From Industry, page 33, issue no. 389, October 13 2008
Translated by Ren Yujie
Original article: [Chinese]

Funding from venture capital firms has dried up in the wake of the global credit crunch, affecting Chinese internet-based startups, which depended heavily on foreign funding.

Fund managers and internet-startup executives told the EO that the new climate will squeeze out smaller, cash-strapped firms, bring more conservative valuations and thorough due diligence, while also bringing new opportunities to healthy firms seeking bargain acquisition targets.

Gu Yongqiang, CEO of Chinese video site Youku, told the EO that the credit crisis had already begun to affect how venture capitalists value companies and create exit strategies. "The US stock markets are looking at the pale expressions on Wall Street, and the venture capitalists are watching the stocks," he added.

Cash-strapped Towona
Towona Media, a mobile media advertisement company, was one Chinese firm affected by the global financial crisis.

The company raised USD 95 million in venture capital and went on to invest in large scale expansion all over China. Afterwards, it faced a cash shortage, and though a market listing was ideal, that path was made impossible by worsening market conditions.

Fang Shikai, CEO of Jiangxi Provincial Mobile Television, realized when he signed an agreement with Towona that whether or not Towona could secure a market listing in July of 2008 would greatly impact cooperation between the two firms.

If Towona failed to list overseas, it would face a capital shortage, jeopardizing cooperation.

But Fang did not imagine then that it could happen so fast.

As early as this past February, Towona failed to pay outsourcing fees to Shanxi Mobile TV, resulting in the two parting on bad terms.

Afterwards,Towona was able to secure a USD 50 million investment by Baring Assets Management, but it still could not solve a fundamental capital shortage.

By the end of August, Towona had ended the agreement with Jiangxi Provincial Mobile Television.

"Towona's failure to list was such a huge setback. Towona could have found other ways to raise funds if it was performing well, but they had already lowered expected profits. It's more difficult [to raise funds] now because the global financial crisis has made venture capital firms more cautious," said one cooperative partner of Towona's.

The New Desert
Zhang Fan, founder and managing partner of Sun & Sun Global Asset Management, told the EO that much of the hot money flowing out of China now had come in originally not to be entrenched in a long-term investment, but instead, to ride the wave of the appreciating yuan. He too has noticed a retreat of various types of funds.

Gu Yongqiang, president of Youku.com, estimated that two thirds of all funding for Chinese internet startups had come from abroad.

But only two or three Chinese startups received overseas financing in 2008. In June, A8 Digital Music was listed in Hong Kong, raising 173 million HK dollars. In July, China Distance Education Holdings saw an initial public offering price on the New York Stock Exchange of seven yuan, and raised only 61 million dollars, far lower than its expected 115 million dollars.

Gu said that only two leading video businesses besides Youku could survive such a climate. Others video companies with high-quality assets, large user bases, could find ways to sell them off. But other firms had to either shift gears or go bankrupt, he said.

Ceng Fuhu, a vice president from Openv.com, a wireless video service website, agreed, saying that this year and next year would be a stern test for the video industry. Several companies’ financing plans have already failed, and more would down the line due to capital shortages. he added.

Meanwhile, VC investors were slashing investments and becoming more prudent.

The Silver Lining
Ru Linqi, a managing partner at Kleiner Perkins Caufield & Byers (KPCB) told the EO that they were now spending three or four month reviewing investment targets that would have only required one or two months before.

Many VC investors were in the same boat as Ru.

In the past, VC firms had to compete with hot money, and thus they were forced to make a decision as soon as finding an investment target.The typical four-week inspection period was reduced to two, company backgrounds were incomplete, and cooperation models were not set in detail.

Ru added, however, that hot money was so abundant in those times that reviews went unusually fast, and that this slower pace was more normal.

Yang Dong from Soft Bank Asia Infrastructure Fund (SAIF) told the EO that this was a a silver lining to the crisis--a return of rational investing.

Others were also optimistic. Zhang Fan, the fund manager mentioned above confirmed that the financial crisis would cause a recession in the IPO market. But he said a high-quality company could afford to not worry about capital, and that they could postpone a listing for one year.

And in the meantime, some companies would win out in a new fundraising environment. Gu said Youku.com was prepared for the coming marketing war.

In Gu’s view, capital winter did not equal to a marketing winter. The financial crisis would concentrate advertisement resources and clients would give more opportunities to leading video companies, which would be perceivved as more trustworthy than small-scale websites.