NEW YORK (TheStreet) -- Investors worldwide are watching the Chinese economy slip. If China brings the world into recession, start-ups and crowdfunding will be affected.

Chinese GDP has grown at a rate between 7% and 12% for the past 15 years, but with China's manufacturing and construction sectors slowing, so is its GDP growth. The Chinese economy couldn't keep going at the same pace forever. At some point a correction needed to occur.

This week the Chinese manufacturing index fell to its lowest point since March 2009 -- the heart of the Great Recession. This is an indication that Chinese manufacturing output is contracting and demand is weakening both in China and overseas.

Some analysts are warning that a China slip will drag the rest of the world into recession. Citi (C)  said said the chances of a recession are 50%, and Morgan Stanley (MS)  warned that debt will contribute to a slowdown. 

If Chinese GDP continues to plummet, how will the ensuing recession affect start-ups, crowdfunding and venture capital? One way to find out is to look at how this summer's blips affected the early-stage market and to compare the current climate to the most recent periods of volatility. Although there is likely to be some impact, funding should remain solid -- or more. 

Start-up Fundraising Holds Steady

So far in the third quarter of 2015, private equity fundraising is slightly lower than in the last quarter, but still solid. Mattermark reported an average of $250 million in private capital deployed so far this month, since many deals went forward that were already in the works. As Mattermark points out, the summer's volatility may not be felt until later this year. 

After September's slow start, there was an uptick with five new funding rounds totaling $2 billion. That put the third quarter only slightly down compared to the second quarter. Overall, 2015 has been a great year for start-up investing, with about $55 billion invested and many late-stage fundings. That includes most famously $1.2 billion for Uber's China expansion.


Total year-to-year capital deployment from 2012 onward to start-up companies has surpassed even pre-recession years, possibly thanks to the JOBS Act, allowing early-stage companies to solicit investments publicly, and enabling companies like FlashFunders, to connect investors with high-growth potential investments. 

Superstars such as Google (GOOGL) , Facebook (FB) , and Twitter (TWTR) took their companies public in the period between 2004 and 2014, enticing investors with the prospect of getting in on a tech unicorn at an early stage.

According to the Angel Research Institute, year-over-year median seed state valuations have risen to $3.95 million, up 30%, and average round sizes have grown to $1 million, up from $800,000 in 2014.

Yet interestingly, the number of seed stage rounds has quieted since they peaked in 2012. 

It's possible that more deals may be coming through the pipeline. More likely, the summer's volatility, with China's slowdown and Federal Reserve interest rates having nowhere to go but up, has investors wanting to step back and watch how events unfold.

Best-case scenario, China's dip was a healthy correction. But if it wasn't, what would a recession mean for start-ups?

Historical Precedent

Research shows that the economic downturn following 2008's financial crisis negatively affected venture capital. Venture capital funds had trouble finding investors, since many of the traditional VC investors are people and institutions who were negatively affected by the crash.

Start-ups were vulnerable to bankruptcy because consumers and firms had less money to spend, and as a result, many start-ups that sought venture capital had lower valuations. 

Interestingly, venture capital activity slowed in July 2008, months before the financial crisis dramatically widened. That's when Lehman Brothers went under, thus positioning a venture capital slowdown as a barometer for a downturn..


A recession catalyzed by China's slowdown would have a few differences from the 2008 crash, or 2000 dot-com bubble. The 2008 crash when financial firms carelessly bundled sub-prime mortgages as securities to meet demand during an overheated real estate market. The dot-com bubble burst because enthusiasm for the web went too far. 

To be sure, the recent early-stage bonanza may be in for a correction if China's economic slowdown takes the world into a recession. Financial problems of all sizes make consumers warier about spending money, and a lot of companies go under. Angel investors may close their wallets reducing the flow of capital. The exciting prospect of opening private equity to the small investor fade when crowds don't have enough money to make risky investments in early-stage, high-growth enterprises.

However, the Chinese economic slowdown shouldn't have the same disastrous effect on financial companies that occurred in 2008. Funds should remain more open to continuing investments in private companies. 

That's because many angel investors have the liquidity to weather market's cycles. Emboldened by precedent, they will be willing to wait for the potential long-term gains of the next Google or Facebook. Anyone who bought Google stock at its 2004 IPO and held on through the Great Recession would now have cause to open a bottle of champagne. The overall investing climate is better than it was then. The excitement of early-stage investing, and the potential for crowdfunding in the new regulatory landscape, means that any passing storm will clear the way for robust angel and start-up investing.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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