Chinese Venture Capital: Is Taking Funding a Bad Idea?

China's Rising Tech Influence and Foreign Investment

The technological landscape is witnessing a significant shift, with China rapidly emerging as a global superpower in the tech sector. Data from the Straits Times indicates that China uniquely fosters rapid startup growth. Specifically, it takes less than six years for a company to achieve unicorn status within China.

This contrasts with the United States, where the same milestone requires seven years, the United Kingdom at eight years, and Germany taking eleven years to achieve.

Despite existing geopolitical complexities and recent modifications to the Committee on Foreign Investment in the United States (CFIUS) regulations, the influence of China remains undeniable.

Addressing Concerns About Chinese Investment

Upon joining Runa Capital nearly a year ago, my primary focus became assisting our portfolio companies with market entry into China, identifying suitable partners, and securing funding from Chinese investment sources.

Frequently, during discussions with our startups, Runa colleagues, and other global venture capitalists, the question arose: Is seeking investment from a Chinese VC a prudent strategy? Is co-investment with Chinese investors acceptable?

I observed a notable scarcity of research addressing these concerns, largely due to a deficiency of readily available information in English regarding Chinese investment practices.

A Data-Driven Study of Chinese Venture Capital

Leveraging my proficiency in Mandarin, I undertook a study to address this informational gap. This research was based on data from ITjuzi, a comprehensive Chinese VC database analogous to Crunchbase.

The study was facilitated by the robust data science capabilities developed by Danil Okhlopkov.

Key Questions Investigated

The following questions will be explored using statistical analysis and a case-based methodology:

• How substantial is the volume of Chinese funds invested internationally?
• What are the prevailing trends in these investments?
• What benefits can Chinese investors offer to Western startups?
• Which Chinese investors are the most actively involved in overseas ventures?
• In what sectors do Chinese funds provide the greatest value?
• What specific advantages do Chinese investors bring to the table?
• Under what circumstances is it most advantageous to seek investment from a Chinese investor?

Understanding these dynamics is crucial for navigating the evolving global investment landscape.

Strategic partnerships with Chinese investors can unlock significant opportunities for growth and expansion.

Interest from Chinese Investors in Western Startups

Analysis of data sourced from ITjuzi indicates that Chinese investment funds allocated approximately $250 billion in 2020. This represents a threefold increase compared to the figures reported by Crunchbase.

This level of investment positions Chinese venture capital contributions at 30% below those originating from U.S. funds, yet significantly surpasses investments from the U.K. by a factor of three, and those from Germany by 12.5 times.

Shifting Investment Focus

However, a relatively small percentage of these investments – 15% in 2020 and 17% in the first half of 2021 – were directed towards companies located outside of China.

This represents a decrease when compared to investment patterns observed in 2019. The shift is largely attributed to China’s comparatively rapid economic recovery during the COVID-19 pandemic.

Consequently, many Chinese investors prioritized reallocating capital within the domestic market.

Potential for Rebound and European Focus

Nevertheless, the potential exists for a resurgence in overseas investments as international borders reopen and the global economy demonstrates signs of recovery.

Currently, European startups are receiving increased attention from Chinese investors.

This trend is influenced by ongoing geopolitical tensions between the U.S. and China, as well as the increasing maturity of the European venture capital landscape.

Key Takeaways

• Chinese investment in startups reached approximately $250 billion in 2020.
• A smaller proportion of this investment was allocated to companies outside of China in recent years.
• European startups are becoming an increasingly attractive target for Chinese investors.

Identifying Leading Chinese Cross-Border Investors

An analysis was conducted to determine which Chinese investment funds demonstrate the highest levels of activity in the United States and European Union markets. The focus centered on five key sectors where Runa Capital possesses significant expertise: B2B SaaS, deep tech, fintech, digital health, and edtech.

The funds exhibiting the most frequent investment activity are visually represented in Fig. 4.

Notably, approximately 50% of these highly active Chinese investors are corporate venture capital firms. This contrasts sharply with the investment landscapes observed in other nations.

However, it’s important to recognize that not all Chinese corporate funds prioritize strategic investments. Tencent and CreditEase, for instance, openly state their approach leans towards financial investment, typically acquiring minority ownership positions of up to 10%.

International Experience and Backgrounds

A common characteristic among these venture capital firms is the international experience of their leadership. Jixun Foo, the founder of GGV Capital, received his education in Singapore and gained professional experience at Hewlett Packard Enterprise.

Similarly, Duane Kuang, who founded Qiming Ventures, previously held the position of director at Intel Capital China. Martin Lau of Tencent also has a background with Goldman Sachs.

These funds generally maintain globally distributed teams, with offices in prominent technology hubs such as Palo Alto, London, Paris, and other international locations.

Assets Under Management

Generally, active Chinese investors engaging in cross-border investments manage substantial assets, frequently exceeding $1 billion. Zhenfund represents an exception, with $600 million in assets under management, reflecting its focus as an angel fund.

