Chinese Startups Shrink Back From Raising Supergiant Venture Capital Rounds

What are we talking about when we talk about “supergiant rounds“? The answer: individual venture capital transactions totaling $100 million or more. If you’ll forgive the pun, they’re kind of a big deal these days.

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Let’s be clear here. Individual companies are taking down more money in single venture rounds than most venture capital funds raise to deploy across an entire portfolio of investments. A prior dive into VC fundraising data suggests that since 2012, half (plus or minus a couple percent each year) of new venture capital funds listed in Crunchbase weigh in at $100 million or less.

While not exactly a new phenomenon (previous analysis of ours determined that the supergiant era began around 2014-2015) it’s a radical departure from the venture business as usual.

In the interactive chart below, you can see the count of supergiant venture capital rounds, segmented by the headquarters location of the companies striking these deals.

Once-remarkable round sizes are now an everyday feature of tech and venture news headlines. Using data pulled from Crunchbase, we can see that, worldwide, there have been at least thirty such rounds announced each month—averaging at least one per day—since March 2018.

But there’s a bigger trend at play now, one that points to a bridge in the gap between the worlds of entrepreneurial finance and geopolitics. China is driving less supergiant venture capital deal volume than it did in the past, while activity in the U.S. and rest of the world remains relatively robust, despite a slight retreat from last summer’s highs.

Back in July 2018, which turned out to be a local maximum of recent supergiant VC deal-making, we wrote about the near lock-step pace of Chinese and U.S. startups announcing nine-figure venture deals.

That’s no longer the case.

The chart below displays the same data as the first one, but in a slightly different way. Here, it shows the percent of monthly supergiant deal volume attributed to startups in the U.S., China, and the rest of the world.

Between January 1 and May 28 of this year, Chinese startups have accounted for just over 20 percent of supergiant deal volume. Compared to the same period of time in 2018, when Chinese companies accounted for 45 percent of supergiant deal volume, it’s easy to see that something has changed.

However, pinpointing what, precisely, changed is difficult. It’s also likely a combination of factors. There’s the ongoing trade war between the U.S. and China, with both sides ratcheting up retaliatory tariff regimes. It’s affecting big tech companies, like Huawei, but trade tensions alone are unlikely to cause a slowdown in startup fundraising in the country.

There are other issues at play. China’s economy is still growing, but at a slower pace than in prior years. Data from the National Bureau Of Statistics Of China shows that China’s GDP growth rate has slowed from 7.5 percent annually in 2014 to 6.2 percent today. For some historical perspective: “GDP Annual Growth Rate in China averaged 9.52 percent from 1989 until 2019, reaching an all time high of 15.40 percent in the first quarter of 1993 and a record low of 3.80 percent in the fourth quarter of 1990,” according to analysis by TradingEconomics.com.

To an economy with slowing growth, add tumult in debt and public equity markets. China’s main stock market metric, the Shanghai Stock Exchange Composite Index, has traded within the same 30-ish percent band for the past four years.

China’s government debt is relatively small compared to its GDP. In 2017, the ratio of China’s government debt to the country’s GDP was 47 percent, compared with 97 percent in the U.S. and 201 percent in Japan. However, corporate debt in China is outsized compared to other major economies. Again citing 2017 figures: China’s corporate debt to GDP ratio was 160 percent, compared to 54 percent in Germany, and 74 percent in the U.S.. Analysis in the Wall Street Journal from January point out a trend: that China’s debt is growing faster than its economy.

If the Chinese central government seeks to deleverage the country’s economy, including large state-owned enterprises, some economic analysts suggest this will further impede growth. Chinese government officials and corporate executives have a challenging path forward, because it costs a nontrivial amount of money to service that debt.

Even if they’re given fiscal carte blanche in the name of growing, high debt loads are difficult to sustain. A recent OECD report on corporate debt shows that China is responsible for the vast majority of growth in bond issuance among emerging economies. It also suggests that such high levels of corporate debt will lead to an increase in defaults.

The Financial Times reported that one fund services firm, InterTrust, has seen a major decline in China-centric venture firm formation. The FT reports: “InterTrust Funds started to see the impact of the trade war on China-focused funds and China-based funds investing abroad in December. The number of private equity and venture capital fund launches handled by the group has halved every month since then, from an average of about 10 per month last year to about two or three now, said James Donnan, managing director of InterTrust’s Hong Kong office.”

Chinese founders and VCs may be feeling the squeeze from a number of different sides, which may result in a more risk-off mindset, leading to a slowdown in funding activity.

Illustration: Li-Anne Dias