Why some savvy venture capitalists lost their shirts in P2P bust

September 18, 2015 11:21
The Chinese government has been enhancing the regulatory framework for P2P lending firms. The sector is expected to keep growing after the current downturn and consolidation. Photo: Internet

China's peer-to-peer lending platforms are still reeling from the negative impact of a slowing economy and the recent stock market crash.

There is no lack of reports about P2P bankruptcies or owners running away with company money, leaving their investors and customers with deep losses.

Among those that went under, quite a few were backed by venture capital funds or angel investors.

So why did these supposedly savvy investors fail to smell trouble beforehand?

“Some P2P lenders offered unrealistically high returns to lure customers, investors must have noticed. But they were still willing to put money into those companies,” blogger Chong Yan said.

Lots of not-so-sound P2P platforms were able to raise funds largely because investors competed for projects during the heyday and P2P used to be a hot theme and regarded as a must-have in their portfolios.

As these so-called professional investors scrambled to buy into faulty P2P operations, some private equity guys and venture capital fund managers quit their jobs and joined P2P firms, the blogger noted.

Now the tables are turned. So many P2P firms are seeking for funds but few investors are willing to jump in.

After the bubble burst, P2P owners no longer sought lofty valuations. The asking price for some projects came off by as much two-thirds, partly because of the poor market, partly because some operations are in dire need of fresh capital to keep going.

Given Beijing's favorable policy toward the sector and the improving regulatory framework, along with the real need for such lending and borrowing platforms, long-term prospects remain positive for sound P2P lenders.

For investors who didn’t get burned, they have now a far better investment environment to cherry-pick the fittest ones.

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EJ Insight writer