We are delivering one exclusive thematic newsletter a week to TechNode Squared members. Our new in-focus series features in-depth reporting on the latest developments in key areas:
- VC activities and outlook
- A changing landscape in China’s auto industry
- Chinese tech giants’ overseas expansion
- Innovations in e-commerce
This week, we launch China VC Roundup, a look at investments as a leading indicator of tech trends. Each issue will round up monthly tech investment activities in China and feature an interview with a tech VC.
As the slowing global economy turns China’s capital winter into a little ice age, it looks like all but a few tech sectors might have to bundle up heavily for the cold.
Normally one of the world’s most active venture capital markets, China’s technology VC investment boom from 2014 to 2015 brought up a new generation of unicorns such as Bytedance, TikTok’s owner, and ride-hailing platform Didi Chuxing.
But last year, that VC boom turned into a bust as investors struggled to deal with a slowing economy and growing financial headwinds, leaving the country’s cash-ravenous startups in a “capital winter.”
At the time, some investors were glad to see a correction to the overheated market. But now some are getting nervous. If capital winter in 2019 was “hard mode,” 2020 has become “hell mode,” said an article in the Chinese venture capital news outlet PE Daily. Between Covid-19 and the escalating US-China feud, VC activities in China’s tech sector nosedived in the first four months of 2020, and private-equity firms raised less money as the exit uncertainties scared investors away.
Investment in China’s tech startups totaled RMB 119.1 billion (around $16.7 billion) in the first quarter of this year, down 31.3% year-on-year, according to business information provider Itjuzi.com. Meanwhile, the number of VC funding deals to tech companies fell to 634 in the quarter from 1,143 a year earlier.
In April, Chinese businesses got back on track as the virus came under control. But VC activities didn’t climb out of the hole. Around 223 VC deals happened in China’s tech-related industries in April, with the disclosed sum of money raised totaling RMB 22.5 billion, according to Chinese venture market research institute Zero2ipo Research.
VCs in the time of corona
The dramatic fall in fundings to tech startups is due to a “more cautious approach“ taken by VC firms amid the coronavirus outbreak, according to Xu Miaocheng, investment vice president at Beijing-based VC firm Unity Venture, in an interview with TechNode last month.
Fear of economic hardship is not the only factor stopping venture capitalists from making deals with startups, said Xu. The national lockdown from late January to the end of March also got in the way of VC firms’ on-the-spot investigations of companies.
Meanwhile, VC firms raised less money from their backers. Chinese VC firms amassed a total of RMB 207.2 billion from limited partners in the first quarter, a year-on-year decrease of 19.8% and a quarter-on-quarter falloff of more than 40%, according to Zero2ipo Research.
The winners
A few companies have gotten funded even in hard times. You may not be surprised to hear that they’re in the strategic fields of semiconductors and biotech.
In the first quarter, companies in the biotech industry closed 41 venture capital funding rounds, raising a total of RMB 11.7 billion. Semiconductor companies, in the meantime, raised RMB 10.2 billion in 22 deals.
State-backed funds, which usually prefer semiconductors and manufacturing industries, became more active this year because of both the post-virus stimulus and Beijing’s push for high-tech self-reliance.
China’s second semiconductor-focused investment fund, which raised RMB 204 billion last year, began to make investments in March. The RMB 2.3 billion first deal of the state-backed “big fund” went to Shanghai-based chip-designing company Unisoc, according to Shanghai Securities News (in Chinese).
China also announced a so-called “new infrastructure” initiative, motivating local governments and enterprises to increase investment in seven key areas, including 5G networks, artificial intelligence, and data centers. Analysts expect the amount of investment from the public and private sectors into new infrastructure projects to reach RMB 1 trillion in 2020.
Fewer exit options
According to Itjuzi, in the first quarter, there were 85 acquisitions in China’s tech VC market, compared with 122 in the same quarter last year. However, more companies exited by listing their shares, powered by increasingly tech-friendly rules on mainland exchanges. The number of initial public offerings of tech companies rose to 66 from 44 a year earlier as early-stage companies came home for exits.
2020 has been a bad year for Chinese tech companies trying to raise funds in the US financial market. Short-sellers released a series of reports accusing some US-listed Chinese companies of committing fraud, including beverage chain Luckin, video-sharing platform IQiyi, and online education firm GSX, denting confidence in fast-growth China stories.
Last week, US President Donald Trump said his administration will study ways to safeguard American investors from the risks of investing in Chinese companies. On May 21, the US Senate passed a bill that could block some Chinese companies from listing shares on American stock exchanges.
