Preqin Ltd. said that investment by China-focused private equity and venture capital firms in the sector fell by more than 70 percent in the first quarter of 2023 compared to the same period of 2023. This follows a 90 percent decline in 2018, when the firm reported a record $73 billion.

Investors have stopped making new bets, but those who still write checks to entrepreneurs have adopted a new mantra for assessing whether a business can survive the increasing frugality of consumers: great value for money. This is a major selling point for shoppers who have been feeling the pinch from China’s economic downturn and widespread job losses.

Some focus on funding startups that reshape their distribution models in order to offer lower prices than the market — or those who launch innovative products and upgrade the quality of their ingredients in order to convince shoppers to part with money.

This is a big change from the days of fundraising before Covid, when investors poured into startups selling 110 yuan ($110), or 66 yuan (66 yuan) ice cream bars. They did this mostly through slick marketing. Several of these brands ended up pricing their products out of the market after the pandemic.

“A few short years ago, you were able to get funding by simply having a great idea. Now, this very limited capital will go only to founders who have solid skills and backgrounds,” Zhang Ye, founder at Beijing-based Cyanhill Capital. This early stage investment firm focuses on China’s consumers sector.

Efficiency-Oriented

MMHM Group, a discount snack chain, is one of only a few consumer startups to have received funding this year. The brand eliminates middlemen by sourcing its ingredients directly from the producers. This allows it to sell snacks at up to 60% lower prices than traditional supermarkets.

Shanghai-based BA Capital is one of its main backers. In 2023, it led a 150 million yuan fundraising for snack chain Zhao Yiming before it merged into a rival company to form MMHM. This year, BA made a new investment in MMHM which operates mainly in China’s booming low-tier markets.

The BA investment shows the growing trend of venture capitalists to invest in startups that are efficient enough to undercut their competitors, as well as the more traditional focus of the firm on companies that target Chinese consumers who are more willing and able to spend money today, according to David He, the founder and partner of the firm.

He said that when the economy is under pressure, it’s important to focus on firms with high efficiency.

Investors say that although Chinese consumers still shop for quality despite a slowdown in the economy, uncertainty about the future may limit how much they are willing to pay.

“Good value for the money does not mean a reduction in consumption, but rationalism.” It’s no longer effective to charge an unrealistic price as if consumers were fools,” said Cyanhill Zhang.

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Published: 21 Jun 2024, 03:02 AM IST