Chinese startups attract record funding despite tech restriction

Unlike in previous years, when most of China’s tech funding went to internet e-commerce startups, most of last year’s money went to areas more closely related to Communist Party priorities, such as as semiconductors, biotechnology and information technology.

Venture capitalists invested $ 129 billion in more than 5,300 startups in China in 2021, more than the latest market record of around $ 115 billion for 2018, according to data from the database of China. investment Preqin, which has been tracking venture capital transactions in China since 2000.

A broader measure of funding for investments in Chinese startups, which also includes private equity funding, reached $ 165 billion in the first three quarters of 2021, on track to surpass a record $ 190 billion in 2017, according to figures from PE Data, an investment-funding database owned by Zero2Ipo Holdings Inc. Data for the full year is not yet available.

Funding boom shows how popular China remains as an investment destination despite government attempts to place more restrictions on certain tech companies and broader financial decoupling between China and the United States

Chinese executives have tried to gain better control over data from tech companies and curb what they see as excessive risk-taking and anti-competitive behavior in the industry. Authorities blocked an initial public offering by fintech leader Ant Group Co. in late 2020, imposed giant fines on consumer internet companies in 2021, and forced many to restructure their businesses in ways that were likely to make them less profitable. .

These and other measures rocked investors and destroyed billions of dollars in market value at Alibaba and other companies.

Washington, meanwhile, has banned dozens of Chinese tech companies, including startups, from sourcing equipment and capital from the United States as it seeks to slow China’s advancement in tech. peak.

Yet Beijing appears to be successful in redirecting capital to so-called “hard-tech” areas, which leaders say may serve national interests better than delivering food, playing video games, or trading. electronic.

Mainstream internet companies like Tencent are no longer seen by Chinese leaders as serving national interests.


Photo:

SONG ALY / REUTERS

The country’s new five-year plan called technological development a national security issue and announced its goal of increasing research and development spending by 7 percent per year, more than budget increases for its military. The economic plan included plans to accelerate the development of technologies ranging from chips to artificial intelligence and quantum computing, which officials say can reduce China’s dependence on or on foreign suppliers. to take the lead in advanced technologies.

Between 2016 and 2020, by contrast, the country promoted the “Internet Plus” movement, which sought to harness the Internet to modernize Chinese industries and fuel growth.

The internet industry, typically among the top two areas for investment in previous years, fell to fourth place in the first three quarters of last year, with around $ 20 billion in funding, or around $ 10 billion less. as the most popular category, semiconductors, PE Data said. Consumer internet companies such as Alibaba and Tencent Holdings Ltd.

, once considered the gems of Chinese entrepreneurship, are no longer seen by Chinese executives as the type of tech companies that can serve national interests, people familiar with the talks said.

Spokesmen for Alibaba and Tencent declined to comment.

China is still very dependent on foreign chip foundries and factory-less chip makers. A cell phone chip factory in Zhejiang, China.


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Press Tpg / Zuma

Venture capitalists polled by the Wall Street Journal said they were happy to be on top of Beijing’s priorities, even though “hard-tech” or information technology companies sometimes put in much more money. time to mature and generate returns than mainstream Internet businesses like short films. heavyweight ByteDance Ltd.

“Semiconductors, advanced manufacturing, enterprise software, anything that involves data, these are ripe areas,” said Gary Rieschel, partner of Qiming Venture Partners, which manages approximately $ 6 billion in business. ‘active and has offices in Beijing, Shanghai and Hong Kong. and Suzhou.

Companies related to the consumer Internet sector accounted for nearly 50% of Qiming’s investment five years ago, but that number has since declined to 15%, Rieschel said, adding that the company had invested instead. in “basic” technologies such as chips, business software and healthcare.

At an entrepreneurs’ summit in Beijing last September, Neil Shen, the founding partner and managing director of Sequoia China Capital, one of the most active investors in China in 2021, told the audience that more than 80 % of the number of investments made by the company in recent years has been in “high-tech” areas such as artificial intelligence and high-end manufacturing.

Mr Shen then said that these investments would require more patience on the part of investors seeking the gain, as these startups and technologies have longer development cycles, but called it “half public service, half business opportunity “.

Even with strong financial backing, industry analysts say China still has a long way to go before achieving self-sufficiency or becoming a world leader in certain areas it targets, particularly semiconductors.

Hard-tech companies sometimes take longer to generate returns than mainstream Internet companies like ByteDance.


Photo:

Thomas Suen / Reuters

China is still extremely dependent on foreign chip foundries and factory-less chipmakers, and with the United States’ export controls on high-end equipment, the country is unlikely to catch up with the West. in the short term, they said.

Still, Danny Mu, Chinese technology analyst at Forrester Research, said Chinese companies have made inroads in sectors such as databases and enterprise software in recent years.

“When I was growing up I thought trying to kick a company like Oracle was very difficult,” said the Beijing-based analyst, who noted that large investors, many state-linked funds, were very interested in “hard-tech”. startups in the past 12 months.

“But right now, there are more and more scenarios in which domestic technology brands and software hold their own in the market, and people have more and more confidence in them. The more you use them, the better they become.

Another emerging area that is attracting venture capital is SaaS, or software as a service. During a forum organized by the Asia Venture Capital Journal in Beijing last October, all speakers participated in a panel entitled “Technology: where are the unicorns in China?” Spoke about opportunities in SaaS startups, which provide a range of business services such as human resources, sales and customer relationship management.

Yuxiang Zhou, a 32-year-old tech entrepreneur whose company sells cloud-based software that helps factories in China manage production, said it only took two months to close around 78 million in Series C funding to get it started in early 2021, as the change of government gathered momentum.

Chinese tech stocks popular with US investors have fallen amid the country’s regulatory crackdown on tech companies. WSJ explains some of the new risks investors face when buying shares of companies like Didi or Tencent. Composite photo: Michelle Inez Simon (Video of 08/06/21)

Zhou said he was surprised at how quickly his company, Black Lake Technologies, raised funds from investors such as Lightspeed Venture Partners and Temasek Holdings, a Singapore sovereign wealth fund, as the size rounds of financing Similar generally take about six months to close.

Shanghai-based Zhou said a watershed moment for enterprise technology came in 2019, with the US-China trade dispute serving as a “wake-up call for China and factories that did not have of their own national factory software “.

To encourage more investment in desired sectors, Beijing has outlined measures to facilitate investment outflows through domestic stock markets, a key consideration for venture capitalists.

The Beijing Stock Exchange, which began trading in November, is designed as a place for small startups with cutting edge technology. The Shanghai Stock Exchange’s STAR Market, a Nasdaq-style board also known as the Science and Technology Innovation Council, revised its rules last year to prioritize listing of “hard-” companies. tech ”.

“Companies in industries such as semiconductors are very popular when listed on national stock exchanges such as the STAR Market,” said Linda Cai, partner of Shanghai-based Loyal Valley Capital, which invests in the ” hard tech “for several years. year.

Several Chinese provinces, including Shanghai, Jiangsu and Guangdong, as well as the Ministry of Industry and Information Technology have also introduced goals and policies promoting the deployment of advanced manufacturing, software and integrated circuits.

Write to Liza Lin at [email protected], Jing Yang at [email protected] and Keith Zhai at [email protected]

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