The strained tensions between the U.S. and China has affected nearly everything between the two superpowers — and venture capital and the tech startup ecosystem is no exception.
Just last month, it was reported President Joe Biden will sign an executive order to limit investment in sectors such as semiconductors, artificial intelligence and quantum computing in China by U.S. investors.
The U.S. already has put a deeper restriction on exports of key American technologies to the country.
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However, even before any order is signed, tech investors in the U.S. seemingly already have backed away from The Red Dragon.
This year is on pace for the lowest amount of dealmaking in China by U.S. investors in recent years, according to Crunchbase data. While 2019 and 2020 saw well over 300 investments in China-based startups by U.S.-based investors, that number jumped to 426 in 2021 — when the venture capital market was at a fever pitch.
However, as political headwinds grew stronger, that number dipped to only 283 investments last year. And through April of this year, U.S.-based investors were on pace to make fewer than 150 investments into China-based tech startups.
Investors do not see those numbers picking up any time soon.
An unnamed investor said a plethora of issues led to his firm putting the brakes on investing in China — including political strain, government action toward some Chinese tech companies, and questions around the ability for some China-based startups to list on the largest exchanges in the U.S.
In addition, there were some concerns from LPs in relation to environmental, social and governance sectors-, he added.
“There is uncertainty to begin with investing in this business, and this just added another level of uncertainty,” he said.
The largest U.S.-based investors in China have significantly slowed their investment pace in the region in recent years, according to Crunchbase.
- Menlo Park, California-based GGV Capital has made the most deals in China since 2019 at 133, but only two so far this year, after two dozen in 2022, per Crunchbase data.
- Another Menlo Park firm, BlueRun Ventures — formerly Nokia VC — has made 71 investments since 2019, but only 19 last year and none so far this year.
- San Francisco-based sports tech and online gaming-focused firm GL Ventures has made 62 deals in China since 2020, but only 11 in the past 16 months.
- Similarly, Palo Alto, California-based GSR Ventures, which focuses on early-stage technology companies developing AI-enabled tech, has completed 60 deals in China since 2019, but only 13 in the past 16 months.
- SOSV and OrbiMed both announced more than 40 deals each in the past four-plus years, but only one deal combined this calendar year.
The numbers do not include firms such as Sequoia Capital China, since it is its own legal entity — separate from Silicon Valley’s Sequoia Capital — and based in China. However, as reported by The Information earlier last month, Sequoia has a profit-sharing arrangement which allows its U.S. partners to benefit from its China-based counterpart’s investments.
Sequoia Capital China is a major investor in the tech scene in that country — having made more than 400 investments in China-based companies since 2019 and 19 so far this year.
Drop in funding
Even with those big totals from Sequoia Capital China and other China-based investors, the migration out of the most-populous country in the world by U.S.-based firms seems to have affected funding in the country.
Venture funding in China nearly doubled in 2021 — despite struggles with COVID still occurring in the country — hitting a record of more than $87 billion, according to Crunchbase.
However, last year those numbers fell nearly 47% to $46.3 billion.
In the first quarter of this year, venture dropped to $8.1 billion — its lowest total in years and essentially a 38% drop both year to year and quarter to quarter.
Whether or not that precipitous drop will continue is difficult to say, even for those who know the market extremely well.
Hurst Lin, general partner at DCM Ventures and head of its China office since 2006, said since China joined the World Trade Organization in 2001, U.S. investors have eyed the gigantic opportunities in the region.
However, around the time of COVID, investor perceptions of the region changed and political tensions have not helped the situation.
“I think there was a cooling-down period as the media (reporting) of China changed,” he said. “That led to a drying up of foreign capital. LPs started to change their perspective, and as an investor you need to be concerned about that.”
Lin acknowledged while Chinese regulations around tech companies and difficulties to go public on foreign exchanges likely affect investor sentiment, those issues have always existed.
Lin co-founded SinaNet, which eventually became the first Chinese internet company to successfully list on the Nasdaq. The listing was accomplished through a variable interest entity — which can still be done now although they are regulated by the government.
With the limited access to foreign exchanges, the Hong Kong Exchanges have tried to fill the gap, Lin said. Just recently, tech giant Alibaba Group said it was already moving along with plans for two other business units — Cainiao Network Technology and Freshippo — to have IPOs in Hong Kong.
However, the Hong Kong exchange has drawbacks. It is more known for retail investors and markets such as real estate and manufacturing, Lin said. There also is not the research analyst coverage that tech companies need to inform potential investors — a significant drawback for startups seeking a public listing.
“Will this turn around?” Lin asked, “I really don’t know.”
While U.S. investment in the China market is not at an all-time low, it is at low ebb for the robust investing cycle that has occurred in the past several years, Lin added.
“We’ll see how this plays out,” he added.
Illustration: Li-Anne Dias
Clarification: This story has been updated to clarify investments made by U.S.-based investors.
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