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The second quarter of 2023 marked the fourth consecutive quarter of declines in deal value, highlighting the prolonged nature of the downturn.
A recent report from PitchBook revealed that Venture Capital companies in China invested $26.7 billion in 3,072 transactions over this time. While these data appear great at first look, a closer examination reveals a significant shift in the dynamics of China’s VC ecosystem.
Chinese Venture Capital Experiences a Significant Decline
On an annualized basis, the data indicates a 31.4% drop in Venture Capital investment compared to 2022 levels. This decline, if sustained, would put 2023 on track to fall below the levels seen in 2016, a year that many consider a benchmark for the industry’s growth in China.
One prominent trend in the Chinese Venture Capital scene is the prevalence of smaller investments. The annualized value of mega-deals, those exceeding $100 million, was on pace to reach its lowest point since 2015, according to PitchBook.
The second quarter of 2023 marked the fourth consecutive quarter of declines in deal value, highlighting the prolonged nature of the downturn. This decline is not an isolated event but rather a sustained trend that has raised concerns among both domestic and international investors.
The report highlights the convergence of several factors, including slowing economic growth, escalating geopolitical tensions, and regulatory changes, which are collectively dampening the prospects of Chinese startups and their access to venture capital.
Decline in Foreign Investor Participation
PitchBook’s report reveals a significant decline in the participation of foreign investors in the Chinese startup ecosystem. In 2018, approximately 16% of deals included an investor base outside of Greater China. In contrast, in the first half of 2023, this number has dropped to a record low of 10%.
The report also highlights that only three funds denominated in US dollars closed in the first half of the year. This suggests a decreased appetite among international investors for Chinese-focused funds. The combination of regulatory hurdles and geopolitical uncertainties has made some U.S. investors cautious about committing their capital to Chinese ventures.
Despite the challenges, the report points out that the growth of Yuan-denominated funds and mid-sized funds has helped boost overall fundraising activity in Greater China. Still, while fundraising activity is on pace to exceed 2022 levels, it represents a significant slowdown compared to the record $131.4 billion raised in 2018.
Meanwhile, market sentiment for Initial Public Offerings (IPOs) in both Hong Kong and the US remains subdued. The number of exits in the first half of 2023 declined to 130 from 177 in the second half of 2022.
Similarly, the exit value fell to $77.5 billion from $100.2 billion. This indicates that startups are facing difficulties at the end of the Venture Capital investment process, as they struggle to access public markets.