Chinese venture capital industry may face reshuffle

Substantial opportunities in the tech sector still exist along with government policy support and new STAR board

There is a substantial feeling in the Chinese venture capital sector that funds are facing a harder time to survive, however there are still some opportunities to invest, especially in the tech sector.

The past few years have seen strong growth in the Chinese venture capital market thanks to the country’s fast-growing economy and strong regulatory impetus. As of Q3 2019, out of the 10 biggest venture capital deals in Asia, seven are from China, according to a recent report by KPMG.

Assets under management (AUM) have been rising over the year, with Greater China-focused venture capital AUM hitting US$225 billion as of the end of 2018, up 52% year-on-year, according to a Vertex Ventures report.

However, whether this momentum can be maintained in the next few years is questionable as the Chinese economic outlook is quite negative. “The slowing economy in China is here to stay, even without a trade war, as urbanization slows,” says Alan Levenson, chief US economist at T. Rowe Price.

Some venture capital funds are starting to see a reshuffle in the industry as they find it more difficult to exit and recoup their venture capital investments. “About 10% of the venture capital funds will survive in the near future,” comments a Chinese fund manager, noting that this will result in a healthier market.

But opportunities still exist amid the economic downturn. “China has a large, tech-savvy domestic market, and that makes it an ideal place to experiment with innovations. At both the national and the local level, there are government policies in place to foster high-tech development, with a huge talent pool that start-ups can draw on. And China’s entrepreneurial drive is impressive,” says Tay Choon Chong, managing partner at Vertex Ventures China, highlighting the opportunities in this market for innovative start-ups, particularly in retail healthcare and transportation.

Last year, the 10 largest deals in the Chinese venture capital market were valued at a combined US$33 billion, a 50 percent increase from 2017 (US$22 billion), according to a report by Vertex Ventures. These deals were mainly in the tech sector.

The Chinese technology industry is showing a lot of potential, with sectors such as AI, advanced manufacturing, and robotics especially worth watching, according to Tay. In addition, the new Science and Technology Innovation Board (STAR) is expected to support the financing of tech start-ups in the country. Intended as the Chinese Nasdaq, STAR, which was launched in July, is aimed at helping the country's tech sector grow as well as the venture capital market.