Does the death of the unicorns start in China?

An Alibaba employee walks through a communal space at the company's headquarters in Hangzhou, China.
Peter Parks | AFP | Getty Images

With the Chinese stock markets mounting a shaky start to the new year, could it mean dead unicorns in that country's start-up scene?

In the face of public market volatility over the past year, American venture capitalists from Bill Gurley to Mark Cuban have called for the "death of the unicorn," saying capital might pull back for Silicon Valley's many highly valued start-ups, forcing IPOs at lower valuations on the stock market.

With its public companies funneling money to India and smaller investors tallying losses, a similar process might already be underway in one of the most fascinating markets in the technology world: China, said Bill Bishop, co-founder of MarketWatch, who blogs and consults on China-related issues.

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"The turmoil in the Chinese markets over the summer dried up a fair amount of the all nonprofessional VC money," Bishop said. "These were people just making stupid, easy money in the stock markets, so it's a healthy shakeout."

The volatility from August's market turmoil, when the shakeout began, reared its head again in the past few weeks. Though Chinese stock markets closed in the green Tuesday, the Shanghai composite is still nearly 42 percent below its 52-week high and down almost 15 percent year to date.

Why should that matter to start-ups, either here or in China? If you've ever hailed a ride with Uber, you're familiar with one of the many products that publicly traded Chinese companies invest in across the globe. Alibaba has led a funding round in Snapchat, Baidu has led a funding round in Uber and Tencent has invested in Uber-rival Didi Kuaidi.

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That presence is even more pronounced in Asian markets, where huge, publicly traded Chinese companies are becoming the main source of capital, as individual investors and VC funds try to salvage their portfolios.

Like the market as a whole, these companies were dinged by the latest market turmoil. U.S.-listed shares of Alibaba are down more than 10 percent so far this year. Hong Kong-listed Tencent is has dropped 10.75 percent; and Nasdaq's and Baidu have dipped 13 percent and 9 percent, respectively, over the same period.

But these companies, unlike many individual investors, have cash to ride out volatility: In its latest quarterly earnings, Alibaba reported cash equivalents of $16.6 billion. And if you're a competitor, it's getting harder to outspend anyone backed by the biggest, most powerful companies.

Another problem: These big sources of cash are increasingly looking elsewhere — like India — for new opportunities. Chinese venture capital has recently backed Indian start-ups like MakeMyTrip, Practo, Paytm and Snapdeal.

And there aren't a whole lot of other cash sources for Chinese entrepreneurs outside of the top firms.

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"There are limited qualified professional funds to back in China itself," said Duncan Clark, author of "Alibaba: The House That Jack Ma Built," and chairman of BDA, a Beijing-based advisory firm serving investors in China's digital and consumer sectors.

"We still see a lot of activity, a lot of financing and interest in the best companies, but it's harder than a year ago," said Jeff Richards, managing partner of GGV capital, a venture capital fund that partners with entrepreneurs in the U.S. and China

With a more rigorous market and increasingly expensive valuations, one option for Chinese start-ups has been consolidation. E-commerce site, backed by Tencent, this week agreed to acquire rival to form a new company, for instance.

A Vipshop banner and Chinese flag hang outside the New York Stock Exchange.
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"Instead of a down round, squeeze into a bigger company and hope that they are No. 1 in their sector," Bishop said. "This is consolidation that makes a lot of sense because of the crazy marketing and subsidies [that big companies get]. This consolidation is rationalizing the market."

So where does that leave Chinese unicorns that have yet to go public?

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There are barriers to filing an IPO, Bishop said. He said it's easier to go public in China than markets like the U.S., both in terms of multiples and regulation. But start-ups with foreign investors can't go public in China without making changes to their structure.

Still, despite the ups and downs in China's public market, it's still more attractive to go public in China than the U.S. in many cases, Bishop said.

"Volatility — most investors who are local in China are just used to it," Richards said. "It's part of the system as the economy and markets grow up. In contrast to markets like Europe, where there are macro concerns about the economy, over the next five to 10 years, investors believe Internet, mobile and e-commerce will see significant growth [in China]."