Investors shun China’s once hot consumer technology start-ups

Unpaid suppliers are acting, founders are fleeing, and thousands of technical staff are being laid off, while investors are on guard against China’s unprofitable consumer internet start-ups.

On a cloudy January afternoon, a throbbing parade of suppliers working for the grocery company Nice Tuan staged a drive-in protest at an Alibaba warehouse in the central Chinese city of Changsha to demand that the e-commerce giant save the company.

“We can not get our money, no one in Nice Tuan has anything to do with us. We lack opportunities, so we are chasing Alibaba,” said sunflower seed supplier Yang Xianli.

Nice Tuan, a Chinese startup of online grocery stores that has raised over $ 1.2 billion. USD from investors, including Alibaba, DST Global and DE Shaw, is the latest company to tip the brink of collapse as a radical shift in Beijing’s policy causes investors to abandon consumer internet. companies in favor of “hard tech” ventures.

Chinese start-ups achieved a record-breaking funding pull last year, an increase of a third over the previous year, according to data provider ITjuzi. But there is a growing division in China’s venture space.

Funding for e-commerce, edtech and social start-ups was flat or down, while investment in semiconductors, robotics and other hard-tech companies rose.

Huang He of Northern Light Venture Capital, a leading Chinese investment firm, said the competition for robotics trades and valuations has never been so fierce.

“The nation wants more focus on hard technology and industry. Investors need to move in the direction of the country,” he said. The Northern Lights consumer internet team has shifted to support direct-to-consumer and retail projects, he added.

SoftBank chairman Masayoshi Son also said the group was changing direction in China. “We are not investing that much in consumer or media data sensitive companies at the moment,” he said in a earnings call in November.

Son said there are “many companies for which the Chinese government does not show red flags”, such as “robotics, medical and B2B.”

The strategic shift gained momentum in July when Chinese authorities launched an investigation into ride-hailing giant Didi Chuxing following their listing in New York. Weeks later, Beijing announced rules that changed the edtech sector, and officials have since added rules that make it harder for Chinese companies to list in New York.

“Consumer Internet looks to the United States as the primary starting point, which is questionable now, especially for large platforms,” ​​said an investor in a China-focused multibillion-dollar deal that has slowed funding in space.

“Great strategies like Alibaba, Tencent or [private equity] funds usually lead the big growth rounds before listing, but they retire, ”the investor added.

Diagram showing VCs changing goals in China

The impact of Beijing’s regulatory campaign on consumer internet companies has been serious. China’s head of online education New Oriental fired 60,000 workers, while others like Gaotu Techedu, TAL Education Group, Yuanfudao and Zuoyebang jointly laid off tens of thousands of workers.

Valuations of other publicly listed, money-burning Internet companies have also declined, prompting staff cuts at companies like iQiyi, a video streaming site, and TikTok competitor Kuaishou.

Online groceries have been targeted by authorities seeking to eliminate predatory prices. Chinese antitrust authorities hit five companies with sanctions for their pricing last year.

Didi’s grocery efforts Chengxin Technology have been significantly reduced, while Tencent-backed Shixianghui and start-up Tongcheng Shenghuo are close to bankruptcy. Fresh produce supplier Meicai and New York-listed companies Dingdong Maicai and Missfresh are retiring.

The regulatory investigation led to intense pressure on the companies struggling to become profitable. “Our positioning was not clear, there was no clear direction… It was completely throwing money into the water,” said a former Chengxin employee.[Didi] could no longer bear the great losses. ”

After plowing $ 3.8 billion into the company along with SoftBank and other investors in the first half of 2021, Didi was forced months later to write down most of its investment.

Didi declined to comment.

Nice Tuan faces a similar fate after burning through $ 750 million. raised from investors like Alibaba and Yuri Milner’s DST Global last March. So far, it has not been able to raise additional investors, which has left its suppliers grabbing repayment.

Nice Tuan has laid off thousands of employees in recent months. A former employee of its strategy department told FT that he was still due for pay for his last two months of work after being fired in late December.

“We knew there were problems, but in December they changed the legal representative [position] to someone we had never heard of, we knew it was really bad, he said. Under Chinese law, a company’s legal representative is legally responsible for the company’s defects.

Public records show that Nice Tuan’s co-managers, Harvard Business School and Bain Capital alum Chen Ying, and Wang Peng, handed over the position in key subsidiaries to a third person, 65-year-old Wang Wenjing on December 15.

One week later, Nice Tuan’s unpaid bills led a court in Beijing to hit Wang Wenjing with restrictions on personal consumption, the first in a cascading number of court orders banning him from going on vacation, playing golf or staying in good hotels.

A spokesman for Nice Tuan, which FT found in an empty office in Beijing, said the company still had “money in our bank account” and that it was only “extending our payment cycle.”

She said some employees were in arbitration over their exit, confirming that the company had laid off over 1,000 employees at headquarters. She called the changes in the legal representative “normal”.

“New government policies have caused the whole industry to withdraw… It’s the same for many of the internet industry, the government does not want us to be polluted by capital,” the Nice Tuan spokesman said.

“There has been a relocation of the education industry, the restructuring of our industry is the same, after that there may be a period of healthy growth.”

Suppliers can only hope that the company survives. Yang, the sunflower seed trader, said he owed 60,000 Rmb.

“With only one elementary school education, I know debt must be repaid even if your business cannot continue, you need to give creditors an account, an explanation,” he said. “How does the boss of Nice Tuan, a Harvard candidate, not understand this?”

Further reporting by Nian Liu and Antoni Slodkowski in Tokyo

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