Chinese Tech Entrepreneurs Struggle to Raise Money

On July 4, after the Shanghai Composite Index plunged 14% over three days, venture capitalist Du Jian sent an alarming message to his mobile chat group of Chinese entrepreneur friends: “If you are planning to raise funds, do it as soon as possible.”

The first response in the chat group came from a founder of an online education startup, who asked if fundraising would become harder soon. “That’s possible,” Mr. Du replied. The messages were sent through the WeChat mobile chat app and Mr. Du shared them recently with The Wall Street Journal. Mr. Du is an investment manager at Shenzhen Capital Group, one of China’s largest government-affiliated domestic venture-capital firms. He focuses on tech startups and frequently communicates with local entrepreneurs.

The July 4 message turned out to be sound advice.

China’s market rout and concerns about slowing economic growth are creating new challenges for early-stage startups. Some entrepreneurs say they now face a much tougher financing environment compared with several months ago.

Big Salad, a startup event in Shenzhen last month. Chinese entrepreneurs say they are facing a tougher climate for fundraising.Juro Osawa/The Wall Street Journal

In Guangzhou, Yu Xiaoyang is struggling to raise additional funds for his online medical consultation startup. Back in November, a Chinese real-estate firm agreed to shell out 10 million yuan ($1.57 million) for a stake in his startup after just one meeting. But recently, the same real-estate firm told Mr. Yu that it won’t be able to make another investment because it has been hit by the stock market slump. A local nutritional supplement company, which had invested in more than 10 startups earlier this year, also declined to invest in Mr. Yu’s startup, saying it was cutting back on expenses.

Tough times are beginning to shake Mr. Yu’s confidence. “Not everyone can be an entrepreneur,” said Mr. Yu, who left Chinese Internet giant Tencent Holdings Ltd. last year to start his company.

Chinese venture capitalists in Shenzhen say they expect greater challenges in their efforts to set up new funds with money from local businesses and individuals, as some of those potential investors have been hurt by the market turmoil.

In April, GPI Partners, a Shenzhen-based private-equity and venture-capital firm, set up an investment fund for early-stage tech startups by collecting 200 million yuan from local businesses and wealthy individuals. GPI invested that money in about 10 startups. Some of those investment decisions were made very quickly in a week or two, said GPI investment manager Luo Wei.

Last month, GPI’s founding partner told Mr. Luo and other managers that the company needed to take a more cautious stance and hold onto its cash. Collecting money for the next fund, which GPI plans to launch next year, will be harder, Mr. Luo said. “People are not so optimistic anymore,” he said.