| | |  | | (Yulia Reznikov/Getty Images) | | | The Chinese tech crackdown has kicked into high gear, prompting investors to dump shares of the companies that have found themselves in Beijing's crosshairs.
The nation's tutoring sector, which until recently had been the envy of the edtech world, is now nonprofit by government decree. That could be just the beginning. Investors are bracing for similar action against other sectors.
This is The Weekend Pitch and I'm James Thorne. You can reach me at james.thorne@pitchbook.com or @jamescthorne. | | | | | | Did China kill the golden goose? In another country, the obliteration of a promising young industry might be unprecedented. Not so in China, where a similar drama unfolded in the peer-to-peer lending market in recent years. Some of those companies also flew too close to the regulatory sun, and then fell to Earth.
Investing in Chinese startups isn't for the faint of heart. Few know this better than SoftBank. Its principal fortune was made on Alibaba, and it has repeatedly backed the country's tech darlings. Two online tutoring specialists caught up in the recent crackdown, Zuoyebang and Zhangmen, were also backed by the Japanese investor.
SoftBank CEO Masayoshi Son compares his business model to the goose that laid the golden egg. In recent earnings presentations, Son has pitched the firm as a golden egg factory, positioned to take a steady stream of companies public.
That vision has played out in China until recently, with Beike and Full Truck Alliance delivering massive IPOs in the past year.
But in Aesop's telling, the goose with the golden egg is a parable that warns against greed. A farmer gets rich after his goose begins to lay golden eggs. He wants to get rich faster, so he cuts open the goose to get all the eggs. The goose dies. Goodbye, golden eggs.
Beijing believes that some corners of the tech world got greedy, and it's wringing the neck of the proverbial goose.
SoftBank-backed Didi Global pulled off an IPO reportedly in defiance of the government's wishes. Now Didi is considering a return to private ownership, The Wall Street Journal reported, as it faces regulatory probes and a ban on its apps.
ByteDance, which is said to have heeded Beijing authorities when it paused its IPO plans, is another of SoftBank's golden eggs.
But SoftBank is just one of a cohort of investors that have braved China's regulatory hurdles to fund billion-dollar startups—a gambit that has paid off in many cases.
Since 2018, China has given rise to 136 new unicorns, making it the second-most prolific producer of billion-dollar companies after the US, according to PitchBook data.
Hillhouse Capital and IDG Capital are also part of a club that has long ruled the region's tech scene. Ditto Sequoia China, which reportedly launched its first fund in 2005 and has backed tech leaders including Kuaishou, JD.com and Pinduoduo.
As China's stock rout shows, the immediate impact of the tech clampdown is a shift in the risk premium that investors charge to certain companies.
Sectors that have pushed up the cost of living for Chinese consumers, such as real estate and healthcare, are seen as especially risky. This has contributed to selling pressure on newly public companies like JD Health, a unit of JD.com, and home-sale platform Beike. Businesses that align with national priorities are comparatively safe. Stocks of electric carmakers like Nio and Xpeng, for example, have risen in recent days despite the broad selloff.
On Friday, the Securities and Exchange Commission called for new disclosures from Chinese companies looking to go public in the US. Chinese companies frequently list in the US through contracts with shell companies, meaning investors don't directly hold equity in the operating business. SEC Chairman Gary Gensler said he wants companies to clearly spell out these structures as well as other risks posed by the Chinese government.
With headwinds like these, venture capitalists will likely find fundraising harder in China. That said, firms that can demonstrate that they have a close pulse on the government's priorities will have an easier time convincing LPs that the benefits still outweigh the risks.
International VCs may also be tempted to look to other countries, which are increasingly producing startups of sufficient enough size to be worthy of their time. Europe's unicorn herd is reproducing rapidly. India and Latin America have also come of age, leading investors like Sequoia, Tiger Global and SoftBank to target the regions.
But China's ruling party can't simply put the genie back in the bottle, and it continues to express a desire to attract foreign capital.
Startups will pivot and change business models, and the ever-growing buying power of the Chinese consumer isn't going anywhere. Entrepreneurs will find a way to work with the government's new rules. | | | | | | | | | | A message from Silicon Valley Bank | | | | Venture activity in healthcare has never been healthier | | Investments and exits for venture healthcare continue to shatter records as the demand for innovation remains strong. Find out more about what's driving the acceleration of dollars and deals across the global healthcare sector in the latest report from SVB's Life Science & Healthcare Practice.
Read our Healthcare Investments & Exits Mid-Year 2021 Report to get SVB's perspective and outlook.
Sources: PitchBook and SVB proprietary data. | | | | | | | | |  | | (Jorge Juan Perez/Getty Images) | | | | "We want a way for the current group of female GPs to raise larger funds, and we want to have new GPs coming into the market. Unless we can deliver that for the women, we will not be moving the needle."
—Kinga Stanislawska, managing general partner of Experior VC and founder of European Women in VC on Europe's funding disparity | | | | | | ... That Robinhood is Silicon Valley's latest high-profile debutante to arrive on Wall Street with a dual-class voting structure, a framework that allows founders to preserve boardroom control?
In Robinhood's case, more than 65% of the company's voting rights will remain in the hands of co-founders Vladimir Tenev and Baiju Bhatt. PitchBook's infographic has more key facts about Robinhood and this week's closely watched IPO. | | | | | | Impact investors are no longer on the fringes of the private markets. Impact-minded investing has mushroomed into a vast and dizzying variety of fund strategies covering environmental, social-themed objectives. - Across all private market asset classes, funds targeting impact goals had $286 billion in assets under management as of the end of December, according to a PitchBook estimate.
- More than 40% of impact funds are managed by venture capital firms, eclipsing other private market classes.
- Categorizing those funds by investment objective may be complex, but PitchBook is using a framework to help break down classifications and provide a guideline for understanding the distinctions. Read more about PitchBook's research efforts on impact investing.
| | | | | |  | | (Sean Gladwell/Getty Images) | | | | After last year's pandemic-dampened lull, the estimated 2021 midyear total exit value stood at more than €233 million, almost 90% of the total haul in all of 2019, one of the biggest years on record, according to PitchBook's Q2 2021 European PE Breakdown. - More deals are getting done, with 702 exits through June 30, compared with 1,118 for all of 2019.
- Part of the rebound reflects pent-up deal demand following the pandemic shutdown.
- But a big driver this year has been liquidity events worth more than €2.5 billion.
- Another key factor was the increase in larger and higher quality assets hitting the market.
| | | | | | Jeff Lowenfels has written a gardening column for The Anchorage Daily News since 1976. What he perhaps didn't realize was that he was also creating a long-running account of climate change in the state. [The New York Times]
From a soaring demand for products to the importance of investing in people: How Latin America's top CEOs got through the past year. [Institutional Investor]
Money and Elon Musk are reshaping the tiny Texas town of Boca Chica. Not all of its residents are thrilled. [Protocol]
As cryptocurrency goes mainstream, a new addiction is also taking hold. [Fortune]
Meet four tech entrepreneurs and women of color who are achieving success through crowdfunding after encountering racial and gender biases in the VC world. [Harper's Bazaar]
The postcard-perfect California town of Mendocino is running out of water. The solution might lie in one very old train. [San Francisco Chronicle] | | | | | | This edition of The Weekend Pitch was written by James Thorne and Alexander Davis. It was edited by Alexander Davis, Angela Sams and Sam Steele.
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