Why are China's venture capital funds acquiring publicly listed companies?
Despite enormous challenges, China's venture capitalists are being adaptive and creative.
Recently, the Financial Times published an article on China’s VC industry, titled “Chinese venture capitalists force failed founders on to debtor blacklist“. The main thesis is:
Chinese venture capitalists are hounding failed founders, pursuing personal assets and adding the individuals to a national debtor blacklist when they fail to pay up, in moves that are throwing the country’s start-up funding ecosystem into crisis.
I applaud FT’s efforts to make this crucial issue more internationally known, which I believe will help resolve this nightmare in China.
However, I have to point out that FT is behind the curve on this issue. As early as last April, I already touched on this topic in the popular article China's venture capital industry is dying. So, for our readers, you already got the idea almost a year before the mainstream. This is precisely why Baiguan exists: to help you stay ahead of the curve for all China-related business and investment topics, using data, contextualized analysis, and honest on-the-ground observations.
There is also a key difference between us and mainstream media. We do not just expose problems and make comments as outsiders. Instead, because we ourselves are part of the ecosystem, we always have an eye for what’s next. We believe that people are inherently adaptive. It’s not the end of the world to have problems. What’s more exciting is how people work with those problems and overcome them creatively.
Now there is another chance for you to stay ahead of the curve, again. An exciting new development is happening again for China’s VC industry and entrepreneurship, showcasing our people’s potential for creativity and adaptiveness, despite the toughest challenges in the world.
A timeline
Before we touch on this new development, we must do a rundown of timelines to give you a better context.
In April 2024, I published the article “VC is dying,” which pointed out that Chinese VCs are turning into debt investors. The original Chinese-language article was widely shared in China, showcasing the depth of the problem.
In June 2024, the State Council gave its first response to support the venture capital industry, and we wrote about it here.
In June 2024, the Communist Party of China concluded the pivotal 3rd Plenum of the 20th Party Congress, which included an important line about personal bankruptcy law. Personal bankruptcy is a major missing piece that may help resolve the “VCs are hounding entrepreneurs for debt” tragedy that the current FT story refers to. We have analyzed this topic here.
In August 2024, there was a wave of Chinese online discussions about the problems of these redemptions, and some high-profile people are openly calling for the resolution of this dilemma. This includes Mr. Kuang Ziping, founding partner of Qiming Venture, a top VC fund, as well as law firm Lifeng Partners, whose pivotal research about startup redemptions served as the basis of the FT’s story. You can read all about them in my personal newsletter China Translated. (Paying subscribers of Baiguan enjoy complimentary access to CT, please find me for this access if you haven’t already.)
In September 2024, the Financial Times (yes, FT again) published a controversial story in which they claimed that new companies formed in China plummeted to almost zero in 2024, which was absolutely not true. The claim created such an outcry that they had to correct the definition a few days later. Yet, however clumsy they might look, their general story was right: VC funding in China is drying up, just like I claimed in the April article.
In late September 2024, China's securities regulator issued a groundbreaking policy on M&A activities (which we wrote about here). In this document, commonly known as “并购六条The M&A 6 rules”, there are many interesting policy moves, such as allowing a listed company to acquire businesses that are unrelated to its main business line and to acquire loss-making companies. There was also this line: ”支持私募投资基金以促进产业整合为目的依法收购上市公司 Support private equity funds to acquire listed companies to serve the purpose of industry consolidation.“
New development: VC funds acquiring publicly listed company
And the VC funds have indeed started to acquire listed companies.
On Jan 7, Tiamaes Technology (300807.SZ) announced that its controlling shareholders had signed into SPA to sell their controlling stake to Qiming Venture, and after the transaction, the ultimate controller will be Mr. Kuang Ziping, the founding partner of Qiming and the very person who wrote the article to call for a resolution of the redemption problem that I mentioned above.
Tiamaes Technology's main business focuses on providing comprehensive smart transportation solutions for cities, with main products including digital public transit series products, commercial vehicle smart cockpits, and new energy charging solutions.
In the first three quarters of 2024, Tiamaes' operating revenue was 55.8 million yuan (~$8 million), a year-on-year decrease of 45.06%; net profit attributable to shareholders was -52.8 million yuan, a year-on-year decline of 6.58%.
Clearly, Tiamaes is a bad business. But by controlling Tiamaes, Qiming has controlled a listing platform through which they can acquire many other businesses related to smart transportation (autonomous driving?), including but not limited to the portfolio companies of Qiming itself. After all, the “M&A 6 Rules” makes all of these potential moves possible.
Qiming was not alone. Wu Shichun, the celebrity founder of Plum Venture, another local VC fund, also bought 10.65% of the shares of another listed company, Mengjie (002397).SZ), and thus became the second-largest shareholder of Mengjie.
What do those transactions mean? Why do they have to do with the “redemption nightmare” the FT story refers to?
Why is this happening and what is the implication for China’s VC industry?
At the most fundamental level, 3 missing pieces will help revive China’s dying VC industry (and entrepreneurship in general). They are:
1) re-entry of the so-called “patient capital”,
3) personal bankruptcy law, and
2) a healthy exit mechanism for VC-backed startups.
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