Global venture capital (VC) seems to be hedging its bets on Chinese tech startups as a sweeping regulatory crackdown continues. On Aug. 10, Alibaba-backer SoftBank said it would pause investing in China until “the situation is clearer.” SoftBank funds are also major investors in Beike, Bytedance, Didi Chuxing, and Zuoyebang, among other Chinese startups.

But the latest data shows 2021 so far hasn’t been a bad year for VC investment in China. Are US dollar funds really pivoting away from the massive market?


Insights is a series of explainers on developing stories in China tech, available to TechNode subscribers.

Bottom line: There are signs that foreign VCs are adjusting their investments in China because of recent regulatory changes. But venture capitalists we talked to on the ground said they are optimistic, arguing that stricter regulations can be an “opportunity,” even as they expressed worry. 

Signs of a retreat: Multiple reports have suggested that international funds are planning to reduce their investment in China as a result of the crackdown.

  • The value of venture deals in India surged to $7.9 billion (RMB 51.3 billion) in July, surpassing China on a monthly basis for the first time since 2013, according to research firm Preqin. VC investment in China the same month was $4.8 billion, it said.
  • On Aug. 10, SoftBank Group Chairman Masayoshi Son said the funds would take a “wait-and-see stance” until the situation in China settled in “a year or two,” the Financial Times reported.
  • In a plot twist, SoftBank China Capital, the Japanese conglomerate’s VC branch in China, said in a statement on its website on Aug. 12 that it is still “committed to investing in excellent high-tech startups in China.” But the statement was deleted soon after, Chinese media reported.
  • SoftBank has continued to invest in China in 2021. On Aug. 18, autonomous vehicle startup Neolix said it had received “hundreds of millions of RMB” in a financing round led by SoftBank Ventures Asia.

Numbers show little change: VC investment this year in Greater China, which may include Taiwan and Hong Kong, totaled around $67 billion, the “highest level seen in recent years,” according to Preqin.

  • In the second quarter, Chinese startups raised $30 billion, up 39% year on year from the same quarter in 2020.

Fewer unicorns: However, the creation of unicorns—startups with more than $1 billion in valuation—seems to be slowing down in China. 

  • Only three Chinese companies have attained unicorn status in 2021 as of June, while 132 American companies reached billion-dollar valuations during the same period, according to Rui Ma, a China tech investor and analyst, who cited data from CB Insights. 
  • By contrast, some 42 unicorns were declared in China in 2018, compared to 51 in the US.
  • Unicorns are defined by their valuations given by investors. The slowdown in China likely reflects cautious investing more than a lack of good companies.

Reasons to worry: There are reasons for investors to worry. Chinese tech companies enjoyed a laissez-faire environment before regulators moved to rein in the sector last year. The firms were rarely restrained by privacy laws or antitrust laws despite repeated public outrage. Now, the situation is changing rapidly. 

No exit? One of the regulatory areas that could hit overseas VC funds the hardest is China’s July regulation on data security and overseas IPOs: It requires companies that control data of more than 1 million users to seek permission from regulators before filing for IPOs overseas.

  • This will seriously affect US listings of Chinese firms, potentially making US dollar funds’ exits more difficult. 
  • But the regulation won’t affect exits in Hong Kong, which can be an attractive destination for companies looking for a mid-point between China and the US.
  • “We haven’t seen a major shift in investing by US dollar funds focused on China, because the exit path via Hong Kong remains clear,” William Bao Bean, a Shanghai-based general partner at the VC firm SOSV, told TechNode.
  • Another reason for investors to be concerned is the unpredictability of China’s tech policy. The most chilling example is the nation’s sweeping regulations, issued in July, affecting its private education sector, making many edtech firms’ businesses illegal overnight.

US flows falling: This is not the first time we asked how politics affect VC investment. In August 2020, we asked venture capitalists and analysts whether the US-China tech war had affected dollars floating into Chinese tech startups. The answer we got was “no,” because money was “not political.”

  • Money may not be political, but money is rational. By the end of 2020, full-year data showed a significant drop in US VC investment in China, according to the US-China Investment Project, a research initiative led by Rhodium Group and the National Committee on US-China Relations.
  • The total value of US dollar-denominated VC investments in China in 2020 halved from the previous year, to $2.5 billion. That was a fraction of the nearly $20 billion recorded in 2018, said the project in a May report.

What VCs say: Venture capitalists already invested in China seem to be optimistic.

  • Bean of SOSV said the regulatory shifts in China are an “opportunity.”
  • “I’ve covered the China tech market since 2003 and the only thing that one can count on is regulatory changes in China. Institutional investors on the ground understand that these shifts in enforcement represent an opportunity,” he said.
  • “I feel confident in the future prospects of China tech startups and we are helping them go global and taking advantage of the increased competition that will result from the market restructuring,” said Bean.
  • Ron Cao, founder and partner of Chinese VC firm Sky9 Capital, told TechNode that he is “confident” about investing in Chinese tech startups. There are still huge markets to be created by the digitalization of many Chinese industries, including consumer, enterprise service, and software as a service (SaaS), he said.
  • “The government regulation is certainly an important changing factor, but it is not a decisive factor,” said Cao.

Writing about semiconductors and telecommunications.