Expert warns of 'disaster' as start-ups face investment surge in China

A prominent investor and financial expert in China has warned of “disaster” from a desperate gold rush into tech startup funding.

The dire prediction comes as the number of venture capital funds in China has more than doubled to 1,216 at the end of October, up from 552 at the beginning of 2015. The data is from the Asset Management Association of China (AMAC).

“We are concerned about the consequence of massive flooding of capital from some institutions, including local government-backed policy guidance funds and fund-of-funds,” said Jia Hongbo, general secretary at AMAC, a self-regulatory body supervised by China’s securities regulator. 

“The volatility and the size of the incoming funds could be a disaster to early-stage investing,” Jia added.

Despite the boom in venture capital in the country, startup funding is down significantly this year as sky-high valuations make it tough for VCs to find decent deals.

The number of China investments by venture capital firms is down 34 percent from the same period last year, according to Beijing-based Zero2IPO Research. The total value of all those deals dropped 12.5 percent.

One major impact of the cash flood in the nation is that “second-tier fund managers are able to raise funds – and these managers fund lower quality startups,” explains William to Tech in Asia. “While they might have a lesser product, these tier two startups’ ability to burn cash make it harder for tier one players to shine. Bottom line: you have inexperienced fund managers backing companies that don’t deserve it and as a result the entire market suffers.”

This is an excerpt from Tech in Asia. You can read the full article here