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“Winter is coming” – Chinese startups face market downturn

Chinese 100 Yuan notes are counted at aChinese 100 Yuan notes are counted at a

On a rainy night last Friday in Beijing, a group of China’s angel investors was huddled inside a shared work space for startups named Tech Temple. They were part of a crowd of 100 that came to hear elevator pitches from some of the rapidly growing number of startups in Beijing and Shanghai, but the end of the night was devoted for investors to give advice.

The biggest one: raise all the money you can now. Because the market is turning.

James Tan, managing partner of Quest VC, an angel in Chengdu and Beijing, titled his talk ‘Winter is coming.’ He said 25% of Chinese startups were funded in just the past year and a half, growth that not only couldn’t continue but that would reverse amid China’s stock market sell-off and general uneasiness about China’s economy. “We tell our companies to go and raise [funding] as fast as you can,” he said.

Indeed, venture capital financing for Internet companies is down 50% in second quarter this year, to $3.7 billion, according to and the 21st Century Business Herald.

The most exposed companies are the thousands who have added users at any expense and put off thinking about profits. Many are part of the online to offline (O2O) industry in China, which has been promoted by the central government and China’s big three tech companies—Tencent Holdings Ltd (TCEHY), Alibaba Group Holdings (BABA), and Baidu Inc. (BIDU) They are in food delivery, education, and dozens of other industries. (Click here to read Fortune’s coverage of Tencent’s evolution into a VC targeting O2O startups this summer.)

The ‘winter is coming’ atmosphere means that fundraising rounds are drying up for the companies burning through capital. In late August, for instance, a Chinese startup selling vegetables and fruits from the countryside laid off 1,500 employees, the Business Herald reported, when it couldn’t raise more money.

If anything, the world’s startups look like they’ll be exposed together. Silicon Valley veteran Bill Gurley was just warning that the cycle of growth being more important than profits might be ending. Fortune reported earlier this week that VC companies on the West Coast are increasingly concerned about ‘dying unicorns’.

China’s companies are hearing the same drumbeat.