Winter Is Coming For China’s Venture Capital And Startup Investment Market – Analysis


By Wei Hongxu

Recently, at the CKGSB Unicorn Summit in China, some industry insiders expressed the challenges they face regarding the domestic venture capital and private equity market. Wu Shichun, the founding partner of Plum Ventures, said some of these challenges include investment, fundraising, exiting business, and so on. These sentiments reflect the current challenges faced by the venture capital and private equity sector amid the complex internal and external environment in the post-pandemic era. Instead of experiencing a recovery, the industry finds itself stuck in a “market winter”.

According to researchers at ANBOUND, the predicament in the venture capital and private equity market is not only the result of external changes but also stems from the shifts in China’s own economic and investment landscape. The venture capital and private equity market were once a vital and dynamic part of the Chinese economy, playing a significant role in the development of the domestic science and technology sectors and being an essential component of the construction of a multi-level capital market and high-quality economic growth. Revitalizing the venture capital and private equity market and breaking free from the “winter” requires not only funding and capital but also policy support to instill confidence.

The difficulties in China’s venture capital and private equity market can be traced back to the tightening of monetary policy and dollar contraction by the Federal Reserve, which has led to significant decreases in fundraising and investments. According to data from Zero2IPO, in the first half of this year, both the VC/PE market fundraising and investment in China and the United States have seen declines. The U.S. raised a total of USD 186.27 billion, a 37.4% decrease, and made investments of USD 503.96 billion, a 29.1% decrease. In China, fundraising amounted to RMB 734.15 billion, a 23.5% decrease, and investments reached RMB 292.96 billion, a 42% decrease.

Comparatively, the decline in fundraising in China’s venture capital and private equity market is lower than in the U.S. Data shows that in the first half of 2023, although non-state-owned limited partners (LPs) accounted for 86.5% of the total number of commitments, 70% of the fundraising amount came from state-owned and state-participated LPs. The entrance of these state-owned entities has to some extent obscured the decline in private capital. Therefore, when considering the factors of state-owned capital, the actual decline in fundraising from social capital may be on par with or even exceed that of the U.S. According to data from Zero2IPO, in terms of individual USD-denominated funds, the fundraising pace has continued to decline, with a total of 23 foreign currency funds closing their accounts, a year-on-year decrease of 54.9%; and a fundraising scale of approximately RMB 42.228 billion, a year-on-year decline of 35.4%. Ni Zhendong, Chairman of Zero2IPO, estimates that this data will continue to decline in the second half of the year, and USD-denominated funds will face significant challenges. Wu also mentioned that social LPs are rarely seen nowadays, and USD financing has decreased by 90% compared to the same period last year, with no immediate improvement in sight.

Apart from the tightening of global monetary policies, under the backdrop of the competition between the U.S. and China, the former has imposed increasing restrictions on American capital investing in Chinese companies, in addition to implementing more and more sanctions. This has led to growing concerns among international capital about investing in China, undoubtedly being a significant factor contributing to the continued decline of USD-denominated funds. This trend indicates that amid the competition between the two countries and the global supply chain adjustments in the post-pandemic era, the decoupling trend in the venture capital and private equity field is becoming increasingly evident. As foreign capital gradually disengages, although it can be compensated by Chinese capital, it still poses a significant risk to the required technology exchange and investment management for the development of China’s sci-tech innovation enterprises, considering that the Chinese venture capital and private equity market is largely modeled after Silicon Valley. Relying solely on funding supplementation may not be sufficient to address the deficiencies in professional investment capabilities and technology commercialization in various aspects, such as discovering investment value, nurturing unicorn companies, and controlling investment risks.

In terms of investment, the decline in the proportion of China’s investment is primarily influenced by domestic factors. On one hand, there is a shift in the investment landscape as the previous wave of venture capital focused on mobile internet applications gradually wanes. New investments are increasingly directed towards deep tech, TMT, and other fields with longer cycles and higher risks, leading to more cautious investment decisions. On the other hand, with the entry of state-owned capital, there are new requirements and objectives for investments, resulting in adjustments in investment projects. In particular, most state-owned capital seeks returns and investment attraction, showing clear differences from the previous pursuit of profitability. However, according to researchers at ANBOUND, the decline in investments is also closely related to the current economic sluggishness and lack of investor confidence. This indicates a decrease in venture capital activity, which is closely linked to the current Chinese economic and investment environment. Additionally, in recent years, stricter regulatory policies have constrained and restricted the unorderly expansion of capital, increasing uncertainty in venture investments and impacting investor confidence. Although there have been recent efforts to allow capital deployment, the recovery of market confidence and reinvigoration require a gradual process. All in all, the downturn in the Chinese venture capital and private equity market is closely linked to the changing macroclimate of the country’s economic and policy environment.

Another concern in the market is the impact of capital market development on venture capital and private equity. The difficulty in exits becomes more pronounced in the overall market contraction. Data shows that in the first half of 2023, there were 1,326 exit cases in China’s equity investment market, a 32.6% year-on-year decrease. Currently, IPOs remain the main exit route for VC/PE institutions invested companies. However, compared to the past, IPO exits are now more reliant on the A-share market. Previously, overseas listings provided an alternative path, but at present, this route has significantly narrowed. In the first half of this year, 218 Chinese companies were listed globally, with 45 companies listing overseas, a 95.7% increase from the previous period. However, the amount raised in overseas listings has decreased by 75.7% in comparison, indicating that raising funds through overseas listings is still relatively challenging.

Some unicorn companies, despite reaching a valuation of USD 1 billion, have struggled to achieve profitability and can only rely on continuous capital injections, making them “unicorpses” or even gradually becoming “zombie companies”. Currently, market experts estimate that one-third of unicorns have already failed, though their demise may not be publicly known. Therefore, in the current economic environment, which is vastly different from the past, for the venture capital market to emerge from this “winter”, further development and improvement of the capital market are crucial. This will create wider circulation channels for venture capital investments and help the market regain its vitality.

Final analysis conclusion:

Since the start of this year, the Chinese venture capital market has faced a challenging “winter”, influenced by a combination of internal and external factors. This situation is a manifestation of both the heightened geopolitical competition between the United States and China, as well as the evolving economic, investment, and policy landscape within the country itself. To revitalize the venture capital market and steer it out of this “winter”, it will necessitate not only funding and capital but also policy support, offering a much-needed green light to instill confidence and foster a favorable market environment.

Wei Hongxu is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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