BEIJING - China’s venture capital scene has been on fire this year, and a record-breaking run to unicorn status by a Chinese coffee startup suggests it is not cooling yet.
Luckin Coffee took just six months to reach a $1billion (R13bn) “unicorn” valuation, a performance that is helping to boost investor appetite for Chinese startups, even as they estimate that valuations are far outstripping US ones.
This month at Hong Kong’s RISE technology conference, a key stop on the Asian venture capital circuit, investors told Reuters that start-ups in China were 30 to 40percent more expensive than their US counterparts and in some cases were even valued at twice the price.
“If I put my US lenses on, this is insane,” said Edith Yeung, a partner at 500 Startups, a California-based venture capital firm. But, she said, the calculus for investors was the sheer size of the Chinese market, noting that the WeChat social media platform had three times more daily users than the population of the US.
Luckin Coffee typifies the optimism evident in China’s start-up scene. The Beijing-based coffee delivery firm only began operating in January and has plans to expand its 660-strong network to challenge Starbucks, with 3400 stores.
Detractors point out that Luckin’s fast growth has relied heavily on cut-price promotions and warn it also faces heavy competition from other chains.
Its backers still see value, however. “Luckin’s valuation is not cheap or lofty - it’s reasonable,” said David Li, the head of Centurium Capital.
The former head of Warburg Pincus Asia Pacific led Luckin’s recent $200million financing round and maintains it is not a conventional startup, pointing to a management of experienced entrepreneurs.
At the other end of the scale from Luckin is Ant Financial, the Chinese payments giant that became the world’s largest unicorn in June, when it secured $14bn in fresh funds that valued the firm at $150bn.
In search of the next Ant, Sequoia Capital China, the local arm of the Silicon Valley-based venture capital giant, is close to raising 15billion yuan (R29bn) in its fifth yuan-denominated China-focused fund, the largest of its kind.
“Lots of China’s rising sizable tech companies are promising and still fast-growing, and rely on fundraising for further growth.
“We are increasing our fund size to capture those opportunities,” said Zhou Kui, a partner at Sequoia China.
The firm’s recent investments include Bitmain Technologies, a Chinese bitcoin mining equipment maker, Pinduoduo, a fast-growing e-commerce firm, and the self-driving start-up Pony.ai.
On average, a start-up in China reaches unicorn status about 18 months quicker than its US equivalent, according to Pitchbook, an industry data provider.
“There is a lot of aggression and hunger,” said Jixun Foo, a managing partner at GGV Capital. “It’s important to recognise the amount of talent and capital that’s pouring into this market.”
Beijing’s deleveraging campaign, which has driven up borrowing costs, slowed the economy and aggravated already tight market liquidity, could affect fundraising for funds and companies, some investors warned.
For now, however, venture capitalists are confident they can exit via either an IPO or a sale.
Hong Kong is preparing for a series of blockbuster tech deals, led by smartphone maker Xiaomi’s $5.4bn float in July, the world’s biggest tech IPO in four years.
Despite a relatively weak debut by Xiaomi, the earliest investors in the company still made 866 times their initial investments at the IPO price, said Hans Tung, the San Francisco-based managing partner with GGV, which invested in Xiaomi from day one.
The trump card for those shrugging off bubble fears in China is the presence of other deep-pocketed buyers, including Alibaba, Tencent and SoftBank, with its $100bn Vision Fund.
The three have shelled out some $45bn since 2015 across 71 investments in Chinese tech companies, according to Thomson Reuters data.
Chinese venture capital funds have so far performed better than their global peers, delivering a multiple of money - the total return on investment - of 1.72 times, compared with their US peers’ 1.59 times, according to May data from eFront, which analyses about 4000 funds.
Tay Choon Chong, the China managing partner at Vertex Ventures, an arm of the Singapore state investor Temasek, shrugged off concerns that any nascent bubbles posed a real danger to the wider venture capital scene.
“It’s like beer. You need the right amount of bubbles for it to taste good,” said Tay, who has been investing in China since 2009.