China is among the countries standing on the frontier of blockchain technology. China is also expected by many to accelerate its blockchain innovation to become the world leader in the field, after President Xi Jinping called for blockchain to become a focus of national innovation on October 24, 2019.
Though the blockchain industry was in the firing line in 2019, a year which saw a considerable decrease in both the number of deals and total capital raised (which will be elaborated below in the 'what has happened?' section), China's emerging blockchain industry still occupies the second-highest position in the field worldwide in terms of numbers.
According to analysis on Crunchbase and ITjuzi database, there were 83 blockchain-related funding events in China last year, which raised a total of USD 557 million in financing – which was behind only the US in both variables.
When it comes to average capital raised per funding round, China has also secured its position in the first tier, with an average volume of USD 7 million in 2019.
Where in China?
Over the last six years from 2014 to 2019, there were four top-tier cities in China – namely Beijing, Hangzhou, Shanghai and Shenzhen – where the blockchain startups began that secured approximately more than 70% of the capital that PE/VC injected into the domestic innovators.
It is worth mentioning that the Sichuan and Chongqing regions have a bunch of blockchain startups – in fact, some of them are doing fairly well. However, a relatively large proportion of these local firms are 'mining' hardware and cryptocurrency professionals, whose core competence is considered to be not closely relevant to the essential blockchain technology as projected by regulators in China.
Therefore, while we do not assign these regions to the central hub of China's blockchain industry, there are also companies – like LianAn Technology and 9BaaS – who are doing the real business of blockchain in these areas.
Unsurprisingly, these four metropolises rely for their solid foundation on economy, a rich talent pool and favorable government support – typically they attract the front ranks of the most tech-driven industries in the domestic market. Apparently, blockchain is no exception.
The active digital ecosystem in China provides blockchain startups with a fine environment in which to develop. The Yangtze Delta, Pearl River Delta and the Jingjinji region are among the top three in terms of the regional measurement of the digital economy. Digital made up more than 40% of the local GDP in 2018.
The Top 20 Startups in the four Chinese metropolises
EqualOcean used the Crunchbase and ITjuzi database to compile a list of blockchain startups, based in the four major metropolises, which raised more than USD 100 million in funding in the three-year period from July 2017 to December 2019.
Enterprise services firms – and data services firms, in particular –recorded the most companies on the map, followed by infrastructure and industrial applications.
Cryptocurrency-concentrated and mining-associated hardware companies are not taken into account, as has been mentioned before.
What has happened?
Here we analyze the blockchain-related PE/VC investment in China to give an overview of the trends and money flows.
Blockchain investment in China cooled down in 2019
Investment in the Chinese blockchain industry started to boom in 2017, and after the inflated year in 2018, PE/VC investors tended to be more prudent and conscientious when valuing the corresponding opportunities in the country.
A total of USD 557 million in funding was raised from PE/VCs in 83 financing events closed in 2019, representing approximately 25% of what was raised in 2018 in terms of both the dollar volume raised and the number of deals.
While the startups located in the four major metropolises continuously dominated the investment market throughout the six-year period from 2014 to 2019 – contributing more than 70% of the pool of money – another tendency is that counterparts based in other Chinese regions started to share the cake, little by little.
Blockchain has hardly been the 'honey' for the money for the incumbent PE/VCs in China; there were several who showed their interest in opportunities in the field though. However, even the most enthusiastic ones have begun to wander between fear and greed – seems that the former mentality won in 2019.
Trends in favor of those tech-driven startups doing the real business of blockchain
Though China's PE/VC investment market in the blockchain is experiencing its winter, the situation is in fact not that bad – and is even slightly in favor – of those tech-driven startups focusing on the real business of blockchain.
The proportion of funding events completed by cryptocurrency-concentrated companies, i.e., trading platforms, crypto wallets, and crypto-asset exchanges, decreased significantly from 49% in 2018 to 36% in 2019. Meanwhile, this figure increased considerably for enterprise service-related blockchain companies, which witnessed a rise from 10% in 2018 to 18% in 2019.
Although the category of cryptocurrency and financial services still occupies the biggest slice in the market, a positive trend started to emerge at least.
Moreover, the average amount of capital raised per financing event in China's blockchain industry did not decrease in 2019 compared to 2018, which was about USD 7 million.
These figures suggest that there is really not that much to fear or worry about as regards financing for those concentrated on the real business of blockchain, who often have a rudimentary business and profit model, and do business with ingenuity.
On the other hand, the 'wolves in sheep's clothing' who aim to earn quick money look likely to meet with a colder future.