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China’s Early-Stage Funding Softens

Venture funding in Asia dropped 44% in the second quarter of 2023, but surprisingly, the decline was not directly related to a pullback by investors in Chinese startups, as might be expected.

With political tensions between China and the U.S. at a high and now an official ban on certain U.S. tech investments in the nation, the dots seemed easy to connect.

Nevertheless, China’s Q2 numbers saw a slight bump, both quarter to quarter and year to year. Instead, it was India, South Korea and other nations in the region that led the decline in Asia’s numbers.

Still, a deeper dive into Crunchbase data shows a softening in China’s early-stage funding that was somewhat covered up by a surge in large growth rounds last quarter.

While late large rounds count toward a region’s total funding, the decline in early-stage funding could set off alarms about the full health of the VC market in China. That’s because a longer-term decline in early-stage cash inevitably leads to fewer startups maturing and raising those large, growth rounds.

Let’s look at the overall numbers

Total funding numbers in China for Q2, and even the first half, have not looked too bad considering the venture market everywhere is down.

In Q2, China-based startups raised a total of $11.5 billion, a 25% increase from the $9.2 billion raised in Q1 and even a small 7% jump from the $10.8 billion raised in Q2 last year.

But first-half numbers paint a more pessimistic view of the venture market. The $20.8 billion raised in H1 was a 13% decrease from H2 2022 and a 17% drop from H1 2022. The H1 total is actually the smallest amount of funding Chinese startups have seen in a six-month period since at least before 2018.

Those first-half numbers this year also were charged up with the help of some large rounds — mainly the reportedly $2 billion raised by fast-fashion startup Shein, according to The Wall Street Journal in May.

In fact, that round led to a surge in late-stage growth and private equity funding numbers in the region.

Chinese companies took in $5.8 billion in such funding in Q2, a tremendous jump of 60% from the previous quarter’s $3.6 billion and even a small increase from the $5.2 billion raised in Q2 2022.

Problems start earlier

Now that’s not to say Shein was the only significant round. Also last quarter, Anhui YOFC Advanced Semiconductor raised nearly $524 million in a Series A, SJ Semi closed a $340 million Series C, and pharmaceutical company Hasten Biomedical locked up a $315 million venture round.

But if you remove the Shein round, late-stage and technology growth funding would have been $3.8 billion — much more in line with the previous three quarters.

Even with that said, the area that may cause the most concern is the stage directly before the late-stage growth rounds.

Early-stage funding to Chinese startups was $5.1 billion in Q2 — a very slight uptick quarter to quarter and year to year.

However, Q2 represented a 28% drop off from Q3 last year and a 39% plunge from Q4 (Q2 2022 was sort of an outlier, as it was the lowest quarter for early-stage funding to China-based startups since 2020).

To illustrate that point further, H1 early-stage funding was $10.1 billion — a 35% decline from H2 2022 and a 17% drop year to year.

In fact, the H1 numbers were actually the lowest total of early-stage funding in China for a six-month period since H2 2020.

Why it’s important

It was impressive to see Chinese funding seemingly rebound last quarter — and they actually did by the numbers.

However, the Shein round did cover up some warts in late-stage growth funding, which really has settled into the $3 billion-plus range if you minus the fast-fashion giant’s raise.

What may be more disconcerting is the early-stage funding numbers. The last two quarters have seen a significant decline and that can foreshadow real issues down the line.

Late-stage growth rounds are what moves the needle in funding — as Shein illustrates. However, a startup has to get to that level to receive those massive dollars. In order to do that, it needs that early-stage money, or it will disappear long before going out for a big, late round.

China’s tech scene is facing significant pressure right now. U.S. investors started pulling back long before the recent executive order was signed. In addition, while that order only prohibits certain investments in China, some VCs have dropped the region altogether due to pressure from LPs.

Right now, keeping LPs happy any way possible has become even more important, since general partners can’t actually show real returns with the IPO and M&A markets somewhat stalled.

It also will not help that just last week it was reported Chinese regulators are dragging their feet when it comes to approving IPOs in the country — further frustrating investors who fund the startup ecosystem there.

All of those headwinds and other geopolitical tensions likely have created some of the difficulty Chinese startups are seeing in raising large rounds. Now, early-stage startups may well be sharing that pain.


The data contained in this report comes directly from Crunchbase, and is based on reported data. Data reported is as of Aug. 29, 2023.

Crunchbase converts foreign currencies to U.S. dollars at the prevailing spot rate from the date funding rounds, acquisitions, IPOs and other financial events are reported. Even if those events were added to Crunchbase long after the event was announced, foreign currency transactions are converted at the historic spot price.

Glossary of funding terms

We have made a change to how we include corporate funding rounds in our reporting as of January 2023. Corporate rounds are only included if a company has raised an equity funding at seed through a venture series funding round.

Seed and angel consists of seed, pre-seed and angel rounds. Crunchbase also includes venture rounds of unknown series, equity crowdfunding and convertible notes at $3 million (USD or as-converted USD equivalent) or less.

Early stage consists of Series A and Series B rounds, as well as other round types. Crunchbase includes venture rounds of unknown series, corporate venture and other rounds above $3 million, and those less than or equal to $15 million.

Late stage consists of Series C, Series D, Series E and later-lettered venture rounds following the “Series [Letter]” naming convention. Also included are venture rounds of unknown series, corporate venture and other rounds above $15 million.

Technology growth is a private-equity round raised by a company that has previously raised a “venture” round. (So basically, any round from the previously defined stages.)

Further reading

Illustration: Li-Anne Dias

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