Venture Funding Down 42% in China in Q1 of 2024

Amid higher interest rates, lack of exit pathways, and heightening geopolitical tensions, venture funding has taken a hit globally, particularly in the Greater China region where private companies in Greater China raised $12.3 billion in Q1 of 2024, down 42% on the previous quarter and a far steeper drop than the global decline of 12%.

The number of deals has also decreased by 20% to 871 quarter-on-quarter, double the global drop of 10%. The Greater China region includes mainland China, Hong Kong – SAR, Macao –SAR, and Taiwan, according to Preqin Pro data’s latest report.

Despite the challenges, China still hosted two of the 10 largest venture capital (VC) deals globally up to June 2024, and eight of the 10 largest VC deals in APAC overall. These mega deals were predominantly in the artificial intelligence (AI), semiconductor, and clean technology verticals – all industries that China intends to grow and support, as outlined in its broader economic policies.

Total venture funding from foreign investors into Greater China deals contracted sharply, from $67.1 billion in 2021 to $19.1 billion in 2023. American firms have also been absent from the largest deals in recent years, following increased scrutiny from the US government.

The flow of venture funding from Greater China investors was steadier, dipping 17% y-o-y from 2021 to 2022, before increasing by 3% in 2023 to reach $60.3 billion, the report said.

Notably, the largest rounds of funding have come from China’s state-backed players, including banks, government agencies, and local authorities. They participated in around 60 of the 100 largest deals from 2021 to June 2024, twice as many as from 2017 to 2020. Chinese tech giants such as Meituan and Alibaba Group are also increasingly active.

AI Driving China’s Mega Deals

The total known value of AI VC deals in the Greater China region in the first six months of 2024 has crossed $5.6 billion – around half of 2023’s full-year total of $11.7 billion. The total was bumped up by two mega deals: electric vehicles (EV) firm IM Motors raised $1.1 billion in a series B round in March, and AI company Moonshot AI realized $1 billion in series B funding in February.

IM Motors, a joint venture between Alibaba Group and state-owned car manufacturer SAIC, will utilise the new funding to continue working on AI-powered car technologies. It also has plans to expand overseas, the report said.

Investors in its series B round included state-owned Bank of China Financial Assets Investment and Chinese battery firm Contemporary Amperex Technology. It recently launched a new line-up of self-driving vehicles that run on semisolid- state batteries, which it claims charge faster and are safer than lithium ion alternatives.

Moonshot AI, founded about a year ago, has attracted $1 billion in funding from Chinese tech giants Xiaohongshu, Alibaba Group, and Meituan Inc, as well as VC firm Hong Shan (Sequoia China). Valued at around $2.5 billion, it is using large language models (LLM) to develop a chatbot named Kimi, which is reportedly able to process 2 million Chinese characters in a single prompt – around eight times that of Open AI’s GPT-4-32K.

In parallel, US tech giants such as Microsoft, Google, and Amazon have been committing billions to US-based LLM start-ups (including OpenAI). In March, Amazon invested $2.75 billion into Anthropic, whose AI system Claude 3 is touted to be equipped with robust safety features.

Last month, Elon Musk’s X AI Corp raised $6 billion in its series B round, led by a group of investors including Sequoia Capital Global Equities, Andreessen Horowitz, and Lightspeed Venture Partners. X.AI Corp released a chatbot Grok to premium X (formerly Twitter) users.

Outlook for China VC

Fewer opportunities to deploy capital have meant Greater China-focused dry powder has accumulated, rising 43% to $182 billion between December 2022 and September 2023. Overall, assets under management (AUM) grew 22% to $1.2 trillion in the same period.

As China and the US compete against each other to gain dominance in AI, semiconductors, and clean technology, private Chinese companies can access steady financing from the nation’s government linked players and private corporations.