China has become a huge magnet for foreign capital. In 2020, despite the COVID-19 pandemic, China passed the United States as the world’s largest recipient of foreign direct investment, while its exchanges hosted half of the world’s 10 largest IPOs and four of the top five. Meanwhile, US pension funds continue to pour money into big Chinese private equity deals—$13 billion between 2010 and 2019—despite geopolitical tensions and disappointment over the sudden halt of the IPO of fintech juggernaut Ant Group.

Investor interest in China is understandable: Last year, China was the only major economy in the world to see growth amid COVID-19. In particular, its business-to-consumer sector has made enormous strides. The country’s massive population and growing affluence make it almost irresistible from an investment standpoint.


Min Zhou is cofounder and CEO of CM Venture Capital in Shanghai.

But for all the inflow of capital, very little of it has gone into Chinese science- and engineering-based startups, especially those working in advanced materials and manufacturing, industrial digitization, AI and IoT innovations, and climate tech. Such companies, often referred to collectively as those in the “deep tech” space (or, more commonly in China, “hard technology”), are where some of the most intriguing developments are underway.

While global private investment in Chinese deep-tech companies totaled $14.6 billion from 2015-2018, according to BCG and Hello Tomorrow, it represented less than 2% of the total private equity funds raised for the China market in that period, based on data from CVInfo.

I see the same lack of interest as a venture capital investor. It’s surprising. The hard-tech space is on a roll: Hard-tech investments in China have had a compound annual growth rate of more than 20% in recent years, with companies benefiting from government policy, an educated workforce, and sheer market size. And the outlook is bright. China’s spending on research and development jumped more than 10% last year, to a record $378 billion. Last month the government announced, as a key new target in the five-year plan, to increase by 7% or more a year its R&D expenditures for 5G, quantum computing, and other initiatives.

There are other reasons the hard-tech space should be attractive to foreign investors. Previously, when foreign interests expanded to China, they brought their own goods and methods. Today’s Chinese market is more dynamic and competent, bringing homegrown innovation to both the domestic market and overseas partners. Tech startups in this space have both the talent and government support to make innovative leaps more quickly than other countries. The size of the Chinese market alone suggests that, if these startups can scale, they will produce returns consistent with those sought by venture capitalists.

That China has both the means and determination to innovate and compete globally in technology and other sectors is increasingly clear—not that it comes without complications. Yes, geopolitical tensions complicate the picture, but there is still opportunity for savvy investors.

Consider the climate space: A recent Goldman Sachs report regarding China’s goal of becoming carbon neutral by 2060 projects $16 trillion in Chinese investment in that sector, creating 40 million new jobs. Plans for IT and cloud infrastructure are similarly ambitious. The technology for much of that is being developed in China and represents a huge opportunity for Chinese industrial startups and foreign investors who choose to back them. Advances in medical devices and solutions are of interest to many investors as well.

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China’s entrepreneurial climate is strong. The profile of CEOs for industrial startups is increasingly one of experience and sophistication. An earlier generation of young B2C entrepreneurs, such as Jack Ma, who started companies based on little more than a vision. Many of today’s entrepreneurs in hard tech are seasoned business leaders with technical expertise and, in some cases, experience working for multinational corporations. Some have even led public companies. These executives and their companies are geared to a venture-capital model and built for public listing or an M&A exit. In fact, a 2019 survey by Silicon Valley Bank found that more than half of Chinese startups expected their next source of funding to come from venture capital.

Also, the Chinese workforce is (as we have seen earlier in countries such as the United States) increasingly drawn to the startup world, where there is less bureaucracy and things move faster. China has made a huge bet on education. More than 10% of Chinese citizens are now considered scientifically literate by internationally accepted metrics, according to a survey conducted by the China Association for Science and Technology. All of these factors point to an era of rapid innovation and industrialization.

It’s difficult to predict what’s next concerning international trade relations, yet it’s worth noting that tensions tend to reinforce China’s commitment to developing its own hard-tech solutions. The “In China, for China” mindset, fueled by policy and enabled by educational strides, is producing hard-tech innovation that is increasingly competitive globally. China offers an entrepreneurial opportunity that foreign venture-capital investors would do well to explore.

Min Zhou

Min Zhou is cofounder and CEO of CM Venture Capital, a Shanghai-based firm that invests in hard-tech startups and works with corporate investors looking to support tech startups in China.