China’s once high-riding startups are feeling the pinch after venture firms began squeezing the tap, worried there’s too much competition and too many copycats.
Now money is drying up and many fledgling companies, once the darling of angel investors, are left in the lurch
Kungfu Bear is one of them.
Wang Run founded the startup in Beijing just over a year ago to let people order inexpensive massages through a smartphone app.
As venture capital money flooded into China, the company raised cash to draw customers and acquire rivals. Its valuation topped US$15 million.
But after pouring more than US$30 billion into the country this year, venture firms switched off the easy money.
A shakeout is beginning, particularly among app makers offering generic services such as car washes and massages, according to Bloomberg.
Wang had to cut his company’s valuation to raise more cash and fight off rumors of bankruptcy.
“In this climate, if you can stay alive, that’s the best,” said the 29-year-old former coder for Baidu Inc.
“Right now, that’s the reality of the market.”
China venture investments surged to historic highs earlier this year, partly inspired by the fortunes investors made in the record initial public offering of Alibaba Group Holding Ltd. China VC deals hit US$34 billion through Dec. 2, more than double the total for all of 2014, according to the London consultancy Preqin Ltd.
In the current shakeout, startups hit the hardest are those in the online-to-offline (O2O) business, where consumers use an app or website to order grocery deliveries, laundry, in-home manicures or car rides.
Kungfu Bear got its start in the heady days of 2014.
After working at search giant Baidu, Wang joined a newsletter called 36kr.com and then participated in a startup accelerator program backed by Microsoft Corp.
He got the idea for a massage app after spending hours hunched over his desk tapping code.
Kungfu Bear landed angel funding from China Renaissance K2 Ventures and started operations in October 2014.
Kungfu Bear recruited masseurs by offering them cash incentives. Users could book a massage in their home for as little as US$16 and then rank their masseuse.
In March, it expanded to Shanghai and landed at least US$1 million from Vertex Venture Holdings.
By June, it started snapping up regional rivals, including one in western China.
The turning point came in July when China’s stock markets lost US$5 trillion after gloomy economic news hammered investor confidence.
That raised concerns among VCs that they couldn’t take startups public and prompted publicly traded companies, which had been putting money into startups, to pull back their investing.
“We had too many unprofessional investors,” said Chuan Thor, managing director of Highland Capital Partners, a Boston-based venture firm that invests in the US and China.
For Kungfu Bear, that meant three investors pulled out in August after signing deals, leaving the firm short of money.
The trouble was reported in Chinese media.
In September, masseurs began picketing and claimed unpaid wages. The company nearly collapsed, Wang said.
The fallout promises to be brutal for many of China’s startups, yet it’s also a sign of maturity for the domestic technology industry.
Silicon Valley regularly goes through boom-and-crash cycles as entrepreneurs rush to take advantage of new opportunity.
“It’s a normal shakeout,” said Innovation Works’ Lee. “O2O is definitely a valid business model.”
Meanwhile, Wang goes back and forth between work and soul searching.
In November, he posted an essay on social media outlining the industry’s tribulations.
The reality is that companies have to make money to survive, he said.
“Kungfu Panda’s still here,” he wrote. “Yes, now our goal is profit.”
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