Another major Chinese VC warns of a bubble, tells startups to raise funds while they can

In September, prominent investor and co-founder of Matrix Partners China David Zhang sent an open letter who his portfolio companies cautioning of an imminent cooldown in China’s venture capital scene. The warning echoed cries of an imminent bubble in the West from Marc Andreeson Benchmark Capital’s Bill Gurley.

But yesterday, another Chinese investor by the name of Ran Wang, the CEO of ECapital, says the downturn will be more of a market correction rather than a full-on bubble burst (h/t to Huxiu).

Wang admits startup valuations are far too high in China, often outpacing their American counterparts. Thanks to oversized early stage funding rounds, a bubble is definitely present. But this trend is already beginning to correct itself, according to his observations.

This will happen through a slowdown in the investment bonanza that’s gone from excessive to exorbitant since Alibaba’s IPO. He advises startups that need funding in the near future to grab it while they can.

See: China’s car services startups get a funding boost that will drive them off a cliff

Wang says the bubble in China was caused by several new business models born out of China’s startups, especially in the online-to-offline (O2O) field. Because startups like these haven’t really existed before, no one has an objective way to valuate them. On top of that, new funds looking to make a name for themselves were aggressive in handing out money. Finally, many of China’s top entrepreneurs formerly worked at large companies like Baidu, Tencent, Alibaba, and Xiaomi, so they themselves carry influence enough to attract investors.

He also notes an unhealthy habit among entrepreneurs to raise and spend funds unnecessarily to prove they are beating competitors. Burning through cash and obtaining a hire valuation is a way to show off. And when everyone is doing it, many entrepreneurs and investors exhibit signs of FOMO (fear of missing out).

Wang argues that investors who were too loose with their cash will withdraw when their startups begin looking for their next rounds, and the larger VCs who take their places will be more experienced and make more reasonable assessments.

But that will take time, and as Zhang pointed out, winter is coming. 2015 will likely be a tough year for startups in China to fundraise.

(Source: Huxiu; top image: Wikipedia Commons)

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Another major Chinese VC warns of a bubble, tells startups to raise funds while they can