Is China’s technology sector in a bubble? Some experienced investors certainly think so – at least parts of it.

“There is a bubble at the angel [early venture capital] investment stage,” said Herry Han, partner and founder at venture capital firm Lightspeed China Partners (LCP). “In the last few years there have been so many angels in China; most of them have done 50 or 100 deals per year – it’s quite similar to the situation five to 10 years ago in Silicon Valley.”

However, there are only 20 well-established, experienced VC funds on the mainland, and the success rate for venture deals is less than 5%, Han noted. He was speaking at the 15th annual HKVCA China Private Equity Conference in Hong Kong last week.

Too many angel investors in tech are not well qualified or experienced in the space, added Han, and this buildup will form a bubble in the coming one or two years. He stressed that he felt the bubble was at the angel rather than the later, Series A stage of investment.

LCP, which focuses on internet, mobile, services and enterprise solution companies in China, is preparing to raise its third fund, noted Han.

There are many sectors that have been over-funded in China technology, agreed Brian Lim, Hong Kong-based partner and head of emerging markets at private-markets manager Pantheon.

“At some stage you’re going to start seeing some unicorns dying in this sort of environment; some of those on the cusp that have not yet succeeded in scaling up,” he told AsianInvestor, separately from the HKVCA event. Unicorns are private companies worth at least $1 billion.

“The discipline of managing growth, managing your burn rate, identifying the right segment and scaling up in a very competitive market – all of these issues that these early-stage companies are going to be dealing with need to be dealt with by experienced hands. That’s why it’s all about selecting the right partner.”

'Burn rate' refers to the rate a new company uses up its venture capital to finance overhead before generating positive cash flow from operations.

Meanwhile, Zheng Yeeli, chief representative of China at Nasdaq Group, also speaking at the HKVCA event, said she did not know whether there was a bubble in China’s tech sector, but that she had a theory about its rapid growth.

“On the one hand, the paper value of these companies is becoming higher and higher – the money-burning speed is getting faster and faster,” said Zheng. “But on the other, if you look at exits via IPOs or M&A, the speed of the market has become very slow.”

She suggested that this had happened because, since the financial crisis in 2008, there had been a popular business philosophy or model: that expanding market-share takes priority over profit.

Chinese tech entrepreneurs are seeking to expanding market share at any price, without worrying about profit, or lack of it, noted Zheng. This is based on their belief that if they can quickly achieve a dominant, market-controlling position, it will then be easy to make profits.

“I don’t know whether this model will work or not, but I think that’s the reason for [the way the sector is developing],” she said.