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What you need to know about venture capital in China

Major players, current developments and outlook

· venture capital

{{{Maximilian Schubert}}}

China’s startup ecosystem is thriving. The share of global unicorns based in China was 14% in 2014 and climbed to 35% in 2018. In the same period, the US share declined by almost a third from 61% to 41%. A look at patents in deep tech underlines China’s rapid growth. In total, China registered four times as many patents in artificial intelligence technologies and three times as many in blockchain technologies as the US. Naturally this lightning pace of growth and innovation requires venture capital. This article will shed light on the venture capital industry in China with special attention to the dominance of a small number of investors.

China’s venture capital industry has seen tremendous growth across all dimensions. Of the $154bn deployed in 2017 globally, 40% came from Asia (predominantly China) and “just” 44% from the United States. This development recently led to a new milestone as venture funding in China in the second quarter exceeded U.S. venture funding for the first time in history. Although this was mainly due to the $14bn Series C round of Ant Financial, Alibaba’s mobile payment platform, the year-over-year growth in deal number almost hit 400%. The gap between China and the US has been consistently narrowing in recent years. In addition, Chinese venture capital firms managed to outperform their US counterparts, returning 1.72 times the invested amount compared to 1.59 times in the US according to an analysis across 4,000 funds by eFront, an alternative investment software solutions provider.

Major players in China’s venture capital industry

VC activity is more heavily concentrated in China than in the United States. The three key players in the market are commonly referred to as BAT. Baidu – the internet conglomerate behind China’s largest search engine with the same name, Alibaba – the online retail giant behind Taobao and Tmall, the largest retail marketplaces in the world and Tencent – the gaming and social-media giant behind WeChat, the biggest social media platform in China with more than 1 billion users. For context, tech giants in US account for 5% of domestic VC investment volume, while BAT account for almost 50%. By the time they hit $5bn valuation, 80% of startups have accepted funding from one of these players. Leader of the pack in terms of size and quantity is Tencent, which has invested over $60bn in over 350 companies since 2012. As these are metrics for disclosed deals, the real numbers are most likely substantially higher. Despite their intense domestic activity, BAT have not forgotten to expand their portfolios beyond national borders and invested in over 150 companies abroad.

Among independent venture capital firms, established players from the US have been actively and successfully investing in the Chinese market. Above all, Sequoia Capital, an early investor in Apple and Google, has been the most active, investing in more than 380 ventures to date. Its portfolio is nothing short of a treasure chest, comprising stars such as Alibaba, JD.com (Alibaba’s closest competitor in online-retail), Mobike (world’s largest bike-sharing platform), DiDi (China’s market-leader in ride-sharing) and Bytedance (the company behind the viral global success Tik Tok). Other well-known US VCs include Matrix Partners with 100 investments and Redpoint Ventures with 25 investments.

Further confirmation of China’s growing importance in the world of entrepreneurship and tech is Y Combinator’s recent announcement to start its first non-US programme in Beijing. It is not the first accelerator heavy-weight to make its move to the Chinese market. 500 Startups and Plug&Play operate in the market already, the latter with 8 offices compared to its presence in 3 locations in the United States.

Current developments and outlook

The rapid growth of China’s tech sector shows signs of an arms race to get involved with the next big “thing” that can scale in a fast-growing country with 1.4bn inhabitants. A striking example of this competitive race is Luckin Coffee, a player in China’s “new retail” industry and a challenger to Starbucks. The company became a unicorn just 6 months after opening for business. This narrowing focus of capital may help explain the drop in early-stage investments in the first half of 2018. As the total dollar volume has been reaching new heights in 2018, early-stage investments have seen a sharp drop to less than ¥200m (annualized, not accounting for seasonality) from well over ¥300m.

In the local funding frenzy, the Chinese government is not remaining idle. To compete with Softbank’s VC-behemoth, the $100bn Vision Fund, China Merchants Group, a government-owned conglomerate, pledged to launch the ¥100bn “China New Era Technology Fund” alongside UK-based Centricus and SPF group – a Beijing-based fund manager. Centricus was involved in the structuring of Softbank’s Vision Fund.


The future has to be embraced with a fair amount of ambiguity. While the VC industry has been on an upward trajectory, China has vowed to deleverage the economy and might thus put an end to the explosion in VC funding growth by scaling back fiscal stimuli and decreasing the money supply to discourage lending. For now China’s deleveraging efforts have been temporarily reversed due to the ongoing trade conflict with the United States. Nevertheless, an exacerbating trade conflict might not only discourage foreign capital inflows but also provoke active intervention of overseas money being invested into Chinese ventures.

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