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For Chinese Net Startups, Winter is Coming

Perhaps Chinese internet companies could learn a thing or two from the Starks, the awesome but ill-fated northerners in George R.R. Martin’s epic fantasy series A Song of Ice and Fire (now also a TV series called Game of Thrones on HBO). The family is known for its gruff, fatalistic motto — “Winter is Coming” — and Chinese internet startups would be wise to take heed.

Winter is coming to the Chinese tech startup scene, which has been enjoying a long summer thanks to increased investment because of the stunning success of larger Chinese tech companies. IPOs in 2010 and the first half of 2011 went well, by and large, and thus there were lots of people wanting to get in on the ground floor of the next big thing. But the environment for Chinese tech IPOs has soured, and mad expansion in some sectors — group buy websites, anyone? — has given way to highly competitive markets where a few top competitors eke out a meager existence and smaller sites starve and die out. Chinese tech stocks have nearly all dropped since May. Even Groupon, who first popularized the group buying concept and who had both money and a big time partner in Tecent for its joint venture, doesn’t seem to be able to hack it here. The real issue, of course, is investment. When the markets are good, investors aren’t as worried about their return, and they’re more likely to throw cash around — after all, everything is going up. But now, with the international markets in a state of rather extreme flux, some investors have less cash to play with, and many others are hesitant to take risks before things have evened out a bit. This isn’t a major concern for bigger tech companies, but investors willing to take big risks are the lifeblood of the startup community, and without them, many companies are facing a difficult future. As Chen Haozhi, CEO of a Chinese tech startup in the mobile touchscreen tech field, told Global Entrepreneur: "When the market is hot, investors will think, even if I lose that ten million, I’ve got another fifty million coming in over here. When the markets are good, investors don’t worry about how much money there will be later. But when the markets cool, if an investor has lost ten million and doesn’t think there’s anything else coming back to him, he may not invest in anything else. Investors are very practical. If they can’t see a return, they’re going to be very cautious."

Returns are hard to find in this climate, even at the highest levels. Many investors may reasonably choose to wait for the market to warm up before backing any startups, since they generally pose a pretty significant risk as compared with more conservative investments. But how many Chinese startups have the cash to be able to weather a long winter without additional investment? Not too many. Things could get grim:

OK, they’re probably not going to get that grim. But many Chinese startups were born during China’s big tech boom, and they’ve never dealt with an investment market like this before. Winter is indeed coming. But how long it will last is anyone’s guess.