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Xi Jinping is making Mao’s dream possible by taking down one startup at a time

Sohil Sinha by Sohil Sinha
March 3, 2021
in India China Latest News
Reading Time: 3 mins read
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Startup numbers in China dropped significantly in 2020. Xi Jinping’s crackdown on major tech companies including Alibaba and Tencent has had a domino effect and startups in China are feeling the heat as they have been starved of seed round funding.

Chinese President Xi Jinping is more Mao than he is Hu Jintao, based on his policies which favour state-owned firms over private enterprises. Over the past few years, huge state-owned corporations have swallowed up many small and some big corporations. Moreover, using the means of ‘anti-trust efforts’ and ‘disorderly expansion of capital,’ Xi Jinping is taking down startups in China one at a time.

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As compared to the same time-frame a year earlier, Alibaba Group Holding’s investments in startups have halved in the past four months after its fintech subsidiary, Ant Group was forced to postpone its stock market listing in November.

The rapid slowdown is an adverse effect of increased pressure from the Chinese Communist Party, which has accused Alibaba of antitrust abuses and financial market monopolisation. Some say the “Alibaba economic bloc” which has dominated China’s online world by swallowing promising startups, has reached a tipping point.

The Jinping administration has been stepping up its investigation of Alibaba since the autumn of 2020. It introduced rules to curb monopolistic conduct and internet companies’ collection of personal information. It also introduced a proposal to monitor Ant’s “Smartphone loans.”

Following the cancellation of the Ant listing, the government fined Alibaba in December, citing antitrust and pricing violations. It has also performed various inquiries and interrogations of Alibaba and Ant executives.

After the listing debacle, Yunfeng Capital, an investment fund in which Alibaba Group founder Jack Ma Yun holds around a 40% stake, has kept a low profile. The fund will aim to be ‘inconspicuous’ when it invests in a self-driving technology startup, according to a senior executive. The negative comment was in stark contrast to the fund’s previous aggressive acquisition policy.

This is certainly not a case where startups are shunning Alibaba. The startups have been starved of investment deals throughout the board. Deals to startups in China dropped significantly in the first three months of this year. While activity had trended down after a 2018 peak, there was a sharp drop-off in Q1’20.

Despite the drop in deals, financing grew on a quarterly basis, thanks in part to three $1 billion mega-rounds. Beyond the notable mega-rounds, the overall decline in operation was not limited to one segment of the venture ecosystem: CVC investments and seed rounds in China dropped sharply in Q1’20. Similarly, the number of mega-round transactions has declined.

Tencent Holdings stayed moderately successful in Q1’20, and was the most active corporate investor in China, even though its investments in 15 equity transactions is down from 19 in Q4’19 and 18 in Q3’19.

The biggest blow has been received by seed-stage startups. Seed-stage deals declined by 44% in Q1’20 versus the previous quarter and by 55% compared to the same quarter a year ago.

The sharp drop in seed-stage deals was followed by an even steeper drop in seed-stage financing, which plunged by 70% quarter-over-quarter. In Q4’19, the total deal size for seed deals with disclosed financing was $5.2 million. The average deal size in Q1 2020 was $2.7 million, as investors were more cautious.

Moreover, new regulations announced by China’s financial industry watchdog will deal another blow to the Ant Community and radically alter the online micro lender’s business model. This would create another domino effect severely affecting the investment capabilities of the ant group and this would majorly affect those startups which have been starved for funding.

Jinping’s crackdown on Alibaba and Tencent has put his sinister plan into play. His push for more state-owned enterprises and enabling them to take control of private enterprises is killing the private sector. Startups are one of the first indirect casualties of Jinping’s push for more authority quelling any reasonable opponent, cue Jack Ma. As a result, startups are being picked off in China, one by one.

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