On the back of increased private and public funding, venture capital (VC) investment in China is booming. According to figures from financial services provider KPMG, over US$31 billion was invested in Chinese startups last year (three-quarters of the U.S. total), up from $27.4 billion in 2015.
This year looks to be another record breaker. The second quarter of 2017 saw Chinese startup investment hit $10.7 billion, with Beijing-based ride-hailing behemoth Didi Chuxing raising $5.5 billion in the largest private venture funding round ever for a technology company.
In sharp contrast to a decade ago, the majority of Chinese VC capital is now raised domestically. China's economic development is creating an ever deeper pool of wealthy, investment-hungry Chinese entrepreneurs, while the country's government views public VC funds as the ideal way to stimulate homegrown innovation.
"The early days of China-based VC was dominated by U.S. funds," says Calvin Cheng, East West Bank's managing director of Tech and Growth Banking in China. "But these days, things are very different. Chinese VC investors are both cash-rich and increasingly sophisticated. They know how to recognise unique business models."
A report by Deloitte and China Venture says that China has 98 unicorns (startups valued at over $1 billion) and many of them are now backed by one of the BAT (Baidu, Alibaba and Tencent) trinity, or e-commerce site JD.com.
"Chinese VC investors are both cash-rich and increasingly sophisticated. They know how to recognise unique business models."
Across the industrial spectrum, the internet and information technology (IT) sector still dominates China-based VC investment. Within the sector, money is now pouring into big data, fintech, artificial intelligence (AI), robotics and the cloud.
"Companies in the internet and IT industries are usually light in assets, and investors anticipate quicker returns than in more traditional businesses," says William Chou, National TMT Industry Leader for Deloitte China.
Underpinned by massive government support, the booming Chinese AI sector is currently one of the most popular destinations for Chinese VC. The Chinese government has recently said it intends to transform China into the world's leading AI power by 2030, while the Chinese Academy of Sciences' Institute of Automation, a partnership of universities and businesses, has already invested RMB 1 billion (US$150 million) of VC funding in AI development.
In July, Chinese AI startup SenseTime completed a $410 million Series B round, in what the company claims is the largest private financing round ever closed by an AI startup. The company is also claiming a valuation of over RMB 10 billion (US$1.47 billion), which would elevate it into the ranks of China's unicorns.
With its vast army of smartphone users and burgeoning m-commerce sector, China is well-placed to drive AI development. The vast quantities of digital data generated by Chinese consumers give tech giants such as Alibaba, Baidu and Tencent the perfect platform to create cutting-edge AI systems in everything from facial recognition to messaging bots. According to the Economist, the number of Chinese AI-related patent submissions made between 2010 and 2014 was up 300 percent compared to the previous five-year period. East West Bank is working with Sequoia Capital and Mobvoi, a Google-backed Chinese unicorn that specializes in AI, voice recognition and natural language processing technology for the production of smart watches and speakers.
According to venture capitalist Jim Breyer, founder of California-headquartered VC outfit Breyer Capital, "China represents about half of the most interesting AI investment opportunities in the world."
"When I think of the great opportunities where we can generate tremendous value, it is in Chinese deep technology companies that are focused on the Chinese market," said Breyer at the CNBC Institutional Investor Delivering Alpha conference in New York recently.
Life sciences and biotech is another Chinese sector attracting increasing amounts of venture capital, with private equity firms and hedge funds investing heavily in startups as they look to leverage the industry's upbeat growth potential. Healthcare services, such as IT, lead life science investments in terms of dollars and deal flow, followed by therapeutics, diagnostics and medical devices.
On the back of an aging population, burgeoning personal incomes and a rapidly developing private medical industry, China's healthcare sector will become a $1 trillion-a-year business by 2020, according to a report by consulting firm McKinsey & Company.
"The inflationary price pressures of the foreign distribution channel have hurt China's ability to deliver affordable healthcare to its citizens," says Larry Gerrans, CEO of Sanovas. The California-based life science technology company is expanding into China by establishing a VC fund and innovation center at the The Suzhou Institute of Nano-tech and Nano-bionics (SINANO) to enhance its innovations and sales in China.
"China has typically had to pay three times more than in the West to acquire medical technologies and drugs for its citizens," continues Gerrans. "Beijing wants to create medical technologies in China, by China, for China. This is leading to massive investment opportunities."
A perfect example is the recent rush to deliver health advice on smartphones, which spawned more than 2,000 Chinese mobile health apps. After several funding rounds, three of these were estimated to be worth more than $1 billion by the end of last year.
According to the Chinese VC intelligence company China Money Network, healthcare-focused venture capital and private equity investment deal volume and total deal value increased by an average of 33.7 percent and 89 percent year-on-year between 2010 and 2016. Life science investment specialist ChinaBio Group claims China life science venture and private equity funds have raised $45 billion and invested $12 billion over the past 30 months. They closed $20 billion in new funds during 2016 and are estimated to hit $30 billion this year.
Kevin Chen, a partner at California-based Sequoia Capital, believes China currently has numerous cash-rich VC firms, but not enough domestic options for biotech investment. With Chinese companies now looking to acquire technologies for use in the Chinese market right across the industrial spectrum, this is driving ever higher levels of cross-border investment.
According to innovation-focused service provider Clarivate Analytics, cross-border transactions within China's life sciences and biotech sector represented 85 percent of deal flow in 2016, as Chinese companies stepped up their push for Western technology. Sequoia Capital, which invests a healthy slice of its $3 billion under management in healthcare, began founding U.S.-based biotech startups with Chinese connections last year, giving Chinese investors an additional investment outlet.
By supporting entrepreneurship, Beijing is now attempting to shift the Chinese economy away from heavy industry towards a more service sector-led model driven by consumption. Across China, local administrations now have upwards of $450 billion in venture capital to invest in startups, as the Chinese government drives measures to reform the economy, create jobs and slash spending on infrastructure.
Such enormous sums are attracting the attention of Western startups, many of whom are finding it hard to access VC at home. While American VCs are steering clear of investments in tech hardware, for example, Chinese VCs are embracing them. China also offers significant advantages in burgeoning consumer demand and mass manufacturing.
"Frankly speaking, innovation capital has been dead in the U.S. for a long time," says Sanovas's Gerrans. "Nobody wants to invest in 'development risk' anymore. They only want to invest in the immediacy of short-term returns. A lot of Western startups will find it refreshing to be able to conduct Chinese VC investment negotiations around innovation and long-term thinking."
Relationships between Chinese VC firms and tech-focused U.S. startups may be complicated by the role of the Committee on Foreign Investment in the United States (CFIUS), which has the power to veto acquisitions of U.S. companies on national security grounds. Concerned over Chinese access to cutting-edge technologies such as AI and machine learning, Washington is currently considering extending the remit of the CFIUS to include joint ventures, minority stakes and early-stage startup investment.
"This prospect means more and more Chinese VC companies are already looking to invest elsewhere," says Deloitte's Chou. "Israel is an increasingly popular destination for investment in transformative tech startups."
In September, Sisram Medical became the first Israeli high-tech startup listed on the Hong Kong stock exchange. The company raised $112 million through its IPO.
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