VC and PE investors facing challenges

Problems for players include dying deals as well as difficulties cashing out of investments

China's venture capital and private equity investors are facing challenges due to dying deals and difficulties in cashing out, according to the chief of Zero2IPO Group.

Ni Zhengdong, chairman of leading venture capital and private equity research company Zero2IPO, said there were many dying startup companies that were industry leaders－or those burning cash after having completed several rounds of financing from VC and PE investors.

"Chinese venture capital and private equity investors made investments too quickly in the past three years and the startups they invested in used up their money and failed to finish the next round of financing," said Ni.

Metao, a Chinese cross-border e-commerce provider that started in October 2013, for example, failed to finish its series C funding and closed down at the beginning of this year. It received series B funding of $30 million in 2014 from VC and PE institutions Vertex Venture Holdings and Matrix Partners.

The Zero2IPO head said another challenge was that it remained difficult for venture capital and private equity investors to cash out－as China abandoned the plan of creating a strategic emerging industries board on the Shanghai Stock Exchange and delayed carrying out the registration-based initial public offering system.

As of June 30 there was a backlog of 894 companies waiting for IPOs on the A-share market, according to data from the China Securities Regulatory Commission.

There were only 162 exits of VC and PE investors in the first half, mainly through IPOs and mergers and acquisitions, Zero2IPO said.

Ni added that popular sectors among VC and PE investors such as online to offline, peer-to-peer lending and smart hardware were cooling down because many companies in these sectors died.

There were 99 new internet lending platforms in China which experienced problem or closed in August, with the total number reaching 1,978, according to web portal Wangdaizhijia, which tracks the online financing industry.

According to Ni, China's venture capital and private equity investors need to control the pace of their investments and think carefully when investing in deals.

Hurst Lin, general partner of DCM Ventures, said his firm processed investments more slowly and cautiously than its peers and closely focused on every investment until the day it went public.

Lin said it was looking closely at companies in the mobile internet and consumer sectors due to China's huge market and the increasing size of the middle class.