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The slowing Chinese economy may beclaiming some unexpected victims: without its robust engine, many techstart-ups relying on China’s fast growth for success are being cast out.


Despite healthy capitalisation,investors are finding that some companies’ underlying technologies may not beas innovative as hoped. And even after a banner year for venture capitalfunding in 2018, some investors predict that as many as 90 per cent of Chinesetech start-ups are doomed to fail.


“The market is going through a severeselection process,” said Weijian Shan, chairman and CEO of PAG, a HongKong-based equity firm managing US$30 billion. “Only those with true technologyand an understanding of risk control are able to survive.”


In other words, China still lacks the deep repository ofinnovation know-how for fundamental tech breakthroughs compared with countriessuch as Israel, Japan and the US.


As a weakened economy can no longersupport start-ups as it did in the past decade, Chinese companies face a hardreality: stand on the quality of their technologies or fail. The moment oftruth is dawning on an industry that has in recent years been touted as a miracleand a source of domestic pride.


The Chinese market is now experiencingwhat legendary investor Warren Buffett once observed: “It’s only when the tidegoes out that you learn who has been swimming naked.”


Globally, tech innovation is seen as apowerful force that can thrust China into a role of technological dominance.The issue has since become a major concern for Washington and governmentsaround the world that it helped trigger US President Donald Trump’s trade waragainst China last year.


Ironically, while much of the world ismoving to contain China’s tech ambitions, domestically, investors arequestioning the nature of companies’ innovations.


Cracks have begun to show, with a numberof recent flops catching investors off guard. The once high-flying bike-sharingoperator Ofo, whose short-lived success was fostered by the large Chinese population,is an example


Founded by five cycling enthusiasts atTsinghua University in 2014, Ofo’s valuation shot up to US$1 billion less thantwo years after its launch in 2015. Membership rose to a whopping 200 millionat its peak but the business model, which has high operating costs, could notbe sustained. After pulling in as much as US$2.2 billion in venture capital andattempting an ambitious expansion outside China, Ofo pulled out of Australia,Austria, the Czech Republic, Germany, India and Israel in July and laid offmost of its US workforce.


It left its lead investor, Alibaba,which led a US$866 million funding round only a year ago, Hony Capital andCitic Group holding the bag.


Some attribute Ofo’s collapse to Mobike,a better-funded competitor that was launched the same year. But Mobike, boughtby Chinese food-to-taxi app giant Meituan Dianping in 2018 for US$2.7 billion,is also in trouble. In early March, it applied to surrender its bicycle-sharinglicence in Singapore, its latest attempt to pull out of overseas markets.


“We have seen too much capital chasingtoo few good ideas,” said China Merchants Bank’s Liu. “So when they saw aseemingly good idea, all the money rushed in and lots of it was lost quickly.”


Other Chinese unicorns have alsocrashed. Aiwujiwu, an online property listings platform, ceased operations atthe end of January and is being liquidated, according to news reports. Foundedin March 2014, the firm had five funding rounds in 18 months, obtaining US$305million and a valuation of US$1 billion. GGV Capital and Hillhouse were amongthe major investors.


Another online property platform,Pinganfang.com, founded by the Ping An Insurance Group in 2014, folded onJanuary 11.


Even the largest growth companies arenot immune. China’s ride-hailing operator Didi Chuxing, which in December wasvalued at US$56 billion, reported losses in the hundreds of millions last year,and its planned IPO has seemed to fizzle.


Despite the failures, China continues tobe the hottest area for venture capital. Overall, Greater China – China,Taiwan, Hong Kong and Macau – completed US$107 billion in venture deals lastyear, according to data provider Preqin. Seven of the world’s 10 largest dealsannounced in 2018 were China-based companies.


“We need better entrepreneurs withbetter imaginations,” said China Merchants Bank’s Liu. “The most importantthing Chinese entrepreneurs need today is a real ability to innovate.”