Nothing Ventured, The Wire China, Mar. 5, 2023.
By Eliot Chen
A look at venture capital investment into China.
he Biden administration is currently mulling plans for a new system to monitor U.S. investment into China, as our News Analysis this week explains, amid fears that American money is fueling its rival’s technological advances.
The reality is that U.S. fundraising for China-focused investment funds is already in steep decline. In 2022, American venture capital (VC) and private equity (PE) firms did not raise any new China-focused funds at all, according to data from Preqin, a financial data provider. And it’s not just the U.S. — capital raised globally for China-focused VC and PE funds also declined precipitously in 2022.
The source of U.S. venture capital investment in Chinese startups has historically been concentrated among a small group of firms. They include companies such as Sequoia Capital, GGV Capital, SOSV and GSR Ventures.*1 But working out how much these firms invest, and whose money they are investing, can often be challenging.
(*1 Sequoia Capital is an investor in The Wire Digital Inc., The Wire’s parent company.)
This week, The Wire looks at the state of private market investment in China: who’s making investments, how those investments help Chinese and U.S. firms, and the limits to how much is publicly known about that investment activity.
Source: The Wire China
THE INVESTORS
Even if investment firms are finding it hard to raise money to invest in China, they still seem to be doing deals with money raised in the past. The table below shows the top U.S.-headquartered venture capital firms, based on the number of investments they made in China in 2022, according to data from Preqin.
In a sign of the difficulty of data collection in this area, a spokesperson for Sequoia Capital disputed the accuracy of Preqin’s estimate, saying that the Menlo Park, California-based firm made no investments in China in 2022. The spokesperson said they could not say how many investments Sequoia Capital China made in 2022, as the two firms “are separate legal entities that operate under the Sequoia brand. They each have their own investment teams who make independent investment decisions.” Sequoia Capital China did not respond to a request for comment. GGV Capital says that it made 40 dollar-based deals in China in 2022, while the remainder of the firms listed did not respond to requests for comment.
The disparity between figures collected by data providers like Preqin and what the VC firms themselves report points to one challenge in measuring American VC activity in China: for some companies, the line between their U.S. and Chinese operations isn’t always clear. GSR Ventures, for example, is an early stage investor that data providers including Preqin and Crunchbase claim is U.S.-headquartered; yet the company — which says its global offices are located in Beijing, Menlo Park and Singapore — was involved in a 2015 case before the Committee on Foreign Investment in the United States (CFIUS), which scrutinizes investments by foreign entities.
Source: The Wire China
ONE INVESTMENT FOCUS: CHINESE AI STARTUPS
When it comes to investments in China’s artificial intelligence sector, domestic firms are the dominant source of funding, according to a recent report from Georgetown University’s Center for Security and Emerging Technology (CSET), which looked at investment in Chinese AI companies between 2015 and 2021. American VC firms participated in just 17 percent of the investments into those startups.
Still, American VC investment comes with advantages that domestic funding might not. “It’s not just about the money,” says Ngor Luong, one of the report’s co-authors. “Earlier stage VC investments can provide intangible benefits beyond capital, including mentorship and coaching, name recognition, and networking opportunities.”
Source: The Wire China
Such intangible benefits could help recipient firms set themselves apart from the competition. The endorsement of a prominent U.S. firm could lead to “coattail investments” — additional funding from firms looking to copy the investment decisions of the U.S. firm. Established venture capital firms bring with them decades of expertise that could be invaluable, particularly for early-stage startups.
But the report’s authors are frank about the limits of what can be understood about U.S. investment activity based on the data that is currently publicly available.
For one, it’s hard to know exactly how much money U.S. VC firms have put into a given startup. When multiple investors contribute to a startup’s funding round, the breakdown of their individual investments is rarely, if ever, disclosed.
Details about the limited partners (LPs) whose funds are being invested by the VC firm are also confidential, a reality which makes it hard to know whether the original source of capital is American or from international sources.
Taken together, these information gaps make it hard to keep track of just how much U.S. capital is being invested in China. The report’s authors suggest that any future U.S. outbound investment screening mechanism could mandate such disclosures, particularly for sectors deemed critical to national security.