China’s technology scene has been in the news for all the wrong reasons in recent months. In the wake of the scuttling of Ant Group’s IPO, the Chinese government has gone on a regulatory offensive against a host of technology companies. Edtech got hit. On-demand companies took incoming fire. Ride-hailing? Check. Gaming? You bet.
The result of the government fusillade against some of the best-known companies in China was falling share prices. The damage topped $1 trillion among just public Chinese companies listed abroad.
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What about startups in sectors that were reformed overnight? If their public comps are any indication, even more wealth was deleted in the recent wave of crackdowns.
The Exchange was curious about the impact of the Chinese government’s actions on the venture capital market. The Chinese startup economy has produced a number of world-leading companies. Tencent and Alibaba, yes, and even Baidu have become well-known for a reason. Could regulatory changes shake up the venture model that helped grow the country’s largest tech concerns?
After we checked in on the same question this Monday, SoftBank provided a partial answer, noting yesterday that it is pausing investments in China. The Japanese teleco, conglomerate and investing powerhouse has been deploying capital at a rapid pace in recent weeks. That will slow, at least in China. Here’s the WSJ:
The regulatory initiative in China has become so unpredictable and widespread that SoftBank and its funds are planning to hold off on investing much more there until the risks become clearer, [SoftBank CEO Masayoshi Son] said at an earnings press conference in Tokyo.
Is SoftBank early to its decision to shake up its investing strategy, missing Chinese deals for some time? Or is it late? We secured data from PitchBook and Traxcn that paints a somewhat surprising picture of venture capital activity at least thus far in Q3 2021.
But first, a reminder of how well China’s venture capital market was performing as 2020 eased its way into 2021.
Before the shakeup
China had a reasonably good Q2 2021 despite the turmoil.
Sure, funding flowing into Chinese startups was down 18% compared to Q4 2020, per CB Insights, but that quarter had recorded an all-time high of $27.7 billion. With $22.8 billion raised, Q2 2021 still did better than every other quarter since Q2 2016 with the exception of Q2 2018, Q4 2020 and Q1 2021. Indeed, the ecosystem had started to cool down in late 2018 before picking up pace again at the end of 2020.
However, that’s only one way to look at the numbers. If you compare recent Chinese venture results with other regions, it underperformed. During Q2 2021, U.S. funding reached a new high of $70.4 billion, with places like Latin America, Canada and India also establishing new records.
This also means that China lost ground as to its share of global startup deal-making, and the same goes for unicorn creation. According to Tech Buzz China’s summary of CB Insights data, the U.S. accounted for 132 unicorn births between January 1 and June 16, 2021, compared with just three in China.
Slightly falling quarterly venture capital totals and a notable decline in unicorn formation does not a startup winter make. So let’s look at what’s happened more recently.
So, what about Q3?
The thesis that there would be an instantly obvious slowdown in Chinese venture capital activity is not supported by the data we secured.
PitchBook prepared an analysis for The Exchange that dug into monthly results for mainland Chinese venture capital activity for April through August 10. The information shared paints the following picture of the months in question, with August presented as a to-date number and in terms of where the month would end if its current pace is maintained (projection: TechCrunch):
- April 2021: $8.16 billion, 427 deals.
- May 2021: $5.34 billion, 348 deals.
- June 2021: $8.11 billion, 415 deals.
- July 2021: $8.74 billion, 420 deals.
- August 2021: $1.77 billion, 126 deals.
- August projected: $5.49 billion, 391 deals.
Before you note that the August number does look a little light in the wake of several $8 billion months, relax. Venture capital data is famously laggy, so the leading edge of reported VC results is always the least accurate. Given the numbers we have, it is too early to say that August won’t match the preceding months’ tallies.
Even more, August 2021’s Chinese venture capital results through the 10th are ahead of their 2020 equivalent, which makes it hard to be too bearish in our reading. July’s data is a bit more solid and shows not only a strong gain in terms of deals and dollars over its 2020 equivalent ($5.73 billion, 383 deals) — it’s the strongest month in our dataset.
Not so much a slowdown, then. At least yet.
Tracxn data is slightly more pessimistic. In its telling, China’s venture capital market had a strong June, with $7.82 billion invested into equity rounds, while July managed just $4.95 billion. However, the July figure provided was better than May’s, and nearly tied with what Tracxn tallied up for April. Once again, the data view is too modest in its changes to warrant calling it a slowdown.
SoftBank pulling the brake could change the math in the rest of the third quarter. Checks from SoftBank proper and its Vision Fund 2 are large, and often rapid; closing that particular checkbook could impact the rest of China’s Q3 venture capital market. And perhaps we’ll see earlier-stage VCs warier about investing in the country now that SoftBank’s cash is off the table at least for the moment.
We will know more when Q3 closes, but early looks can often provide useful perspectives, and this time, the data seem to show that the market in question is steadier than anticipated.
Perhaps the effects of the regulatory shakeup will simply take longer to be felt. Or maybe investors are still simply so bullish on the Chinese technology market that they will take lumps where needed so that they can keep playing the game.