BEIJING — The coronavirus outbreak is shaking up China's investing industry, as companies shift their business mentalities, while others seek new opportunities.
Rapid economic growth in China once meant that businesses could ride short trends and quickly generate capital for their founders' next venture, with little thought to the long-term consequences, or opportunities.
Now, some in the industry say more start-ups are realizing the importance of having more capital on hand, while investors are assessing what trends the virus' disruptions may accelerate. The coronavirus that's killed more than 2,900 people in China has brought much of the country to a near standstill, following last year's slowdown in official GDP growth to 6.1%.
The venture capital industry in China was already struggling last year.
After surging over the last decade to a high $110.7 billion in deal value in 2018, Chinese venture capital deals dropped to $49.4 billion in value last year, according to financial data firm PitchBook. The value of VC deals notched just $2.1 billion for this year through Feb. 26, the company added.
"The virus is a kind of transmission of negativity," said Jeff Wu, a China-focused partner at Silicon Valley-based Pegasus Tech Ventures, according to a CNBC translation of his Mandarin-language remarks. "2020 will be even harder."
"For the first half of the year, VC, PE (private equity firms) need to maintain their network, maintain their cash flow," Wu said.
Investors speak generally of canceled meetings and delays in deals as a result of the virus. It's just a slice of the ripple effects the highly contagious disease is having on the Chinese economy. Global companies that rely on factories in the mainland are worrying about the ability of suppliers to get back to work and fulfill orders.
Hubei province and its capital of Wuhan, the center of the outbreak, are still reporting deaths and hundreds of new cases, even if the virus' spread seems to have stalled in the rest of the country. The disease has now spread beyond China's borders and infected thousands in at least 60 countries around the world.
"After this crisis, the market will definitely slow down. That will definitely slow down the private equity market in China," Michael Xu, managing partner at China-based CEC Asset Management, said in an interview. The private equity market in China is very small, and "U.S. private equity (firms) cannot come to China to do their due diligence, cannot close the deal."
Preqin said China-based venture capital and private equity firms have raised about $600 million so far this year, versus $84 billion for all of last year.
The industry's struggles have created opportunities for Xu, who says the firm is flush with cash despite having to delay the launch of its second U.S.-dollar fund from February to June. "We see a huge, huge opportunity after this crisis to buy a lot of our (investment portfolio) competitors (at) a very cheap price," he said.
The firm's investments include biotech, medical device and e-commerce businesses, which have not really been affected much, even if they're not necessarily doing as well as before the virus hit, Xu said. He noted that one investment in a convenience store chain in Wuhan is still making money — roughly 2 million yuan ($286,000) a day — despite the city's quarantine state.
In the niche industry of Chinese e-cigarette makers — which has attracted tens of millions of dollars and big-name investors such as Sequoia Capital — the virus is just the latest challenge.
While coming under increased scrutiny over health risks in the U.S., the e-cigarette industry in China was hit in November by a ban on online sales, which forced companies to move to physical stores. About two months later, as the coronavirus continues to spread, potential customers are staying home, while some stores have had to close, at least temporarily.
Relx Technology, an e-cigarette start-up, has enough capital on hand to weather at least two more years, founder and CEO Kate Wang said in an interview. The roughly two-year-old company says it has about 2,000 stores in China, and has cornered more than half the domestic market.
Its factory — which hires a staff of 3,000 to 4,000 — has gradually resumed operations in the last several days, and Wang expects production will return to normal by the end of March. This year, she still plans to open more locations at home and abroad, and work more closely with convenience stores.
Meanwhile, Chinese media reported in the last two weeks that competitors such as SnowPlus fired about 50% of its staff since the fourth quarter, and Flow hasn't been able to pay employees for at least two months.
SnowPlus would not confirm a figure, but told CNBC staff reductions are part of business "optimization" rather than a market reaction, and that the company still employs more than 450 personnel, excluding sales staff. The company also would not disclose its financial situation, but said its "strategy through 2021 is firmly in place" and investment is forthcoming. Flow did not immediately respond to CNBC's request for comment.
From January to February, amid the Lunar New Year holiday and worries about catching the virus, daily active users for ride-hailing app DiDi and Meituan, which runs food delivery, dropped off sharply, according to data from app developer services company Aurora Mobile. On the other hand, the data showed a slight increase for video apps such as Kuaishou and iQiyi.
It's not clear whether these trends will last, or at what scale, as Chinese return to work and business activity eventually returns to normal.
But investors tend to agree some new businesses, such as fresh produce delivery, are here to stay, and will command higher valuations in the future given their multiples of sales growth in the last few weeks. Health care will also be a major focus for capital, investors said.
Among trends that will last, Sophie Yao, general manager, at Pegasus Tech Ventures (China), expects a pickup in the development of self-driving technology, while hype around artificial intelligence and blockchain technology will gradually dissipate.
Financial markets are already reflecting investor bets on potentially more sustainable growth opportunities. As U.S. stocks plunged more than 10% last week, some New York-listed Chinese companies weathered the sell-off far better than others.
Even Luckin Coffee, the self-proclaimed Starbucks rival in China, held up better than its American competitor. Shares fell 1.2% last week, versus more than 10% for Starbucks.
When Luckin listed on the Nasdaq in May, the start-up was the first company since the dotcom bubble to achieve a valuation of $3 billion in less than two years, raising concerns about sustainable growth. But Liu Erhai, founder of Luckin investor Joy Capital, said that as is the case for the firm's core investments generally, the coffee company has sufficient reserves for the next 12 months, with more than 10 billion yuan in cash at hand.
Luckin declined to comment on its financial situation, and said it's been offering consumer discounts as stores in much of the country reopened in the last two weeks.