Smaller Chinese VCs often find sufficient investment opportunities within the domestic market due to its considerable size. Conversely, larger entities like Tencent and Qiming Ventures actively seek global diversification of their investment portfolios.

The Potential Value of Chinese Investment in Western Startups

Determining value within the startup ecosystem can be approached from various perspectives. However, increases in company valuation and successful liquidity events – such as Initial Public Offerings (IPOs) or acquisitions – are generally considered key indicators of success.

An analysis was conducted to assess the performance of startups, referred to as “success cases,” following investment from Chinese funds. This involved tracking valuation growth, acquisitions, and IPO announcements. The findings are visually represented in Fig. 5.

Across five distinct sectors, the top 10 most active Chinese overseas investors demonstrated a success rate averaging 53%. The complete dataset supporting this analysis is available here. For a comparative benchmark, 750 startups located outside of the U.S. were examined, focusing on those that secured funding from five leading VC firms: Sequoia Capital, Bessemer Ventures, Insight Partners, Index Ventures, and Accel.

Utilizing the same methodology, the success rate for these U.S.-based funds was found to be approximately 55%. This suggests that the proportion of successful international investments made by Chinese funds is comparable to that of their U.S. counterparts.

It is important to note that U.S. funds generally favor investments at earlier stages of development than Chinese funds, a distinction further illustrated in Fig. 6.

Identifying Industries Attractive to Chinese Investment

For global startups seeking Chinese venture capital, understanding which sectors demonstrate the strongest potential for synergy is crucial.

Financial Technology (Fintech)

China’s fintech landscape is notably robust, with major entities like Tencent, Ant Group, and CreditEase pioneering advanced financial solutions domestically. These companies are now extending their expertise to portfolio investments internationally. Specialized venture capital firms, such as Horizons Ventures, further contribute by focusing on specific fintech sub-sectors like insurtech and challenger banks.

Notable Investments:

• N26, a German neobank, secured funding from Horizons Ventures in 2016 at a $195 million valuation, followed by Tencent in 2018 at $1 billion, and currently holds a $3.5 billion valuation.
• Hippo, a U.S.-based insurtech company, completed a Series A round with Horizons Ventures and GGV Capital in 2016, valued at $70 million, and is now valued at $3.2 billion following a SPAC merger.
• Wefox, a German insurtech startup, received investment from Horizons Ventures in 2016 at a $135 million valuation, and from CreditEase in 2019 at $600 million, currently valued at $3 billion.

Advanced Technologies (Deep Tech)

The Chinese government prioritizes the development of cutting-edge technologies, actively encouraging investment in areas like artificial intelligence, machine learning, the Internet of Things, virtual/augmented reality, and cybersecurity. Consequently, both strategic investors (including Tencent and Baidu) and financial funds (such as GGV and Horizons) have cultivated significant expertise in deep tech, which they apply to investments made outside of China.

Successful Ventures:

• tray.io, a U.S. cloud integration platform, secured a Series A round from GGV Capital in 2018 at a $70 million valuation, and is currently valued at $600 million.
• Dynamic Yield, a U.S. customer interaction platform, received funding from Baidu in 2016 at a $110 million valuation and was later acquired by McDonald’s for over $300 million in 2019.
• Blue Vision Labs, a U.K. machine perception startup, closed an angel round from Horizons Ventures in 2016 at a $12 million valuation and was acquired by Lyft two years later.

Digital Healthcare

Alongside deep tech, medical technology is a key focus for Chinese leadership. Several Chinese funds, including Qiming Ventures, Ally Bridge Group, Zhenfund, and Baidu, actively invest in the U.S. and European medtech sectors, leveraging their specialized knowledge.

Illustrative Cases:

• LetsGetChecked, a U.S. health testing application, completed a Series A round with Qiming Ventures in 2018 at a $60 million valuation, and now exceeds a $1 billion valuation.
• Subtle Medical, a U.S. AI-driven medical imaging startup, secured an angel round from Baidu in 2017 at a $5 million valuation, followed by Zhenfund in 2018 at $25 million, and is now valued at $60 million.
• Avail Medsystems, a U.S. telemedicine application, raised capital from Baidu in 2019 at a $60 million valuation, currently valued at $500 million.

Business-to-Business Software as a Service (B2B SaaS)

While SaaS represents a substantial portion of the venture capital market in Western nations, its adoption in China is still developing. This results in a limited number of Chinese venture capital firms – including GGV, Tencent, and Horizons – possessing dedicated SaaS expertise, and those that do typically maintain a global presence with international teams.

