China’s Once-Hot Startups Feel The Pinch Of Tighter Venture Capital

Kungfu Bear had its day.  Wang Run founded the startup in Beijing just over a year ago to let people order inexpensive massages through a smartphone app. As venture capital money flooded into China, the company raised cash to draw customers and acquire rivals. Its valuation topped $15 million.

Now the good times are over for Kungfu Bear and many of China’s once-hot startups. After pouring more than $30 billion into the country this year, venture firms switched off the easy money, concerned there’s too much competition and too many copycat products. A shakeout is beginning, particularly among app makers offering generic services like car washes and massages. Co-founder Meng Junxian, a former Baidu staffer, said his startup had to cut its valuation to raise more cash and fight off rumors of bankruptcy.

China venture investments surged to historic highs earlier this year, partly inspired by the fortunes investors made in the record initial public offering of Alibaba Group Holding Ltd. China VC deals hit $34 billion through Dec. 2, more than double the total for all of 2014, according to the London consultancy Preqin Ltd.

In the current shakeout, startups hit the hardest are those in the online-to-offline, or O2O, business, where consumers use an app or website to order grocery deliveries, laundry, in-home manicures or car rides. Dozens of apps often started in a single niche, and many would use venture cash for subsidies to pull in customers and suppliers.