China’s start-ups are slashing jobs, cutting pay and appealing for government bailouts after the shutdown caused by the coronavirus outbreak cut off their access to funding. 

The dynamic but fragile sector was already suffering from a “capital winter” that began last year as a venture capital boom turned into a bust. 

Now many start-ups have been hit by the long pause imposed on China’s economy, with most face-to-face meetings with investors put on hold because of the risk of coronavirus contagion. 

“A lot of VCs actually stopped bringing new deals to their investment committees because they can’t really meet and get the feel of [start-up] founders,” said Zhao Chen, managing partner of the start-up accelerator Plug and Play China.

He added that some investors who had already committed money to start-ups and signed term sheets before the outbreak had put these deals on hold. 

“Evaluating a start-up in normal conditions is very different from evaluating a start-up during this disaster, or post this disaster,” he said. “They need to re-evaluate the company, re-evaluate the market altogether once the dust settles.”

Li Yuanfeng, an entrepreneur building a chat app for stock traders, Tiantian Reliao, said only a fifth of the investors he had recently approached would accept a meeting in person. 

“We need to meet to raise money, but investors are comparatively well-off and place a high value on health. They think this epidemic is life-threatening,” said Mr Li, who has delayed his fundraising plans as a result.

The number of venture capital deals in China dropped 64 per cent in January and February through Monday compared with January-February last year, while the amount of capital raised fell 66 per cent, according to Preqin data.

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Zhou Xiang, a managing director at the investment bank China Renaissance, estimated the epidemic could delay the fundraising cycle by three months or longer.

“At the same time there’s a lot of lossmaking start-ups that need to raise capital for cash flow and growth,” Mr Zhou said, noting the situation presented bargain hunting opportunities for investors. “Competitive companies will survive,” he predicted.

To make it through the cash crunch, many companies have cut wages and laid off workers. New media advertising firm Xinchao fired 500 workers and cut executive wages by 20 per cent. Elsewhere, like at green tech start-up Papa Bear, employees have volunteered to cut their own pay.

Companies “need to seriously look at slimming down by shuttering, pausing, merging, and refocusing (business lines)”, said David Wei of Vision Knight Capital on a special series of podcasts that GGV Capital has released to help entrepreneurs navigate the epidemic. 

“Executives and entrepreneurs cutting their pay is a must — if employees have to suffer, executives and founders should suffer more,” said Mr Wei. 

At Waterdrop Inc, a healthcare crowdfunding and insurance start-up with more than 4,000 employees and backers such as Tencent and Meituan, executives took a 20 per cent pay cut and employees were laid off, according to one person familiar with the situation. The company slashed money for headhunters, birthday parties and all but essential printing, according to an internal memo seen by the FT. 

“The market environment over the last year has fundamentally changed and the coronavirus has added to the challenges,” said founder and chief executive Shen Peng.

Nio, the struggling New York-listed electric car company, managed to secure what one analyst called a government bailout, winning more than Rmb10bn ($1.42bn) in investment after agreeing to move its headquarters to the central city of Hefei. 

A NIO Inc. EP9 electric sports car stands on display at the Auto Shanghai 2019 show in Shanghai, China, on Thursday, April 18, 2019. China's annual auto show, held in Shanghai this year, opened to the media on April 16 amid the specter of an electric-car bubble and as the world's largest auto market trudges through its first recession in a generation. Photographer: Qilai Shen/Bloomberg
Electric car company Nio has secured what has been called a government bail-out © Bloomberg

Beijing has agreed to defer tax collection for struggling companies. Cong Liang, a senior official at the National Development and Reform Commission, said on Monday that it would “keep researching measures to cut taxes and fees to help small and medium sized companies get through this hard period”.

It remains unclear what conditions would see investor meetings resume; Mr Zhao predicted that face-to-face appointments between start-ups and VCs would be half the normal number in March. But he said that 200,000 people had tuned into a livestream of start-ups showing off their demos.

Wen You, who runs a two-year-old logistics start-up helping Chinese students move their belongings abroad, faced problems after the lockdown of cities caused luggage to be delayed or returned. He had been pitching for investment to grow his nine-person team, but has given up. “Investors have turned conservative,” he said. 

“We didn’t have enough money to pay our employees, we explained it to them,” Mr Wen added, noting they would pay benefits to the laid-off employees for a period of time.

“The epidemic exposed shortcomings in our business model,” he said. “Raising money to get us through this period was unrealistic.” He and his co-founder had turned their sights on Australia “where there is no epidemic” for a new line of business.



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