Venture Capital in China (105.0 B$)
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This week, I’m pumped to chat with you about VC and the VC scene in China - a land of endless possibilities where I spent a few months in 2024.
Before diving in, let’s set the stage. When I say “China” in this piece, I’m talking about mainland China, excluding Hong Kong and Macao, which are their own unique beasts. And by VC, I’m talking about investing in small companies with massive growth potential (think Alibaba, Meituan, ByteDance...).
Venture Capital around the world is pretty standardized, with management companies and operating companies. The former are regulated, while the latter focus on providing the management company with the resources to run its funds. In other words, “management company = holding the funds” and “operating company = deal flow analysis/management…”
But here’s the thing: Mainland China, with its political structure, economic culture, and investment habits, plays by its own rules in this otherwise standardized VC world.
Political Verticality
Political verticality is probably the first thing that pops into your head when I mention China. But honestly, when you’re in Shanghai or Shenzhen, you don’t really feel it - except in early-stage projects...
As I mentioned in a previous article (right here), China’s got its pros and cons. When we talk about increased verticality, it also means enhanced communication. The Chinese government regularly publishes its “red notice,” which highlights the key issues society needs to address in the coming months and years.
This means early-stage projects aiming to make a massive impact are the ones featured in this “red notice.”
Economic Culture
Naturally, this “red notice” has a huge impact on economic culture because, let’s face it, all these projects addressing societal issues need money. So, who’s the country’s top VC? You guessed it... the government.
This government is super vertical - Beijing, the regions, the sub-regions… To roll out this notice and its allocated budget, each region sets up investment funds, aka the famous Chinese VCs.
Their structure is totally different from your typical European or American funds. Here, there’s no management company... just a management team with two General Managers - usually a government official and a director - followed by a team, just like a regular fund operating company.
So, that begs the question: where are the LPs (Limited Partners)?
Investment Habits of the Population
In a “classic” fund, you usually have two types of LPs (investors): institutions and individuals.
And guess what? These LPs are pretty much absent in Chinese VC funds for two reasons: recent regulations and the population’s risk aversion.
Since the COVID crisis, the Chinese government has been keen on improving its balance of payments, meaning money should flow into the country and definitely not out. But when you invest in a fund, it’s to make a profit and enjoy it - which is tricky nowadays if you want to be outside China.
Plus, the Chinese government has been tightening the screws to prevent wealth from leaking out by changing governance structures and requiring that money stays in China.
These measures even forced Sequoia to kill its Chinese unit, transforming it into “HongShan”—a company now completely detached from Sequoia Worldwide and its various entities.
As for individuals, they’ve been brought up on the real estate dream (which has recently been shattered) - a dream where anyone could become a billionaire by becoming a real estate mogul. This mindset has wrecked the population’s ability to take risks with their savings.
Moreover, successful Chinese individuals do everything they can to secure a significant portion of their wealth in Hong Kong, allowing them to invest outside China and remain as independent as possible.
All of this makes it extremely rare to find Chinese Business Angels or LPs.
That said, some individuals and institutions do invest in Chinese funds, but it’s still pretty uncommon. When an individual wants to get involved, they just need to connect with their region’s General Managers or go through a fund-of-funds that invests across multiple regions.
To give you some perspective, China remained the second most active region in capital raised in 2024 ($105,000.0 million), trailing the US ($264,500.0 million) but ahead of Israel ($16,000.0 million)—with an average early-stage volume of $34,500 million in 2024.
For more stats, check out Statista → right here
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