the company got listed, its valuation was USD 2.9 billion, lower than that of the previous year. And that was only a beginning.
No coincidence no story. In 2015 there was a star company called Square that was valued only at USD 2.9 billion when first got listed on NASDAQ in October. Compared with the valuation of USD 6 billion in 2014 after the company’s last round of financing, it signifies a fall of 50% in the secondary market.
“Valuation bubbles created during the VC/PE period won’t be recognized when they enter the secondary market,” Liu Yong stated, saying that the direct result is the decrease of valuation for startup companies.
Besides the fall of valuation, the depressed market can also be shown by the massive laid-off activities. After entering the 2016,traditional companies such as Yahoo, VMware, and Blackberry etc. and startup companies like Tango and NetApp etc. started to lay off some of their staff. Statistics from market research organization DataFox show that up till February this year, at least 18 tech enterprises or companies related to the tech industry have undergone laid-off activities. Yahoo has reportedly laid off over 1,500 people while NetApp laid off 12% of its staff and Zenefits laid off 250 people. The famous VC group at the Silicon Valley, Andreessen Horowitz(A16Z), also started to lay off people.
“Job cut has become a current tendency in the Silicon Valley. Some of those once unicorn companies’ valuation started to decrease after going public, while some didn't even have the opportunity to get listed and might have lower valuation in the future,” Liu Yong, an active investor in the U.S, commented on the Silicon Valley’s current trend.
On the other hand, before entrepreneurs become afraid, investors have already started to act careful. Statistics show that compared to the same period in 2014, whether it’s Pre-A round of IPO, the investment volume in 2015 had a drop of 50%. Another set of statistics shows that the percentage of startups in the U.S that have successfully entered from the seed stage to the A round was 45% in 2009 and now it’s less than 10%. In some way it signifies that there have been gigantic bubbles in angel investment in the past few years.
Liu Yong concluded that there are two main factors that contributed to the growing bubbles:
Capital from China and other regions continues to flock in while there aren’t many channels for the capital to find the adequate projects. For that crowdfunding platforms such as Kickstarter and Angellist etc. emerged, bringing great convenience to angel investors that are looking for startup projects to invest in. However, since there aren’t many VC organizations that can make follow-up investment, therefore while there are lots of angel round projects, only a few of them can make it through A round.
Besides that, due to the lack of relevant experience, the herd effect might plague investors, making many of them on the edge of falling from the cliff, said Liu Yong.
China: Capital needs channel
The tech industry in the Silicon Valley is undergoing profound changes, during which process there’s sure be a lot of twists and turns. Meanwhile, China is going through a transformation, but differently.
Let’s take a look at the statistics about China’s economy first. In recent years, China’s economy has been slowing down and the GDP growth last year was only 6.8%. Under these circumstances, the Central Bank decides to regularly issue more currency so as to regulate the market. For example, in 2009 around 4 trillion RMB were put into use while in January this year there have been 2.5 trillions. With the depressed stock market and strict control over currency exchange, comes the situation where capital is in desperate need of channels to find exits. One of the exits for capital is the real estate industry, and it’s confirmed by the rising housing price in recent time. Another exit is innovation and startup field. Mass amount of capital continue to flow into innovation and startup bases, incubators, accelerators, and maker space scattered in different regions in the country.
According to ZERO2IPO Research Center, VC organizations in 2015 have poured in an amount of 129.3 billion RMB in startups, making China the top innovation country only second to the U.S (about 400 billion RMB).
Meanwhile, China also has started to establish foundations that encourage the tech world, tax reduction, and supporting policies that back angel investment. In January 2015, the State Council announced to have established Innovative Startup Foundation of China with a scale of 40 billion RMB, dedicating to support and guide innovations, startups, and industrial upgrades. Furthermore, China will establish Developmental Fund For Small and Medium-Sized Companies with a funding of 15 billion RMB from the central government, in order to attract private and state-owned companies, financial organizations, local governments etc. The goal is to form a fund that has a scale of 60 billion RMB, and help startups in their seed stage or developmental stage through marketization.
Just like the tech market in the U.S during its early stage, the mass amount of capital has become active in China. The surplus of capital and subsidy from the government make it possible for startups to find financing. Some might worry that tech bubbles will also appear in China since innovations are limited and can’t be pushed to happen using capital.
However, the good news is things are changing. The big slump of the economy in summer last year eventually helped form stricter protocols for VC organizations to find their projects and eliminate weak startups.
“In general, the investment market of the tech industry in China is growing healthily,” Liu Yong stated.
Cross-border capital winning more opportunities
From the previous signals from the market, we can sense that the bubbles in the tech industry in the U.S are bursting. And now, China is entering the period during which the tech market will increasingly need more financing.
“However, in areas where technological innovations are extremely essential, such as robotics, e-cars, VR, and artificial intelligence etc., companies in China is still lagging behind the U.S in terms of the number of innovative startups and technological sense,” Liu Yong pointed out.
China has an enormous capital pool but lacks good projects. In contrast to that, there are a lot of quality startups in the U.S where the market is currently in a depression. In Liu’s opinion, there is immense potential for cross-border investment.
“We can either transfer capital in China to the U.S, or we attract more elite American companies to China,” Liu Yong stated. “On one hand, we can attract investment organizations in China to pour in their capital to our foundations in the Silicon Valley. On the other hand, we can share the projects in the U.S to the LP, partners etc. in China, making it possible for them to invest in American startups that have immense potential and advanced technologies.” At present, organizations like WI Harper Group are trying to make this happen for China and the U.S.
It’s reported that WI Harper Group will arrange 1 or 2 tech startups it has invested in from the U.S to come to the Chinese market. For example, Wonder Worshop, a startup based in the Silicon Valley that is highly praised by Bill Gates’ wife Melinda Gates and Apple, has visited China in early 2016. Arranged by WI Harper Group, the startup made contact with incubators, foundations, and manufacturing companies in Beijing, Shenzhen, and Hangzhou and has planned to register a branch company in China. Meanwhile, WI Harper Group China is trying to push the development of the raise of Chinese Currency related foundations and further participate in Wonder Workshop’s following financing plan. “We are the mediator between China and the U.S, making it possible for capital from China to flow to the U.S, and technology and innovations from the U.S to come to China,” Liu Yong concluded.
WI Harper Group, with 20 years of experience in cross-border investment, is dedicating to help elite startups to explore the Chinese market. “We also want to help increase the investment efficiency of investors in China, and focus the resources on great projects,” Liu Yong said.
As a partner of a cross-region VC organization on the side, He has the following suggestion for Chinese investors and entrepreneurs: The year of 2016 might be a big year for AR/VR, robotics, financial technologies, bio technologies, and new energy.
[The article is published and edited with authorization from the author @SiliconNews, please note source and hyperlink when reproduce.]
Translated by Garrett Lee (Senior Translator at PAGE TO PAGE), working for TMTpost.