Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Heading into the new year, it wasn’t known that the coronavirus, known as COVD-19, would shutter much of China, slowing its industrial output, its services industry and more. But heading into 2020, China’s venture capital world was already in steep decline. This morning we’re exploring the country’s Q4 2019 venture capital results and pulling in fresh data from 2020 to get a handle on what’s happening in China today.
Some years ago, China’s venture capital scene was a clear global leader, busy vying for the top spot in global venture capital activity. So great was China’s rise in the venture world you could find investors and founders alike extolling working culture in China as superior to that of the United States, paeans to the scale that China’s population offered technology startups and some concerns that China’s venture market could surpass the United State’s own, creating a new center of gravity in the world of technology.
Views on China have since changed. Let’s figure out how much.
2018 vs. 2019
In 2018, China managed to surpass the United States’ venture results, posting periods of time in which it was the leading market for venture dollars in the world. As Crunchbase News reported, concerning the year: “In the first and second quarters of 2018, Chinese VC dollar volume surpassed the United States for the first time.”
This data point was at least partially echoed by Goldman Sachs data, which said that Chinese companies raised $30.9 billion in Q2 2018, above the tally their American counterparts managed in the three-month period ($27.2 billion). Regardless if it was Q1 and Q2 of 2018, or just one of the two, the year showed that China’s venture capital landscape was hot, active and able to challenge the traditional center of gravity in the growth-oriented, often tech-focused, private capital market.
By Q3 2018, however, the United States was back on top, with Crunchbase data showing that by Q4 of the year venture activity had swung sharply in favor of the American venture market: “In Q4 [2018], China-based companies raised just over 21 percent of the reported funding during the quarter, relative to the 53 percent netted by U.S. companies.”
Turning to 2019, venture activity appeared to worsen for China. In Q1 2019, KPMG tracked a sequential decline in venture investment into China-based companies of $10.1 billion in Q4 2018 to just $5.8 billion in Q1 2019. Venture activity didn’t improve much in Q2 2019, with CNBC reporting that “the value of VC investment in China was […] down by nearly 77%” from the year-ago period.
(I wrote about the then-nascent Chinese VC slowdown here in July 2019, for some historical context.)
There was some bounce for China in Q3 2019, with KPMG reporting a rebound in Chinese venture capital rounds, even if dollars invested remained far under preceding totals. This brings us to Q4 2019.
Q4 in particular
Even before Q4 2019 was done, alarm bells were ringing. Crunchbase News reported that in a little over half of the quarter, China’s venture capital totals had fallen to $4.1 billion across 183 deals. That was off from the $10.9 billion across 388 deals the country had seen in the preceding year’s comparable period. (Crunchbase publishes projections, while other sources provide tallies. This leads to some data discrepancies. We care about directional changes this morning, not absolute numbers, so we’re content to look at a number of sources in our quest.)
Later KPMG data showed a decline in rounds from both the year-ago period and the sequentially-preceding Q3 2018. Q4 2019 was yet another quarter that showed decline in China’s venture capital market, even if it appeared that dollars invested into China’s startups had leveled off at around the $10 billion per quarter mark.
In contrast, the United States’ venture market wound up putting up a very similar set of results in 2018 — the year of China’s surge to the top of the polls, if temporarily — and 2019, with $140.2 billion and $136.5 billion in VC invested apiece, according to Pitchbook data.
What we can see, then, is the rise of and fall of China’s venture capital market from pole position in the first half of 2018 to a fraction of the leading totals in the next year.
Are things improving for China in 2020?
2020 so far
No. It has, in fact, gotten worse for China.
This brings us back to the current coronavirus outbreak in the country, where the epidemic appears to have started and where most of its infections can be found today. It is impossible to tell what portion of the country’s slowdown can be tied to the outbreak or normal macroeconomic trends.
Prepping to write this post today, I had intended on using this section to run some simple data queries and use that data to make a point. However, as it turns out, Pitchbook beat me to the punch. From a recent post that the service emailed out this morning, the following:
In the past month and a half, venture capital activity in China—both in terms of the number of deals and the money raised by startups—has fallen more than 60% compared with the same period last year, according to PitchBook data.
That’s a 60 percent reduction from, recall, numbers that were already sharply down from the preceding levels.
As Pitchbook was kind enough to do some of our lifting for us, let’s ask a more narrow question: How far have rounds of $100 million or more fallen in China year-to-date, compared to the year-ago period? Here’s the answer, via Crunchbase data:
- Rounds of $100 million or more in China, January 1-February 18 2019: 14
- Rounds of $100 million or more in China, January 1-February 18 2020: 6
The 14 rounds in 2019 were worth $2.96 billion. The 6 rounds of $100 million or more in 2020? $1.55 billion. China is therefore seeing a similar decline in large rounds as it is dollars invested into them.
Adding that to Pitchbook’s data and things look grim on the ground for China in Q1 2020. More when we have it, and may everyone get healthy as quickly as possible.