For many mainland startups, bluffing is the rule of the game

September 09, 2015 13:43
Food delivery O2O venture has been suspected of overstating the capital it has raised by more than US$200 million. Photo: Internet

About 80 percent of mainland startups inflate the amount of capital they have raised, StartupBeat said, quoting a Tencent report.

The number of startups that were able to raise US$100 million or above is actually limited, but a lot more are saying they have done it.

“Some companies simply add a zero at the end (i.e., 10 times the original amount)," says an unnamed investor. "Some raised funds in renminbi but pretended that the amount was in US dollars when they announced the transaction.”

Basically, the norm is to blow up the number three to five times.

So if there is a mediocre project that claims to have attracted a large chunk of capital, that is usually the result of number inflation.

Food delivery O2O platform is one venture recently criticized for allegedly overstating its fundraising scale.

Although it is usually hard to verify, the truth comes out when a company lists its shares.

For instance, the amount of money raised by group purchasing site 55tuan as revealed in its IPO prospectus was only a quarter of the figure the firm announced previously.

Investors are reluctant to correct this practice of inflating a company's valuation because they have everything to gain when the company they have invested in “appears” to be worth a lot more.

Yet with the recent equity market rout on the mainland, investors are now getting much more cautious. Doing such inflation tricks is probably a lot harder to pull off now.

As billionaire investor Warrant Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.”

Startups seeking money must now back their claims with solid business and products. Those who cannot may have no alternative but to shut down as cash flow dries up.

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EJ Insight writer