China’s venture capital sector is not in the slipstream of the US any longer because new figures show that Chinese start-ups are attracting more funds than US peers. The change underscores how the economic centre of gravity is moving to the East. The figures may also be a warning that US entrepreneurial dynamism – a motor for future wealth – cannot be taken for granted.
In the first six months of this year, $56 billion was invested in China-based early-stage firms, leaving the US in second place, at $42 billion. The data comes from Preqin, the research firm tracking venture capital, private equity and hedge funds, and European business school INSEAD.
The US is still home to the greatest number of venture capital unicorns – defined as privately held, venture capital-backed companies with valuations of $1 billion or more. The US is home to 162 such unicorns out of 321 that exist globally. But five of the 10 largest such entities are in China, including Ant Financial Services Group, valued at about $150 billion. China-based firms also account for three of the largest initial public offerings of venture capital unicorns, including the largest of all, Alibaba Group. That firm had a value of $231 billion when it floated on the New York Stock Exchange in 2014.
Perhaps fittingly, the authors of the report call the latest developments The Year Of The Red Unicorns.
“China’s emergence as a hub of innovation and entrepreneurship has been the major venture capital narrative of the past five years. Conditions in the country are well-suited to promote large technology firms – China boasts more mobile phone users than any other country, and technology like e-commerce and mobile payments are deeply embedded in the lives of many people,” Christopher Elvin, head of private equity at Preqin, said.
Growth pace has been rapid: In 2010 China-based early-stage companies secured just $4.6 billion in venture capital funding – in 2017 they secured $64 billion. Of the 321 venture capital-backed unicorns currently active worldwide, 98 are based in China while 162 are based in the US.
Coupled with recent data from UBS and PricewaterhouseCoopers that China is the strongest driver globally for new billionaires, such data bolsters the idea that the country is the best place for wealth managers to find new clients.
As of July, the largest unicorns globally are: Ant Financial; Uber Technologies; Didi Chuxing; Airbnb; Tongcheng Network Technology Co; WeWork Companies; Palentir Technologies; Toutiao; Shanghai Lujiazui International Financial Asset Exchange, and Pinterest.
The Preqin/INSEAD report’s authors throw in a few words of caution, however: “For example, China has difficulty conquering the global labor market compared to the US. Whereas Silicon Valley attracts top talent from around the world, China is not quite on the list of preferred start-up locations. Stumbling blocks include the language barrier and cultural differences. Additionally, despite new policies having been implemented to protect patents and endorse intellectual property rights, China is still criticized for – and some may argue being held back by – a lack of strong intellectual property and trademark laws.”
The report also noted that a high number of VC investors in Chinese firms operate in the country. Of the 465 investors globally that invested in the 98 Chinese unicorns that form Preqin’s dataset, 66 per cent have a local presence in mainland China and a further 9 per cent in Hong Kong. Only 13 per cent of investors are investing directly from the US, and barely any are located in Europe.
The report also names the top-10 investors in China when ranked by the number of unicorn holdings: Sequoia Capital ; Morningside Venture Capital ; Matrix Partners ; ZhenFund ; IDG Capital ; Qiming venture Partners ; CDH Investments ; Shunwei Capital Partners ; Lightspeed Venture Partners , and GGV Capital .