In recent years, the Chinese venture capital market has been a thing of wonder. There are huge chunks of capital chasing a host of companies, which are targeting a key part of the global Internet market. And we’ve seen those China-based companies blanket cities in bikes, open hundreds of stores, become the nation’s defacto comms tool, and more.
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There are scores of China-based unicorns, and some of the country’s biggest names are well-known even where their products aren’t popular. Companies like Didi, Tencent, Alibaba, and others. And then there’s, say, TikTok, which is owned by a China-based company and apparently gave us Lil Nas X.
Meme-powered rappers aside, if you care about technology and its good bits (change! innovation! the future!) and its bad bits (surveillance! clustering! podcasts!), China has been a key participant, even driver, of the boom that the venture-backed startup world still finds itself in the midst of.
However, that state of affairs is changing somewhat. Let’s see how.
As the following chart shows, China’s share of the world’s supergiant rounds—venture rounds of $100 million or more—has fallen from its world-leading position in 2016 to third place today.
Supergiant rounds are the power plays of the unicorn world; by raising nine- and ten-figure rounds, the hottest, and sometimes even the best private technology firms, can avoid going public, operating off-the-radar to some degree while they accrete size. Capital for such companies is a weapon. (Examples include Megvii, Chehaoduo, and Jusda.)
But sometime after seemingly peaking in mid-2018, China went from being the country where the most supergiant rounds were raised to the below state of affairs:
As you can see, the downward trend regarding China’s participation in the supergiant venture space has continued. And now China’s two-quarter moving average (the lines of various color) has dipped to third place.
Losing the supergiant race implies that companies based in China are no longer the most capable at raising late-stage money. This could lead to earlier IPOs from China-based companies or simply slower activity in the Chinese Internet sector; you cannot spend as much as you might want if your next $100 million round might not be there when you need it.
A single country finding itself in third place after the traditional market leader and the rest of the world grouped into a single collective is no sin, of course. As you can tell from the chart, only two countries in the world have had a shot at managing a leading supergiant tally on their own. But for China to fall as far as it has—note that China’s Q2 2019 result is lower than what we’ve seen from the country since what looks like late 2015—likely tells us two things.
First, China’s rise in the rankings of supergiant rounds was is somewhat connected to its macro condition. Trade tariffs continue to impact the country at the direction of the Trump Administration, and it appears that the startup scene (as measured through venture capital) is slowing as well.
We often discuss the impact of tech stocks (good or ill) on investors deploying capital into similar, private companies. That the macro picture would impact the former, and thus either ding or bolster the latter, makes good sense. Venture data concerning China underscores the point.
Second, China isn’t going to take over the entire world of startups in one go. A few years back, if you spoke with VCs, you would hear impressed comments about China-based companies. Long hours (the dreaded “996” model) and a huge market with strong smartphone penetration and fewer hang-ups around privacy seemed to indicate that China was what’s next.
However, that ignored the fact that China’s population is rapidly aging, cost of living is rising (when compared to other emerging economies), and annual economic growth for the country has been steadily declining since 2012.
For all those reasons, China as a startup hub that is capable of supporting cash-burning enterprises seems less certain.