China And Israel Venture Funding Rebound In Q3

While venture funding in Asia is still off even last year’s pace, it has slowly crept up from earlier in the year.

In the most recent third quarter, two of the countries that helped push funding higher are the pair perhaps facing the greatest geopolitical tensions in the region — China and Israel — per Crunchbase data.

Total funding in Asia fell 8% from Q3 last year to $22.3 billion — however, that’s an 8% increase from the $20.6 billion in funding in the second quarter of 2023.

The Red Dragon rises

One of the main drivers of the region’s quarter-to-quarter growth was investment in China.

In the second quarter, it seemed the country’s venture funding was stabilizing after mainly declining last year, with venture funding seeing a nice 23% bump from Q1.

The third quarter continued that trend, with China-based startups raising $14.1 billion — a 20% increase from the $11.8 billion raised in Q2.

The increase is likely due to some of the massive rounds Chinese startups — mainly EV and semiconductor companies — saw last quarter. Firms such as GTA Semiconductor, Runpeng Semiconductor, Hozon, Rox Motor and Hithium Energy Storage all saw rounds in the quarter of more than $500 million.

China’s uptick is somewhat hard to explain. It was just in the last quarter that U.S. President Joe Biden signed an executive order banning U.S. investment in Chinese companies in certain sectors, including semiconductors and quantum computing.

Even before the order was signed, U.S. investors had been pulling out of the region due to increasing tensions between the two countries. Last month, GGV Capital announced plans to split its business in two — with one firm focused on Asia and the other on the U.S. That followed Sequoia Capital’s similar announcement in June.

Nevertheless, non-U.S. investors have clearly picked up the slack, giving the Chinese venture funding market its best quarter since Q1 last year.

Israel sees jump

Israeli startups also had their best quarter raising money since Q3 of last year.

Venture funding jumped 56% from last quarter, from $900 million to $1.4 billion. However, that is still well under the $2.2 billion startups raised in Q3 of last year.

Last quarter’s numbers were helped greatly by two huge rounds — one to a startup in Israel’s specialty, cybersecurity, and another in the booming AI space:

Tel Aviv-based Cato Networks locked up a $238 million round led by Lightspeed Venture Partners at a valuation of more than $3 billion last month.
In August, fellow Tel Aviv-based startup, AI21 Labs — which creates its own proprietary large language models — raised a $155 million Series C from investors that include Google and Nvidia at a $1.4 billion valuation.

It comes as little surprise that cyber and AI would lead a potential comeback in Israel’s venture funding, as the country helped give rise to significant cyber companies such as Check Point Software, CyberArk and Imperva, and a lengthy list of still-private companies.

Artificial intelligence, on the other hand, is on every investor’s mind, so startups in the field — regardless of region or country — are able to get funding at high valuations.

Of course, these are last quarter’s numbers and much has changed in the country since then. Venture capital funding is the last thing on anyone’s mind right now as Israel and Hamas go to war — with many startup founders, VCs and employees entering the military. The war and the uncertainty it causes will affect everything in Israel, including its robust tech scene.

On the down side

While Israel and China may have seen their venture numbers jump, some other notable Asian tech regions saw their numbers fall.

India, the second-largest venture market in Asia, saw a 34% drop in funding, falling from $3.8 billion in Q2 to only $2.5 billion in the third quarter. That’s also a slight decline from Q3 of last year, when startups raised $2.9 billion.

India’s venture dollars have declined significantly since more than $15 billion was raised in Q3 2021. While 2021 numbers are an anomaly, the rocky economy and the overall slowing down of venture surely have affected the country’s numbers. In addition, India’s previously flourishing consumer app and fintech sectors likely have taken hit as investors have retreated from those areas.

South Korea saw the biggest percentage decline of any big market in the region. Venture funding dipped 40% in the country, falling to less than $1 billion. That’s also a 64% fall from the $2.5 billion raised in Q3 2022 and a drastic drop from the $5.6 billion raised just in Q1 of last year.

With so many wheels in motion in the extremely diverse region, these numbers could easily flip by next quarter — but it does seem investors’ appetite for things like AI, semiconductors and energy storage crosses the Pacific.