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Venture capital hasn’t given up on China

China’s listed internet-technology companies are reeling from this year’s regulatory crackdown. But that hasn’t stopped the action in the private markets: Investors are still charging into many of the country’s technology startups.

Venture capital and private-equity investment in Chinese startups for the first three quarters of 2021 rose 75% from a year earlier to $165 billion, according to research firm Zero2IPO. That total is higher than for full-year 2020, and is on track to beat the peak set in 2017.

Fundraising is surging too. Lean times in China’s venture-capital sector from 2018 until 2020, triggered by new regulations on the asset-management industry intended to rein in financial risks, seem to be ending at last. VC and PE funds raised nearly $200 billion in the first nine months this year, a 50% increase from the same period in last year.

That’s a sharp contrast with the struggles of many publicly traded tech firms. KraneShares CSI China Internet exchange-traded fund, which tracks Chinese internet stocks listed in Hong Kong and the U.S., lost 35% this year as investors fled Beijing’s regulatory crackdown.

While Beijing’s ire has certainly darkened the prospects of some previously up-and-coming sectors—online education being the most dramatic example—there are still plenty of opportunities in a country as big as China. Investors naturally seem to be favoring startups riding regulatory tailwinds.

That includes biotechnology and semiconductor firms, which had already established themselves as investor darlings over the past couple of years. The Huawei saga has exposed how dependent China is on foreign semiconductors. Investors also see opportunities in healthcare given China’s aging population and continuing reforms in the sector. Chinese mRNA technology company Suzhou Abogen Biosciences raised more than $700 million in August. Hangzhou Semiconductor Wafer raised around $510 million in September including from some state-backed funds. And electric-vehicle maker Leap Motor and AVIC Lithium Battery were also among some of Asia’s largest private deals last quarter, according to data provider CB Insights.

China’s vibrant domestic stock markets this year—in contrast to the carnage in overseas-listed Chinese firms—are probably another factor supporting the uptick in VC activity. The A-share market raised record funds through initial public offerings in the first three quarters, according to KPMG. Tech-focused markets such as Shanghai’s STAR board and Shenzhen’s ChiNext have done particularly well. The latter has also been helped by a simpler application process for listing.

Money is still flowing into the internet sector, though investors will increasingly prioritize actual profits, unlike the go-go days of yore when startups could burn cash with relative abandon. Listing on U.S. bourses seems certain to get more challenging and the falling stock prices of China’s big internet firms could also affect valuations for potential exits.

Investors in Chinese technology stocks are nursing deep wounds. But many VC funds are still eager to find the next technology heavyweights in the country—albeit mostly in different types of technology than before.

 

This story has been published from a wire agency feed without modifications to the text

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