China's VC Business Turns Sour on Sino-U.S. Trade, Tech Wars

While the number of unicorns in China exceeded that of the United States by mid-2019, VC investments in the country have declined dramatically.

Anna Vodopyanova
    Jan 25, 2020 1:25 PM  PT
China's VC Business Turns Sour on Sino-U.S. Trade, Tech Wars
author: Anna Vodopyanova   

The venture capital business in China declined steeply in 2019 as the country's economic deceleration and the Sino-U.S. showdown weighed on investor sentiment. And while initiatives like Alibaba Entrepreneurs Fund's Jumpstarter competition this year attract more than triple the number of applicants, they further reveal the need for capital by abundant emerging companies.

In recent years, the VC sector in China enjoyed a wild ride that turned a slew of startups like ByteDance, operator of social app TikTok, into unicorns. Just in June 2019, the number of startups valued over $1 billion in China exceeded that in the United States, according to data compiled by the Shanghai-based Hurun and presented in October in the Hurun Global Unicorn List 2019.

Out of 494 unicorns, 206 were China-based and 203 were in the U.S. as of June, Hurun reported. They were companies in the tech innovation space, including robotics and artificial intelligence, as well as in e-retail, new energy autos, fintech and edtech sectors.

However, the startups that haven't made it to the top are feeling the chill in VC investment.

Globally, as The Telegraph reported, VC investments fell 15% last year to $258 billion. It also said the number of deals dropped to 21,723 from 22,807 in 2018. And China was among the countries taking the biggest hit as a number of factors led to uncertainty and fears among investors.

Fears of Economic Crisis

In 2019, China's GDP has experienced its slowest rate of growth since 1990, at 6.1%, compared with 6.6% in the preceding year. The situation was further dampened by regulatory curbs in some sectors, as well as by the trade conflict with the United States and the concurrent strain on tech progress.

The Trump administration's moves against Chinese tech innovators have gone far beyond its standoff with Huawei Technologies. And China firms have responded accordingly – by shifting away from relying on U.S. tech service providers to domestic players, as CW columnist Mark Melnicoe wrote in a commentary on the tech war in June.

Earlier this month, the Rhodium Group and the National Committee on U.S.-China Relations estimated that the volume of American VC investment in Chinese startups fell to less than $4 billion in 2019 from $17.4 billion in 2018. That year saw peak backing from U.S. over the past 20 years. The numbers were approximate, however, as the deals are often carried out privately, according to the report.

Overall in 2018, VC investments in China reached $70.5 billion, up 53% from the previous year. The increase was driven by a number of large-scale deals. One such deal was a $14 billion round on Ant Financial, a unit of Alibaba (NYSE: BABA; HKEX: 9988) that operates Alipay, the world's largest mobile and online payment platform.

The year-end quarter of 2018 saw a 27% downturn in capital funding from the previous three months, totaling $9.8 billion. The number of deals reached just 713, down 25% year-over-year. 

In the first half of 2019, startups in China raised just $17 billion compared with $61 billion in the same period of the previous year, according to Seattle-based market research compiler Pitchbook Data.

The winter in China's macroeconomy will continue, David Zhe Wei, head of Shanghai-based Vision Knight Capital (VKC) and former CEO of Alibaba, told CapitalWatch in an interview. He said companies in 2019 were seeing valuations 20% to 30% lower than in the preceding year, while fund managers raised 75% less capital than in 2018.

However, the economic instability in China has affected some industries more than others.

Wei said, "Some sectors are completely immune, or are very resilient." He added that those are the industries in which his fund places focus. 

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