Meanwhile, China continues to open its financial markets to tech firms. The country launched STAR Market, a Nasdaq-style high-tech board last year. In late April, China announced it would bring the listing process used by Shanghai’s STAR Market bourse to Shenzhen’s ChiNext startup board, in the country’s step to further mobilize private capital to assist companies hit by the outbreak and accelerating financial market reforms amid increasing scrutiny of Chinese firms in overseas stock markets.
In the first quarter, the Shanghai Stock Exchange and Shenzhen Stock Exchange were the most popular destinations for Chinese tech companies, with 35 and 18 firms going public on the two bourses, respectively, according to Itjuzi. Through the quarter, only four Chinese tech companies listed on Nasdaq, and one on the New York Stock Exchange. By comparison, 24 out of 149 newly listed Chinese tech companies chose Nasdaq last year, according to another Itjuzi report.
In the worst-case scenario, US markets will be shut down to many small Chinese companies. Q1 data shows startups are already moving back from New York to Shanghai and Shenzhen, meaning money flow to China’s tech sector will become less international. Chinese startups may lose appeal to investors looking to exit with “hard currency” in order to bypass China’s strict foreign exchange controls.
Big deals
- Feb 26: Pony.ai, a Guangzhou-based autonomous vehicle startup, raised $400 million from Japanese auto giant Toyota Motor Corporation.
- Mar 5: Beijing-based online housing platform Beike announced it has secured $2.4 billion in a Series D Plus from a consortium led by SoftBank’s Vision Fund and participated in by Tencent, Hillhouse Capital, and Sequoia Capital.
- Mar 31: Online education unicorn Yuanfudao raised $1 billion in a Series G from investors that included Hillhouse Capital, Tencent, and IDG Capital. The deal valued the company at $7.8 billion.
- May 29: Didi Chuxing’s autonomous driving subsidiary raised over $500 million in a fundraising round led by SoftBank’s Vision Fund 2.
Investor talk

Tony Verb, co-founder and managing partner at Greaterbay Ventures & Advisors
Tony Verb is a serial entrepreneur, urban innovator, venture capitalist, and film producer from Hungary, based in Hong Kong. Greaterbay Ventures & Advisors is an integrated investment and consulting firm specializing in modern urban development and smart cities.
What is the impact of the Luckin scandal on China’s venture capital market?
The Luckin coffee thing is a big deal. It’s a pretty big one in terms of the numbers and the distortions, and Luckin coffee was such a celebrated, high-optics example of the fast growth China story. It’s a major shame for the Chinese startup ecosystem that this happened, because people in the West are always questioning how much they can trust and rely on numbers in China.
I don’t think, ultimately, things will change too much. People will be investing in Chinese companies and Chinese IPOs. I think it’s more of a reputational thing, and it’s more likely to hurt the China brands. It is not the case that Chinese companies cannot raise funds anymore. But definitely, investors will be much more cautious and do stricter due diligence, which I think ultimately will be a good thing.
What does stricter due diligence mean for Chinese startups?
Investors can only do as much due diligence as the information they have access to. Ultimately, it might hurt the valuations of startups. Because when investors may take the risk of fraud into consideration, they’ll calculate that risk and it potentially hurts the premiums. From a macro perspective, it won’t change too much. It will just make investors more cautious and keep certain investors away from riskier-looking opportunities.
Chinese companies have been recently facing increasing scrutiny in the US capital markets. Recently the US Senate passed a bill that could delist some Chinese companies from US stock markets. How will this backlash affect China’s private equity market?
I think this means the exit strategy will be different for Chinese companies. I’m based in Hong Kong; it’s definitely not a bad piece of news for the Hong Kong Exchange. And we’ve been seeing the dual-listing trend going on in Hong Kong. Alibaba has listed its shares in Hong Kong, and JD.com is about to list. In the past years, Chinese companies have already been advised not to list in the US because of the risk they are facing right now.
Will Hong Kong be the next destination for Chinese tech startups? What’s Hong Kong’s appeal compared with China’s STAR Market and newly reformed ChiNext startup board?
The appeal of Hong Kong has not changed—it’s an international market for companies and entrepreneurs exiting in hard currency, which is very different from RMB. As long as China still has capital controls, Hong Kong will enjoy benefits over Shenzhen and Shanghai. Especially for Chinese companies that want to be positioned as more international, Hong Kong will always have more PR value and practical value over other exchanges.
Are Chinese companies’ dual-listings in Hong Kong a trend? Why is this happening?
I think this will be absolutely a trend, especially if what President Trump said becomes true. Some of the dual listings happened because companies want to mitigate the potential risk of such steps. Also, since dual-class shares have been allowed on the Hong Kong stock exchange, frankly, there isn’t much reason for not to list in Hong Kong. And it is closer to home.
As I said, as long as there is access to the international financial markets and foreign exchange in Hong Kong, this trend is going to increase. And as long as the risk in the US will be present, this trend will continue.