July 12, 2017 2:50 pm JST

Startup financing losing steam in US, China

Monetary tightening curbs investor appetite as interest rates rise

YUSHO CHO and MAMIKO FUJITA, Nikkei staff writers

Bike-sharing company Mobike's distinctive orange bicycles have been sprouting up like mushrooms on China's streets.

SHANGHAI/PALO ALTO, U.S. -- Venture capital investment has slowed markedly in the U.S. and China, the two largest players in the field by far, a slump that could last for some time as both countries embark on tighter monetary policy.

The head of a venture capital firm with a presence in Shanghai remarked wryly that up through last year, fledgling businesses were not short on money -- just colors to paint their bikes.

The colorful bicycles flooding China's streets are a sign of the proliferation of startups in the country. The vehicles come courtesy of a plethora of bike-sharing companies, each of which paints its bikes a different color: orange for Mobike, yellow for Ofo, and light blue, white and gold for smaller rivals.

But while Mobike and Ofo have raised hundreds of millions of dollars from investors on multiple occasions, competitors have been forced to withdraw as their coffers have run dry, suggesting a change in the fundraising environment.

Financing to companies backed by venture capital firms came to just over 83 billion yuan ($12.2 billion) between January and June, data from research firm Shanghai DZH shows. The total clocked in at more than 167 billion yuan a year earlier, boosted by big fundraising rounds.

Total spending since then has hovered around 40 billion yuan a quarter. Investment this year is expected to come in below the more than 230 billion yuan logged in 2016. The average amount raised per deal has also slumped from more than 300 million yuan in 2016 to 250 million yuan in the first half of this year.

The drop-off owes partly to rising interest rates. The one-year Shanghai Interbank Offered Rate has jumped from just over 3% a year ago to around 4.4% now. On top of this, tighter regulations on sales of insurance products, intended to curb speculation, have had the side effect of limiting venture capital firms' funding sources, one such fund noted.

The U.S. has experienced a similar slowdown since the latter half of last year as the Federal Reserve tightens monetary policy. Investment in venture-capital-backed businesses came to $13.9 billion in the January-March quarter, falling 11% on the year and down more than 30% from a 2015 peak, a report by PricewaterhouseCoopers and research firm CB Insights shows. The number of deals also slid 15% on the year to 1,104.

Investors are getting choosier compared with their exuberance over the past few years. Yet this is not a sign of weakness in the venture capital industry, American research firm PitchBook Data argues.

The first quarter of 2017 saw more investing in such fields as health care, artificial intelligence, machine learning and cybersecurity, while internet-related businesses took a smaller slice of the pie. California-based Grail, which is developing early detection tests for cancer, held the quarter's biggest funding round, raising $900 million. 

The U.S. and China, the world's two largest economic powers, drive global venture capital investment. Startup financing in these two countries outstripped that of other major economies in 2015 by a wide margin, data from Japan's Venture Enterprise Center shows. 

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