China’s tech start-ups kiss goodbye to cash burning as investors focus on profits

The failed WeWork IPO has signalled the end of the days when tech start-ups could burn cash to scale up their business before going public – a strategy that was last used in the dot-com era of Silicon Valley 20 years ago.

So-called blitzscaling has been an effective strategy for some Chinese start-ups, especially those in services like group buying and ride hailing, where companies gave out cash incentives to lure customers in a highly competitive market.

For some, that all came to an end in 2019, which will go down as one of the toughest years for Chinese tech start-ups. China is experiencing an ongoing decline of its venture capital market amid an economic slowdown and uncertainties about the US-China trade war.

In 2019 Chinese companies raised US$35.6 billion in 2,047 rounds of funding from January to mid-November, compared to US$93.4 billion from 2,795 rounds over the same period in 2018, according to Crunchbase.

“Investors who view cash burning and fast capital raising as a competitive advantage are becoming extinct,” said Genping Liu, partner at Vertex Ventures. “All investors are becoming more rational and are looking more closely at operating or financial unit economics to reduce waste and focus on returns.”

Chinese internet giant Tencent Holdings, one of the most active investors in the technology world, significantly scaled down this year after a bullish investing spree in 2018. The Shenzhen-based company put money into 108 deals globally, 33 per cent fewer than the 162 deals in 2018, according to Chinese research firm IT Juzi.