China’s Venture Slowdown Comes Into Sharper Relief

Morning Markets: A little more on the Chinese venture slowdown that is shifting the makeup of the global VC market.

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Just a few years ago, China’s venture market was the envy of the world. Nothing was hotter or more insane than the activity amidst China-based tech startups and the host of global investors pouring capital into those companies and their operations.

As I wrote just a few days ago, China’s population of Internet-connected persons, smartphone penetration, and rising consumer wealth made it a powerful market to build growing companies inside of. And the opportunity was capitalized on. Excited money from around the world lined up to fund the next generation of China-based technology giants.

The results were staggering. Reported dollar volume in China skyrocketed as 2018 hit its midpoint, diminishing the United States’s own status as the global VC leader; as 2018’s second half came to pass, however, China’s venture totals began to decline.

Why the Chinese venture market cooled isn’t due to any single, particular cause; trade tensions and debt worries, high-profile flameouts, IPO disappointments, and some tough stock market movements all likely played some part. But the narrative of decline is now firmly entrenched when it comes venture capital activity in China because the data bears it out.

We have more data on the matter (our most recent data work is here, regarding China) coming out next week. Today we’ll set context.

Decline

We know that China’s venture volume slipped in Q3 2018 from Q2 of the same year, and that Q4 of that year wasn’t great either. But how far things have fallen in 2019 is news.

The country’s 2019 venture declines are more than merely China-based companies losing their share of global “supergiant” rounds. Indeed, aggregate venture tallies in China are falling as well.

Bloomberg reported earlier this week that the “value of [venture] investments in [China during Q2] tumbled 77% to $9.4 billion in the second quarter from a year earlier,” going on to note that deal volume (in contrast to dollar volume) was off about half.

Those figures shock as we can presume that there are a number of China-based companies who previously raised large checks at high valuations who now, due to the pullback, are either slamming on their brakes or taking steep valuation reductions to raise new capital. When expensive, high-burn companies deal with a market-wide fundraising slowdown, options can get messy.

Crunchbase News has some new data on the matter as well. From our recent Q2 2019 global venture report, two short excerpts:

U.S. and Canadian startups accounted for 50.9 percent of the combined late-stage and tech growth dollar volume in Q2 2019, up from 31.8 percent in Q2 2018. The resurgence in North American latter-stage venture dollar volume primarily comes at the expense of Chinese startups, which were many of the most-funded companies from quarters past are headquartered.

This tells us that the United States’ venture market is effectively back to its former position of prominence. Also, the Canadian scene is a small figure compared to the United States’ own tallies, so their combined results are effectively a proxy for domestic venture activity. Continuing from the report:

The tables have turned. According to a Crunchbase Pro search four of the ten largest late-stage VC rounds struck between 2018 and the end of Q1 2019 were raised by Chinese tech companies; just one U.S. venture round, smart glass-maker View’s SoftBank-led Series H, made that cut. In Q2 2019, four of the ten largest late-stage rounds were raised by U.S.-based companies, with just one Chinese company, Megvii, making the top ranks last quarter.

This is more anecdotal than data-built, but it is a good companion point.

Why do we care about which companies are raising the biggest checks? In recent years, money has shown to be as big a moat as technology itself, fueling SaaS, self-driving cars, ride-hailing, and more. And if China-based companies are struggling to raise, they could go into the rest of 2019 less well-armed than they would like.

Either way, the narrative that China’s venture market was set to challenge the United States’s own is, for now, on hold.

Illustration: Li-Anne Dias.