TOKYO • China went through a five-year surge in venture capital investment that fostered a new generation of start-ups from ride-hailing giant Didi Chuxing to TikTok-parent Bytedance.

Now, the boom may be over.

Venture deals in China plummeted in the second quarter as investors pulled back amid unpredictable trade talks and growing concerns about start-up valuations.

The value of investments in the country tumbled 77 per cent to US$9.4 billion (S$12.78 billion) in the second quarter from a year earlier, while the number of deals roughly halved to 692, according to market research firm Preqin.

The second quarter of last year marked the peak for China venture deals with a total of US$41.3 billion invested. That included a US$14 billion round for digital payments giant Ant Financial, US$3 billion for e-commerce upstart Pinduoduo and US$1.9 billion for truck-sharing service Manbang Group (known also as Full Truck Alliance Group). In comparison, the largest venture deal in the second quarter of this year was a US$1 billion investment in JD Health, the healthcare affiliate of e-commerce provider JD.com.

China has never been through a widespread bust like the United States did after the dotcom boom, in part because the country's venture market is so new.

Years of steady growth in tech investments resulted in predictable - and enormous - profits. Whether the current downturn becomes a painful crash depends in large part on how entrepreneurs and regulators navigate terrain they have never seen before.

"We're seeing real stress in the system for the first time," said Mr Gary Rieschel, a founding partner at Qiming Venture Partners, who has worked in China and the US. "We have never seen a downturn in the China market. For 20 years, it's been pretty much up and to the right."

China's venture boom began in 2014 when Alibaba Group Holding went public in the largest-ever initial public offering, making clear to investors the potential riches in the world's most populous country.

Venture deals tripled that year to more than US$17 billion and rose every year to 2018 when the total topped US$105 billion, almost as much as in the US.

Along the way, firms like Qiming, Sequoia China, Tiger Global Management and SoftBank Group fostered some of the most valuable start-ups in the world.

77%

The drop in the value of investments in China in the second quarter, according to market research firm Preqin.

Bytedance, the force behind short-video app TikTok and other addictive services, sports a valuation of US$75 billion, the highest anywhere, according to CB Insights. Didi, the ride-hailing service that ousted Uber Technologies from China, was last valued at US$56 billion, the second highest.

But the rise of China's tech industry puts it squarely in the crossfire of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidising companies in strategic fields, including semi-conductors, artificial intelligence and autonomous driving. In May, the US blacklisted Huawei Technologies, preventing the telecom giant from buying American components, and is considering doing the same to a swathe of start-ups.

The trade war gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile start-ups such as smartphone-maker Xiaomi and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private-market valuations had gotten out of hand.

So-called sharing economy start-ups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money.

Now, there is scepticism that many such companies will ever turn a profit.

"You're really reaching the end of the shared economy - this idea of let's give away services for free and make up for it in volume," said Mr Rieschel. "Some companies - Didi is the classic case - are just not showing any ability to become profitable."

A Didi representative did not respond to a message and e-mail seeking comment.

Valuations have not declined yet in China. The country's start-ups have resisted so-called down rounds, when they raise money at lower valuations than an earlier round. "China entrepreneurs, more than any on the planet, will do unnatural things to avoid a down round," said Mr Rieschel.

Meanwhile, venture firms are pivoting to alternative business models like enterprise software. Such start-ups are not only less capital intensive, they are at a stage of development where they require less money.

This also may simply be a time when venture investors opt for caution. Given the volatile negotiations between presidents Donald Trump and Xi Jinping, it is not clear what kind of opportunities China's tech start-ups will face in the years ahead or how capital markets will treat the next big IPO filing.

"It won't cost you that much to sit on your hands for a few months," said Mr Rieschel.

BLOOMBERG