INTERNET: Babies, Cars And Dogs Get New Funds
Bottom line: A current round of big fund raising for Chinese tech firms will continue through the first half of the year but then start to fade, leading to a steady drop in valuations for such companies.
The fund-raising frenzy for Chinese tech companies continues as we head into the end of January, with word of another mega funding worth $100 million for childcare website Beibei.com. At the same time, a used car specialist called 51Auto has landed a nifty $30 million in its own new funding round. But my favorite story from the fund-raising realm comes from a company that has created a PC for dogs, and has found a backer to give it 5 million yuan ($800,000) for the endeavor.
While the dog PC idea is really more for dog owners and could even succeed, it also nicely illustrates the fact that anyone with a high-tech idea in China can attract big investor dollars these days. That’s not to say that some of these ideas aren’t good ones. But many of these companies seem to be getting unusually high valuations simply because they’re in China, and I doubt they would attract nearly as much attention in any other market.
The biggest example of this kind of overinflated valuation drawing on the tech + China factor comes from leading e-commerce site Alibaba (NYSE: BABA), which raised a record $25 billion in its IPO last year and is now worth about $250 billion. By comparison, global e-commerce leader Amazon (Nasdaq: AMZN) is worth just over $140 billion, even though it generated $20.6 billion in revenue during its latest quarter, nearly 10 times more than Alibaba’s $2.7 billion.
Such valuations seem to have “bubble” written all over them, especially for names like Alibaba and smartphone sensation Xiaomi that will have to go global to keep their strong growth alive as they run out of room for expansion in China. That will put them in direct rivalary with much savvier global companies like Amazon and Apple (Nasdaq: AAPL), which will give them far tougher competition than they face in their relatively protected home market.
All that said, let’s start this latest capital-raising round-up with Beibei.com, which has found a comfortable niche for itself selling products for the young children of doting Chinese parents. The new $100 million funding was led by New Horizon Capital, and also included IDG and Banyan Capital, and values Beibei at $1 billion. (Chinese article)
Beibei has found a niche for itself by selling low-cost no-name products on its site, commanding 70 percent of that part of the market. No financials were given in the report I saw, meaning the company probably still reports relatively modest revenue of perhaps $100 million or less each year, though the figure could be growing fast.
Next there’s 51Auto, which has won a more modest $30 million in a third round of funding led by Softbank China Venture Capital. The company began its life as an informational source for used car buyers, but has grown into a trading platform for sellers and buyers of used cars and related services like financing.
China’s only listed online car sales site, Autohome (NYSE: ATHM), went public in late 2013 and currently trades at a very rich ratio of 34 times its expected earnings for 2014. These rich valuations are being fueled by big hopes for China’s auto market, which is now the world’s largest and where used car sales could start to accelerate as people look for cheaper alternatives to new cars as the nation’s economy slows.
We’ll close out this fund-raising round-up with the Dog PC venture, which is aimed at the millions of Chinese in major cities who pamper their dogs almost as much as others spoil their children. This particular product is actually more aimed at dog owners who want to keep an eye on their pets and perform simple functions like feeding them, which is done using a smartphone app connected to PC in their home. (Chinese article)
Perhaps Dog PC will succeed despite my high degree of skepticism. But it’s far more likely to quietly get shelved due to lack of a marketing and product development skills of its founder. Others like Beibei and 51Auto could stand a better chance of longer term survival, but I expect their valuations could drop sharply once the current wave of investor euphoria towards Chinese tech start-ups start to fade later this year.
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