China venture capital funding hits record $ 131 billion despite crackdown

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(Bloomberg) – When the Chinese government launched a sweeping crackdown on the tech industry over the summer, panicked venture capitalists stopped issuing checks and startup valuations began to fall. It looked like the historic innovation boom in the country was over.

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Then a strange thing happened: In just a few weeks, the boot machine restarted. In fact, venture capital investment in China reached $ 130.6 billion for 2021, according to research firm Preqin. This set a new record for the country – about 50% more than the previous year’s total of $ 86.7 billion.

The performance is breathtaking considering the devastation suffered by the industry’s big name players. Alibaba Group Holding Ltd., Tencent Holdings Ltd., ByteDance Ltd. and ride-sharing provider Didi Global Inc. have all been taken turns to beat in recent months. The entire online tutoring industry, once a hotspot for risk dollars, has been forced to become a nonprofit.

Yet entrepreneurs and venture capitalists have turned to new opportunities with surprising speed. They turned away from softer internet businesses and turned to core technologies like semiconductors, robotics, and business software. The amount of money invested in biotechnology reached $ 14.1 billion last year, ten times more than in 2016.

“Investor appetite for Chinese technology remains intact. What has changed, however, is where they put their money, ”says Jiang Jingjing, a fundraising lawyer at King & Wood Mallesons in Hong Kong. “It has become pretty clear that more and more funding has flowed into startups with cutting edge technology. “

China still lags far behind Silicon Valley in venture capital investment overall. The United States hit its own new record high of $ 296.6 billion last year, more than double the Asian country’s total.

But in some fundamental technologies, China has already overtaken the United States. Preqin data. As President Joe Biden desperately sought to expand semiconductor manufacturing capabilities in the United States, Chinese chip startups were overwhelmed by funding offers.

“In China right now it’s getting crazy,” says Yong Luo, a former engineer at Intel Corp. who has raised funds for a new semiconductor startup despite being probably two years away from generating revenue. “The chip business is really hot.”

This is almost exactly how President Xi Jinping’s central planners would have imagined in their five-year plans. The Communist Party has denounced the corrupting influence of games (Tencent) and online videos (ByteDance), while pushing for more resources to be allocated to basic research. The change aims to help reduce the country’s dependence on US suppliers – a top priority for the Xi administration after US blacklists hit key players like Huawei Technologies Co. and SenseTime Group Inc.

In its latest five-year economic plan unveiled in March, Beijing outlined plans to increase national R&D spending by more than 7% per year and identified seven technological areas in which it hopes to achieve “major breakthroughs.” They include space exploration, brain science, and quantum information – all areas where U.S. companies now have a grip. The Chinese government is also betting big on emerging technologies like hydrogen vehicles and biotechnology, while working to help its semiconductor industry close the gap with Intel Corp. and Taiwan Semiconductor Manufacturing Co.

“The Chinese government is very aware of the importance of innovation for the future of China, in particular to cushion the impact of aging and excessive capital accumulation on growth,” says Alicia García-Herrero , leading Hong Kong economist at Natixis investment bank. “Investing in cutting edge technology is absolutely essential. “

There is no guarantee that the strategy will work. China has built a generation of tech giants by letting talented entrepreneurs like Jack Ma of Alibaba and Zhang Yiming of ByteDance choose their own path to success. Now that private sector innovation has been subordinated to a much more government-led model.

A sign of the need for caution, the country’s former semiconductor champion collapsed in 2021 after years of government funding and political support. Tsinghua Unigroup Co. spent a decade gorging on easy credit and buying foreign assets before imploding as the government admitted its multibillion dollar debts had not brought the country closer to building a sustainable chip business.

Beijing’s crackdown has narrowed the range of sectors considered safe for investment, leading to inflation in startup valuations as venture capitalists all compete for the same kinds of deals. Investors joke about the money lavished on “PPT companies” or startups with nothing more than a PowerPoint presentation.

“The acceleration and focus by the government on these areas has just pushed so much capital in this direction,” said Chibo Tang, Managing Partner of Gobi Partners. “There is a risk of overheating. “

China’s pivot to basic technology has been going on for years. It really took off in 2018 after Washington banned US technology exports to ZTE Corp. The once-major telecommunications equipment giant has had to shut down large swathes of its operations – exposing the vulnerability of Chinese companies to U.S. policy decisions. The effort gained momentum with the blacklisting of Huawei, China’s leading manufacturer of communications equipment and smartphones.

Today, China’s enthusiasm for the basic technology has spread across the country. In southwest China’s Guiyang city, Pix Moving founder Angelo Yu used to scratch his head trying to win over investors who questioned the capital-intensive nature and of time from his autonomous driving business. But with Beijing’s crackdown on internet companies last year, all of those doubts have suddenly vanished.

“There is a drastic shift in the attitude of investors towards deep technology,” Yu said. “In 2020, whether or not we could raise funds was still a question mark. This year, fundraising is no longer a problem. The question has become at what valuation we would like to fundraise. “

Easier access to capital, combined with increased demand for Chinese-made technology solutions, has attracted more talent to entrepreneurship. A vivid example is Yuan Jie, professor at the Hong Kong University of Science and Technology.

The longtime scholar has spent much of his career helping global giants like Intel advance their chip technology. Now, Yuan has founded Atom Semiconductor Technologies to manufacture its own silicon. Founded at the end of 2020, the startup completed two fundraising rounds and quadrupled its valuation, paving the way for Yuan to commercialize its multi-year research.

Beijing-based Sinovation Ventures, a tech venture capital firm founded by former Google executive Kai-Fu Lee, plans to spend every dollar it raises this year on investments in advanced technology and science of life. This is an increase from the roughly 10% Lee allocated to these sectors in 2010.

Gary Rieschel, founding CEO of Qiming Venture Partners, says deep tech startups now represent around 40% of his company’s portfolio, up from 10% in 2014.

“That’s what you see with all the venture capitalists now,” says Rieschel. “They make these transitions.”

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