China VC activity dips as Asian investment soars

More than $39.7bn was invested in Asia over the course of the year, more than the previous four years combined, according to a report from CB Insights and KPMG.

China saw a massive slowdown in venture capital funding and deals in the fourth quarter of last year although the year saw record-setting levels of investing elsewhere in Asia, according to the 2015 Venture Pulse Report from CB Insights and KPMG.

While Asia’s venture capital scene continues to garner significant investment, a significant pullback in China was seen in the last quarter of 2015. Funding fell 29 percent and deal activity fell 39 percent.

Total deal value across Asia dropped from $14.2 billion in the third quarter to $9.7 billion in the fourth quarter, with both China and India receiving substantially less capital.

Overall, 2015 was still a record-setting year for VC investment in Asia, which includes a mix of traditional VC money, hedge funds, private equity investors. More than $39.7 billion in total was invested over the course of the year, totalling more than in the previous four years combined.

The latest global venture analysis report said the slowdown in the last quarter can be attributed to a number of factors such as China’s weakening economy and retail sector, traditional companies struggling to compete with internet-based businesses, as well as a lack of mega-rounds.

The funding rounds in the fourth quarter were significantly smaller, including the likes of research provider Pharmaron ($280 million), mobile taxi and car hailing app Olacabs ($275 million) and online ticketing app Weiying Technology ($235 million). Meanwhile, the previous quarter included some mega-rounds over $500 million fundraising by taxi hailing app Didi Kuaidi ($3 billion), online travel agency LY.com ($1 billion) and meal ordering service company Ele.me ($1.2 billion).

The report also noted that Asian investors are becoming more selective about where to focus their investments.

“The Asian market is fluid and volatile compared to more mature markets … we are seeing Chinese VC investors and VC-backed companies shifting their focus to invest in the international market, where things are a bit more stable, to acquire complementary technologies to strengthen their ecosystem. We are seeing more investment in the US, Europe and Australia across all sectors,” said Lyndon Fung US Capital Markets Group, KPMG in China.

Just this month, China-based investment firm Cocoon Networks announced it will launch a $720 million London-based fund which will invest in European tech startups and help to set up operations in China. Cocoon is backed by private equity investor China Equity Group, which was an early investor in the country’s biggest search engine Baidu and Hanxin Capital.

Other known Chinese investors with eyes on the international market are tech solutions provider Huawei Technologies, e-commerce giant Alibaba, gaming company Rekoo and ticketing company LY.com.

According to the report, companies in China using innovative business models seem to be coming under more regulatory scrutiny, especially in the financial technology space. Recently, the Chinese government has been focused on getting micro-finance companies to clean up their business practices, which may be drawing attention and concern from investors.

In India funding has also slowed, with prominent investors expressing concern over overheating in India’s VC ecosystem. Deals fell 46 percent and funding 18 percent respectively in the fourth quarter compared to the previous quarter, the report noted.

In Southeast Asia, Singapore, Malaysia and Indonesia are the top countries with the most investment activity.

Globally, funding to VC-backed companies in 2015 hit an all-time high of $128 billion up 44 percent on 2014’s total of $89.4B. That amount funded about 7,872 deals, in sectors that ranged from healthcare to fintech, and retail to education. In addition, 71 VC-backed companies achieved unicorn status ($1 billion valuation) during the year, compared to 53 in 2014.

Overall VC investment in North America declined significantly, following three quarters of consecutive growth, from $20.8 billion in the third quarter to $14.1 billion in the fourth quarter.

Comparatively, Europe experienced the least decrease in VC activity, although both the number of deals and the total deal value in Europe remain small compared to other regions of the world.