Venture capital seems to be the hottest topic over the years. Venture capital in China has faced a current dilemma and leads the decline of the whole industry. This article will dig into the venture capitals in China, and discuss how they could save themselves from the current situations.
As globalization has become increasingly popular, "Made in China" products have spread to every place in the world. For most companies that want to expand overseas, the first way to come out of their minds is to look for funding. Venture capital investors have been the top choice for many years. However, when discussing venture capital's future in China, this article will dig into the pros and cons of this industry.
We believe that venture capital has grown fully and covers plenty of industries in China. Looking into the industries of core venture capitals in China, the IT companies category is ranked as the highest category in 2021, according to Statista. The remaining companies are the biotechnology sector, semiconductors, Internet, chain stores, mechanical engineering, chemical resources and processing, food and beverages sector, and others. From Venture Matters, over the past 15 years, one-third of the unicorns worldwide are from China. And that was the time when venture capital in China expanded aggressively. In Q2 2018, China start-ups accounted for 47% of the world's venture capital funding. This is also the first time in record that China's venture capitals surpassed the United States.
However, all of a sudden, everything changed because of the increasingly strict regulations of the government. The government tightened enforcement of the anti-trust laws in 2021. 43 companies of unreported and illegal implementation of concentration of business operators were filed for investigation on November 20, 2021. For example, Alibaba, Byte Dance, JD.com, Tencent, Didi, and Baidu were involved in this investigation. These companies all violated Article 21 of the Anti-Trust Law of the People's Republic of China, and constituted the failure to declare and illegally implement the concentration of business operators. The penalty was a fine of CNY 500 thousand on the companies involved. Red signs were already lighted on before. Early in 2020, the country's government has taken control of major tech companies - from anti-trust to anti-unfair competition, to game control, to data securities, and to others. All these policies all indicated the Chinese government's restriction towards companies' freedom in several aspects. Ant Financials also received a fine of USD 2.80 billion because of its violation on April 3, 2021. Penalties for e-commerce also occur because of the mandatory exclusivity rules. We believe that the regulations also indicate the government's decision to restrict its economy to the industries that they want to improve on.
Venture capitals in China are highly impacted and lead the global decline of this whole industry. According to Preqin, the value of venture deals in China is USD 24.7 billion in the first four months of the year, down 44% year-over-year. This rate was relatively large, four times the global decline. Because of the increasingly strict regulatory and global influence on tech companies, the entire tech industry was viewed as a high-risk deal by most venture investors. The COVID-19 policies also caused the economy of China to fall back. In addition to its restriction on money outflow from the Chinese government, we believe that venture capital investors were experiencing a hard time in finding directions of investments.
There are absolutely exits for venture capital in this dilemma. If they want to deal with the current policy restrictions on anti-trust and money outflow, venture capital investors can invest in companies that want to expand their business overseas. A win-win situation could occur. Because for those companies who might want to expand their business to other countries, they are looking for capital expansion to support their next move of the business plan. If venture capital can provide the things these companies are looking for, venture capital can also find a way to invest in overseas companies. Venture capital can analyze and choose companies with a high potential of spreading their products worldwide. Besides investing in companies that want to expand business overseas, venture capital investors in China that have assets outside of China could re-invest in other possible companies and support them. Through the circle of investment and re-invest, the capital will have a high increase in return rate.
Chinese capital going overseas has been a huge trend over the past ten years. In 2014, Chinese capital going overseas reached149 investment events that year, marking a new start. In 2017, the investment amount reached the highest one over the past five years, with an amount of CNY 95.82 billion. In 2019, the number of Chinese capital overseas investment projects began to decline and then rebounded in 2021. The number of Chinese capital going overseas investment events reached 454, marking another highest record in history. The investment amount in history was CNY 53 billion. We believe that in 2022, this number will go higher and higher and mark a new record. Within the first two months of 2022, there are more than 40 events with more than CNY 5 billion investments going on so far.
There should be no hesitation for companies that want to expand their business overseas. Because as the last article mentions, the current market is the perfect time to make such decisions. With the support from venture capital investors, there should be no worries for these companies to move forward. And we believe sooner, "Made in China" will also be louder again.
If you want to learn more about the trends of China's VC/PE, join us in Manhattan on July 29-30, WIM (World Innovators Meet 2022) and we will hold a fireside talk, "Post-Tech-Crackdown: The Future of Venture Capital in China". We invited Rui Ma, Bin Zhang, and Albert Tseng to share their thoughts about China's VC/PE sectors. Meanwhile, you could interact with like-minded business leaders, investors, scholars, and international relations experts on the key issues and opportunities facing U.S-China business collaboration and investments.
Over the course of 2 days, hear from speakers on the past, present, and future of innovation and exchange between China and the world–from trends in Blockchain, IoT, AI, 5G, Biotech, and Fintech for 10 sessions, and network with 175 attendees representing top institutional investors, venture funds, and investment firms.
