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A bank employee counts China’s renminbi (RMB) or yuan notes next to US dollar notes at Kasikornbank in Bangkok, Thailand on January 26, 2023.
Athit Perawongmetha | reuters
BEIJING – Venture capitalists in China, who once rose to fame with giant U.S. IPOs of consumer companies, are under pressure to drastically change their strategy.
In the last few years, strict regulations in China as well as in the US, tensions between the two countries and a slowdown in the world’s second largest economy have increased the need to adapt our playbook to the new environment.
There are three shifts running here:
1. US Dollar to Chinese Yuan
The business model of well-known venture capital funds such as Sequoia and Hillhouse in China typically involves raising dollars from university endowments, pension funds and other sources in the US – known as limited partners in the industry.
That money then went to startups in China, which eventually sought initial public offerings in the US, generating returns for investors.
Now many of those limited partners have stopped investing in China, as Washington has increased scrutiny of US funds supporting advanced Chinese technology and made it harder for Chinese companies to list in the US. The recession in the Asian country has further weakened investor sentiment.
This means venture capitalists in China need to look to alternative sources, such as the Middle East, or, increasingly, to funds tied up in local government coffers. The shift towards domestic channels also means a change in currency.

In 2023, total venture capital funds raised in China are set to fall to the lowest since 2015, with the US dollar share falling to 5.3% from 8.4% the previous year, according to industry research firm Xinyu data.
This is much lower than in previous years – data shows that US dollars accounted for about 15% of total VC funds raised for the year 2018 to 2021. The remaining portion was in Chinese yuan.
Currently, many USD funds are focusing their attention on government-backed hard tech companies, which generally aim for A share exits rather than US listings.
For foreign investors, high US interest rates and the relative attractiveness of markets such as India and Japan also factor into the decision to invest in China.
“VCs have certainly changed their view on Greater China from a few years ago,” Kyle Stanford, lead VC analyst at PitchBook, said in an email.
“There is still a lot of capital available in Greater China’s private markets, whether from local funds, or from regions like the Middle East, but in general the outlook on China’s growth and VC returns has changed,” he said.
2. China investment, China exit
Washington and Beijing resolved a long-running audit dispute in 2022, reducing the risk of Chinese companies being delisted from US stock exchanges.
But following the controversy over the US listing of Chinese ride-hailing giant Didi in the summer of 2021, both countries have increased scrutiny of China-based companies seeking to go public in New York.
Beijing now requires companies with large amounts of user data – essentially any internet-based consumer-facing business in China – to seek approval from the cybersecurity regulator before listing in Hong Kong or the US, among other measures. Needed.
Washington has also tightened restrictions on American money going to high-tech Chinese companies. Some big VCs have separated their China operations from the US under new names. Last year, the Sequoia was most famously rebranded as the Hongshan in China.
“USD funds in China can still invest in non-sensitive sectors for A share IPOs, but there is a challenge for local enterprises to prefer capital from RMB [Chinese yuan] fund,” said Liao Ming, founding partner of Beijing-based Prospect Avenue Capital, which has focused on U.S. dollar funds.
Stocks listed on the mainland Chinese market are known as A shares.
“The trend is moving towards investment in parallel entity overseas assets, which is a strategic move from ‘long China to long Chinese’,” he said.
Liao said, “With US IPOs no longer a viable exit strategy for China assets, investors should target local exits in their respective capital markets – in other words, China exits for China assets, and “America exits for foreign assets.”
Only a few China-based companies – and barely any large ones – have listed in the US since Didi’s IPO. Despite reported regulatory concerns, the company went public on the New York Stock Exchange in summer 2021.
Beijing immediately ordered an investigation that forced Didi to temporarily suspend new user registrations and app downloads. The company became listed later that year.
The investigation, which has now ended, comes alongside Beijing’s crackdown on alleged monopolistic practices by internet tech companies like Alibaba. The ban also included after-school tuition, minors’ access to video games, and real estate developers’ high reliance on debt to fund growth.
3. VC-Government coordination, big deals
Instead of consumer-facing sectors, Chinese officials have emphasized support for industrial development such as high-end manufacturing and renewable energy.
“Currently, many USD funds are focusing their attention on government-backed hard tech companies, generally aiming for A share exit rather than a US listing,” Liao said, noting. That it also aligns with Beijing’s priorities.
These companies also include developers of new materials for renewable energy and factory automation components.
According to PitchBook data, in 2023, the 20 largest VC deals for China-headquartered companies were mostly in the manufacturing sector and did not include any e-commerce business. In 2019, before the pandemic, the top deals included some online shopping or internet-based consumer products companies and some electric car start-ups.
The turnaround is even more pronounced than the boom that followed when online shopping giant Alibaba went public in 2014. According to PitchBook data, the 20 largest VC deals for China-headquartered companies in 2013 were primarily in e-commerce and software services.
…The venture capital landscape has become even more state-centric and focused on government priorities.
camille boulnoise
rhodium group
The shift away from Internet apps to hard tech requires more capital.
The average deal size among those 20 largest China VC transactions in 2013 was $80 million, according to CNBC calculations based on PitchBook data.
The analysis showed that this is much smaller than the average deal size of $280 million in 2019, and a fraction of the average of $804 million per transaction in 2023 for the same category of investments.
According to the data, many of those deals were led by local government-backed funds or state-owned companies, whereas a decade ago VC names like GGV Capital and internet tech companies were more prominent investors.
“In the last 20 years, China and finance developed very rapidly, and in the last ten years private [capital] The fund grew very quickly, which means it has to invest in any industry [generate] “Returns,” Yang Luxia, partner and general manager of Haiying Capital, said in Mandarin, translated by CNBC. She is focusing on the yuan fund while focusing on raising capital from abroad.
Yang does not expect the same pace of development to continue going forward, and said she is also taking a “conservative” approach to new energy. Technology changes rapidly, he said, making it harder to select winners, while companies now need to consider buyouts and other options for IPOs.
Then there is also the question of China’s growth, especially as state funds and policies play a larger role in tech investment.
“In 2022, [private equity and venture capital] Investment in China halved, and it fell again in 2023. Private and foreign actors were the first to step back, so the venture capital scene has become even more state-centric and focused on government priorities,” said Camille Bolanoise, Associate Director, Rhodium Group.
The risk, he said, is that science and technology become “more state-directed and aligned with government priorities”. “This may be effective in the short term, but is unlikely to encourage a thriving innovation environment in the long term.”