Chinese e-cigarette startups are facing a tough winter as investment institutions become more cautious about betting their money on the industry, PE Daily, a Chinese private equity media, reports.
According to PE Daily’s research, from last June until November, about 30 Chinese e-cigarette companies, have secured a total of over one billion yuan($140 million) in investment.
However, the excitement around Chinese vaping business has cooled due to the Chinese government issuing an online sales ban in early November.
PE Daily reported that the industry is now facing a turning point, and that companies that have failed to create a positive cash flow will be finding it harder and harder to survive the winter of 2019.
“Startups such as SnowPlus and Flow that fail to maintain a healthy operation will find themselves in a very cold winter if they are not able to secure further investment,” an anonymous venture capital partner told PE Daily.
Things were quite different back in 2018. Originally understood as having a low barrier to entry and high net profits, investors were extremely enthusiastic about China’s e-cigarette business, as China already has a mature supply chain and fast-growing market. It only took about five million to start a new E-cigarette brand, according to PE Daily.
Luo Yonghao, founder of e-cigarette brand Vvild said their net profit remained at 10 million Yuan a month in the first half of 2018.
However, as the Chinese government issued the notice to ban online sales of e-cigarettes, the key to winning the competition lies in the brick-and-mortar business, but not every startup has a comprehensive strategy for their offline business.
“Companies such as SnowPlus and Yooz have similar strategies—offering their distributors their products at the lowest price to secure the market and sales channels, and then betting on those distributors to purchase from them again,” an e-cigarette investor told PE Daily.
He continued by stating that such a strategy could very well help expand the market share rapidly, but that without sufficient cash flow, it will find difficulty in making a profit. That is why many companies now need to heavily rely on continuous investment to support their low-pricing strategy. In a more egregious act of desperation to secure as much funding as possible, a number of brands have been found to be faking sales data to attract investors.
SnowPlus, for example, said it sold 800,000 sets of its vape product from this April to July. AI Caijing, a Chinese media outlet, has accused SnowPlus of faking the numbers.
Vapeast, a vaping media from Hong Kong also reported SnowPlus company faked its overseas R&D partner—Reverie Lab, which didn’t really exist.
Business Insider, reported in November that SnowPlus, went as far as to fake the signature of John McCain, the former US senator who passed away in 2018. The “signature” was found on a card endorsing one of their latest products.
“The E-cigarette business was very hot, but outside of some top investment institutions, which only invested the top companies, other capital has primarily come from individual investors,” said Zhao Yangbo, vice-president of investment of Polaris Capital. “However, investors have not abandoned the industry. In China, we are all waiting for the national standards for the e-cigarette industry to land.”