Key Investments:

• Zendesk, a U.S. CRM platform, received funding from GGV Capital in 2012 at a $300 million valuation and went public in 2014 with a valuation exceeding $910 million.
• Slack, a U.S. enterprise software platform, secured capital from Horizons Ventures in 2015 valued at $780 million, and from GGV Capital in 2016 at $3.7 billion, ultimately going public in 2019 with a $23 billion valuation.
• BlueKai, a U.S. data platform for marketing, closed a Series C round from GGV Capital in 2010 at a $105 million valuation and was acquired by Oracle for over $400 million in 2014.

Educational Technology (Edtech)

Chinese companies face challenges when investing in the Western education sector, stemming from differing educational philosophies between China and Western countries. However, GGV has achieved some successes in this area.

Successful Examples:

• Brightwheel, a U.S. all-in-one preschool platform, raised money from GGV Capital in 2017 at a $50 million valuation, and is now valued at $600 million.
• Labster, a Danish virtual laboratory solution, closed a round from GGV Capital at a valuation of $45 million, with its current valuation reaching $300 million.

It’s important to note that the founders of all the aforementioned startups are not of Chinese origin, demonstrating that Chinese funds do not exclusively invest in companies founded by Chinese entrepreneurs.

The Motivations Behind Chinese Investment in Western Startups

Through discussions with venture capitalists based in China and startups that have secured funding from Chinese sources, three primary drivers for seeking Chinese investment have become apparent.

Key Reasons for Seeking Chinese VC Funding

• Capital Availability: Chinese investors frequently offer substantial investment amounts and favorable valuations.
• Specialized Knowledge: Certain sectors, such as fintech and deep tech, benefit from the specific expertise held by Chinese investment firms.
• Market Access: The potential to enter the Chinese market is a significant draw for many Western startups.

Interestingly, these factors are not equally weighted in importance. While access to the Chinese market appears intuitive, only approximately 20% of Western startups funded by Chinese capital actually conduct business within China.

This limited market penetration is attributable to significant obstacles to entry and a highly competitive landscape. Furthermore, for startups already well-established in the U.S., geopolitical considerations often play a crucial role.

Despite these challenges, companies with a Chinese presence often seek partnerships with local strategic investors. For instance, MariaDB, a portfolio company, benefited from Alibaba’s Series C investment through inclusion in Alibaba’s marketplace for Chinese developers.

Identifying the Optimal Time to Collaborate with Chinese Investors

A key characteristic of investment strategies employed by Chinese funds is a preference for later-stage financing. Data indicates that only 47% of deals finalized in the EU and U.S. with Chinese fund participation occurred during early stages – defined as funding rounds not exceeding $20 million.

This contrasts sharply with the behavior of U.S. funds, which completed 75% of their deals at these initial stages.

Despite this trend, 47% representation in early-stage deals remains a substantial figure for Chinese funds, particularly given that the European and American markets represent relatively new territories for them.

Analysis reveals that 55% of these deals – those with funding rounds up to $20 million – ultimately proved successful, resulting in either increased company valuation or a liquidity event.

Specific Investor Focus

It's important to note that certain Chinese investors actively target early-stage opportunities.

For instance, Zhenfund operates as an angel fund, typically participating in rounds averaging around $2.5 million.

Therefore, securing funding from Chinese investors during smaller rounds (up to $20 million) is achievable.

However, it’s crucial to understand that they may exhibit greater caution with these investments unless they are specialized angel or seed-stage investors, such as Zhenfund.

Key Insights into Chinese Venture Capital

The People's Republic of China ranks as the world’s second-largest provider of venture capital. Despite existing geopolitical complexities between China and nations in the West, a significant portion – approximately 75% – of all Chinese overseas investment in 2020 was directed towards the United States and the European Union.

European markets are increasingly viewed by Chinese investment firms as a crucial new region for strategic capital deployment.

Factors Influencing Chinese Investment Decisions

Generally, Chinese funds will pursue international investments only when they have reached a substantial size, managing assets under management (AUM) exceeding $1 billion.

A robust international profile is also key; this often manifests as a founder with prior executive experience in a Western corporation, or strong ties to financial hubs like Singapore or Hong Kong, rather than direct connections to Mainland China.

Value Proposition for Foreign Startups

While Chinese investors can offer considerable benefits to startups operating outside of China, careful due diligence regarding their specific expertise is essential.

Collaborations between Chinese funds and Western companies in sectors like fintech, deep tech, and digital health demonstrate a higher probability of success compared to areas such as B2B SaaS and edtech.

Investor Types and Strategic Alignment

When seeking a higher company valuation or specialized knowledge in fintech or deep tech, prioritizing a financial investor is advisable.

Conversely, if the primary goal is market access within China, a strategic investor may be more appropriate. However, it’s important to recognize that not all corporate venture capital (VC) represents genuine strategic investment, as exemplified by firms like Tencent and CreditEase.

Investment Stage Preferences

Chinese funds typically favor investments in more mature companies, with funding rounds exceeding $50 million.

However, rounds ranging up to $20 million are also considered, particularly when originating from Chinese angel or seed-stage funds.