Tensions between the United States and China have affected everything between the two superpowers — and the venture capital and tech startup ecosystem is no exception.
Just last month, it was reported that President Joe Biden would sign an executive order to limit investment by US investors in China in areas such as semiconductors, artificial intelligence and quantum computing.
The US has placed further restrictions on the export of key US technologies.
However, even before any order is signed, tech investors in the US seem to have backed away from Red Dragon.
According to Crunchbase data, this year is on track for the slowest pace of trade in China by US investors in recent years. In the year While 2019 and 2020 saw more than 300 investment deals in China, this number rose to 426 in 2021 – when the venture capital market was at a fever pitch.
However, as political winds picked up, that number dropped to 283 deals last year. As of April this year, US-based investors were on pace to participate in fewer than 150 deals with China-based tech startups.
Investors won’t see those numbers rising anytime soon.
One unnamed investor said a number of issues have caused his firm to put the brakes on investing in China — including political pressure, government action against some Chinese tech companies and questions about whether some China-based startups can list on major exchanges. US
Besides, there were some concerns from LPS related to environmental, social and governance aspects, he added.
“There’s an element of uncertainty to start with investing in this business, and this added another layer of uncertainty,” he said.
Major US investors in China have significantly slowed their investment in the region in recent years, Crunchbase reports.
- Menlo Park, Calif.-based GGV Capital has done the most deals in China since 2019, with 133, but only two this year, followed by two dozen in 2022, according to Crunchbase data.
- Another Menlo Park firm, BlueRun Ventures — formerly Nokia VC — has made 71 investments since 2019, but only 19 last year and none this year.
- GL Ventures, a San Francisco-based firm focused on sports technology and online gaming, has made 62 deals in China since 2020, but only 11 in the last 16 months.
- Similarly, Palo Alto, Calif.-based GSR Ventures, which focuses on early-stage technology companies building AI-enabled technology, has closed 60 deals in China since 2019, but only 13 in the past 16 months.
- SOSV and OrbiMed have both announced more than 40 deals each over the past four-plus years, but only one deal combined this calendar year.
The number does not include firms such as Sequoia Capital China, which is based in China because it is its own legal entity – separate from Silicon Valley’s Sequoia Capital. However, as The Information reported earlier last month, Sequoia has a profit-sharing arrangement that allows its American partners to benefit from its Chinese counterpart’s investments.
Sequoia Capital China is a big investor in that country’s tech scene – it has made more than 400 investments in China-based companies this year since 2019 and 2019.
Despite large sums from Sequoia’s capital, China, and other Chinese-based investors, the exodus of US-based companies from the world’s most populous country appears to have affected the country’s funding.
Venture capital in China has doubled in 2021 – despite the country’s Covid-19 outbreak – hitting a record of more than $87 billion, according to Crunchbase.
However, last year these numbers decreased by 47% to 46.3 billion dollars.
Investment in the first quarter of this year fell to $8.1 billion – the lowest total in years and essentially a 38% decline year-over-year and quarter-over-quarter.
There is no predictability.
Even for those who know the market closely, it is difficult to say whether that downpour will continue.
Hurst Lin, DCM Ventures General Partner and China Office Head since 2006, since China joined the World Trade Organization in 2006.
However, investors’ perceptions of the region have changed around the time of Covid and political tensions have not helped the situation.
“I think there was a cooling off period when the Chinese media (reporting) changed,” he said. “This has dried up foreign capital. LPs are starting to change their attitude, and as an investor you should be concerned about that.
Lin acknowledged that China’s laws around technology companies and issues with foreign exchange disclosures have affected investor sentiment, but those issues have always been there.
Lin co-founded Synnet, which eventually became the first Chinese Internet company to successfully list on the Nasdaq. The listing is done through a variable interest component – which is still regulated by the government but can still be done.
With limited supply of foreign currency, Hong Kong exchanges have tried to fill the gap, Lin said. Just recently, tech giant Alibaba Group said it was moving with two other business units – Cainiao Network Technology and Freshipoo – to have IPOs in Hong Kong.
However, the Hong Kong exchange has its weaknesses. It’s better known for retail investors and markets like real estate and manufacturing, Lin said. There’s no research analyst coverage that tech companies need to inform potential investors of — a major drawback for startups seeking a public listing.
“Will this change?” “I really don’t know,” asked Lynn.
While U.S. investment in the Chinese market is not at an all-time low, Lin added, it is at a low point for the strong investment cycle of the past several years.
“We’ll see how that goes,” he added.
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