China’s Startups Attract Record Funding Despite Tech Clampdown

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Investors embrace Beijing’s pivot to ‘hard tech’ even as Chinese leaders wield more control over the country’s tech sector and sours Sino-US ties

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Venture-capital investors invested $129 billion in more than 5,300 startups in China in 2021, up from about $115 billion for 2018, according to data from Prekin, an investment database that tracks China’s venture-capital deals since 2000. The dollar exceeded the previous record of the market.

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A broad measure of investment funding in Chinese startups, including private-equity financing, reached $165 billion in the first three quarters of 2021, surpassing a record $190 billion in 2017, according to data from PE Data. on the track. -Zero2Ipo Holdings Inc. Owned Financial Database. Full year data is not yet available.

The funding boom shows how popular China is as an investment destination, despite the government’s efforts to impose more sanctions on some technology firms, and widespread financial disengagement between China and the US.

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China’s leaders are trying to gain more control over tech firms’ data and rein in what they see as excessive risk-taking and anti-competitive behavior in the sector. Officials blocked an initial public offering from fintech leader Ant Group Company in late 2020, imposed heavy fines on consumer-internet firms in 2021, and forced many to reorganize their businesses in a way that They will benefit less.

Those and other moves rattled investors and destroyed billions of dollars of market value in Alibaba and other companies.

Meanwhile, Washington has banned dozens of Chinese tech companies, including startups, from sourcing equipment and capital from the US, as it seeks to slow China’s progress in cutting-edge technologies.

Yet Beijing capitalizes on what are known as “hard-tech” sectors that leaders think may better serve national interests than food delivery, videogaming or e-commerce.

The country’s new five-year plan dubbed technology development a matter of national security, and announced it aimed to spend 7% annually on research and development – ​​more than the budget increase for its military. The economic blueprint included plans to accelerate the development of technologies from chips to artificial intelligence and quantum computing, which officials hope could reduce China’s dependence on foreign providers or allow it to take the lead in advanced technologies. can.

In contrast, between 2016 and 2020, the country fostered the “Internet Plus” movement, which sought to use the Internet to modernize China’s industries and fuel growth.

The Internet sector, typically among the top two investment sectors in previous years, dropped to fourth in the first three quarters of last year, with nearly $20 billion in funding—about $10 billion less than the most popular category, semiconductors, PE data. indicated. Consumer-Internet companies such as Alibaba and Tencent Holdings Ltd.

, once considered the crown jewel of Chinese entrepreneurship, is no longer seen by Chinese leaders as the type of technology companies that can serve national interests, people familiar with the discussions said.

Spokesmen for Alibaba and Tencent declined to comment.

Venture-capital investors interviewed by the Wall Street Journal said they are happy to piggyback on Beijing’s priorities, even though companies in “hard-tech” or information technology sometimes take longer to mature and become more consumer friendly. -Internet firms give returns as compared to short-videos. Heavyweight ByteDance Limited

“Semiconductors, advanced manufacturing, enterprise software, anything that involves data are ripe areas,” said Gary Richel, partner at Kiming Venture Partners, which has about $6 billion in assets under management and is located in Beijing, Shanghai, Hong Kong. and Suzhou.

Companies belonging to the consumer-internet sector accounted for about 50% of Cumming’s investments five years ago, but that number has dropped to 15%, Mr. Richel said, adding that the firm has instead invested money in “core” technology. such as chips, enterprise software and healthcare.

During a summit for entrepreneurs in Beijing last September, Neil Shen, founder and managing partner of Sequoia China Capital, one of the most active investors in China in 2021, told the audience that by more than 80% of the number of investments Investments made In recent years the firm was in “hard-tech” areas such as artificial intelligence and high-end manufacturing.

Mr Shen then said that more patience would be needed by investors looking to pay for these investments because these startups and technologies have longer development cycles, but called it “half public service, half commercial opportunity”.

Even with significant financial backing, industry analysts say China still has a long road to travel before it achieves self-reliance or becomes a global leader in some sectors, notably Semiconductor.

China is still dependent on foreign chip foundries and fabless chip makers, and with US-imposed export controls on high-end equipment, the country is unlikely to catch up with the West in the near future, he said.

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

“When I was growing up, I thought it was too difficult to try to take a company like Oracle out,” said the Beijing-based analyst, who saw strong interest in “hard-takes” large investors, many state-linked funds. Seen taking Startups in the last 12 months.

“But right now, there are more and more scenarios in which home tech brands and software are taking hold of the market, and people are increasingly confident about them. The more you use them, the better they become. “

SaaS, or software as a service, is another emerging sector attracting venture capital. At a forum hosted by the Asia Venture Capital Journal in Beijing last October, all the speakers asked “Technology: Where Are China’s Unicorns?” Featured on the title panel. We talked about opportunities in SaaS startups, which provide a wide range of services to businesses such as human resources, sales and customer-relationship management.

Yuxiang Zhou, a 32-year-old technology entrepreneur whose firm sells cloud computing-based software that helps factories in China manage production, said there will be about 78 percent in Series C funding for his startup by early 2021. It only took two months to close Million Dollars. , when the government’s innings was gaining momentum.

Mr Zhou said he was surprised at how quickly his firm Black Lake Technologies raised funds from investors such as Lightspeed Venture Partners and Singapore sovereign-wealth fund Temasek Holdings, as a similar-sized financing round would typically take about six months. Huh. Close it

Shanghai-based Mr Zhou said 2019 marked a turning point for enterprise technology, with the US-China trade conflict “a wake-up moment for China and factories that did not have their own home-factory software.”

To encourage more investment in desired sectors, Beijing has taken measures aimed at easing investment through domestic stock markets, an important consideration for venture capitalists.

The Beijing Stock Exchange, which began trading in November, is meant to be a venue for small startups with advanced technology. The Shanghai Stock Exchange’s Star Market, a Nasdaq-style board also known as the Science and Technology Innovation Board, revised its rules last year to prioritize listings of “hard-tech” companies.

“Companies in industries such as semiconductors are very popular when they are listed on domestic stock exchanges such as Star Market,” said Linda Cai, partner at Shanghai-based Loyal Valley Capital. years.

Several provinces in China, including Shanghai, Jiangsu and Guangdong, as well as the Ministry of Industry and Information Technology, have introduced targets and policies favoring the rollout of advanced manufacturing, software and integrated circuits.

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

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