(Yicai Global) July 20 -- China's venture capital firms are tightening their belts on policy shifts and volatility in the international markets, which has resulted in granting smaller funding for startups.

This Feb., the number firms which secured fundraising plunged 54 percent to 23 from Jan. This was only 28 percent of the companies that raised capital in Dec., data from Chinese consultancy firm CVSource shows. The value of funds awarded in Feb. declined 24 percent to USD3.7 billion from Jan., which was a 81 percent plunge from Dec.

"The size of raised funds in the first quarter this year was down significantly from a year earlier, and may continue to fall," said Jin Haitao, chief executive of Qianhai Equity Investment Fund at the 12th China LP/GP Summit.

New Rules in the Volatile Market

Market analysts point to two reasons for the decline in funds, first of which is the central government's introduction of the Guiding Opinions on Regulating Asset Management Businesses of Financial Institutions this April that has struck a direct blow against venture capital and private equity firms.

According to the new rules, financial institutions are prohibited to create a 'capital pool' for funds raised through asset management products, which earlier allowed them to hide losses by issuing new products.

Secondly, the global secondary market has also proven bearish and fickle this year. This is why market players are increasingly cautious and a growing number of financial institutions tilt toward safer investments, skipping newly set up small firms, and thereby cause lower valuations in the primary market.

A whopping 60 to 80 percent decrease in the capital supply in the primary market would absolutely point to an adjustment in the valuations of firms there, said Wang Ran, chief executive of Chinese investment bank CEC Capital. He estimated a widespread 30 percent fall in these firms' valuations over the next three to six months, and even worse, a more than 50 percent decline in valuations of some hyped up sectors, without specifying those.

Advice to Those Needing Funds

Wang also offered his advice to entrepreneurs who need to raise money this year or the next. The suggestion is to take the move as early as possible, except if some important business milestones need to be reached first.

A financial institution founded by entrepreneur Zhang Dian followed Wang's advice and raised over USD30 million in its D-round financing last month, half a year earlier than planned. "In fact, the company currently has no money issues. But our investors have been recommending an accelerated fundraising, which they believe would only become even harder amid unfavorable market conditions. Even some companies signing the term sheet have failed to get the capital they need," Zhang told Yicai Global.

Another firm headed by Han Li also raised capital early for its second yuan-denominated fund. "We need to seek safe havens in a volatile market," Han said.

Editor: Emmi Laine