Could China become the next big market for VCs?
UAE's visit to China is fostering stronger economic ties for mutual economic growth. We already know that the UAE is attracting more VCs and international investors to tap into the region's market potential with a slew of new regulations. In light of this move to strengthen the SME and startup ecosystem, we look at the potential of China to attract venture capital from the foreign market.
The rise of China and its startups have not gone unnoticed by VCs. Chinese tech companies have already been giving serious competition to the likes of Apple. Now the country’s startups are steadily gaining ground to give their American counterparts a serious run for the money.
The US startup and VC market is becoming increasingly saturated. With more unicorns devaluing post IPOs, increasing competition from multiple VCs and startups being founded ever so often, the market is seeing an interesting trend.
Investment returns are becoming riskier while startups are struggling with competition in a market where funding rounds are larger with a bigger pool of investors.
VCs have begun looking outside the U.S. to get a higher return on their investments. Europe as well as developing countries where startups have shown traction, are the next big thing for VCs—especially China.
The Asian economic giant has been easing rules and regulations, making it easier and quicker for foreign investors to access the market. This has seen a steady increase in VC investments in China. In 2017, it reached $62 billion; while 2018 saw a record $70.5 billion.
While the VCs in the US steadily increased the deployment of resources over the years, 2018 surprisingly saw a 91.3 per cent bump in fundings over 2017, to $130.9 billion.
If the growth rate from 2017 had continued, China could have overtaken the US in fundings in 2018. However, this unexpected 91.3% increase has again proved the strength of the US market.
Having said that, it is difficult to say whether 2019 will see an increase in VC investments over $130.9 billion. In the likely case that it doesn’t, we could see VC investments in China again come at par with the US.
Six years ago in 2013, President of China, Xi Jinping, said, “Our technology still generally lags that of developed countries, and we must adopt an asymmetrical strategy of catching up and overtaking.”
This asymmetrical strategy is encouraging Chinese tech firms to expand globally and raise foreign capital via fundraisers and IPOs. This also serves to get them international recognition. However, two trends have emerged due to this:
A deep and wide range of privately held companies valued more than USD 10 billion
Lack of visibility into the scale and maturity of the venture ecosystem.
According to Crunchbase insights, April 2018 saw 232 privately held companies have valuations greater than $1 billion. 63 of these were Chinese. While China published its report saying there were 164 Chinese Unicorns, 10 of which were technology companies with valuations over $10 billion.
The reason behind this is China’s ability to scale at speed. Didi Chuxing, for example, is already making headlines with investment from SoftBank, and if and when it expands to other markets could give Uber some serious competition.
For Venture Capitalists from the US though, China is a lucrative, albeit not as transparent opportunity to invest their money. The complications of Chinese exit processes and the possibility of artificially high valuations in a market with opaque financial performance could pose a serious risk.
Before entering the market or investing in a firm, VCs must do thorough research to understand the risks and opportunities better. We expect that as the market changes, the entrance of US VCs in China could lead the change for more transparent financial practices.