Rampant development to high-quality development

We believe VC in China is experiencing a transition from rampant development to high quality development. By October 2019, there are over 400 unicorns around the globe among which China has 180 and the US has 179. This demonstrates the dynamism of entrepreneurial and innovation in Chinese market. Since 2019, we can witness some changes in the Chinese VC market in the wake of the Guiding Opinions on Regulating the Asset Management Business of Financial Institutes (the New Rules) and deleveraging regulations. Factoring in also the turmoil of the market, some of the impacts are:

  1. It would be harder for GPs to raise RMB funds
  2. Valuation is going back to a normal level
  3. Post-investment value-add is getting more attention from managers

However, the adverse impact for USD funds is less according to our analysis for the reasons below:

  1. Valuations are down which is good for USD funds
  2. GPs are more discreet when it comes to invest
  3. Exit opportunities for USD funds are not much affected

Meanwhile, there are lots of VC practitioners in Chinese markets. According to Asset Management Association of China, there are 14,000 registered VCs in China, which is much larger than the US. As a result, very high abilities are required for LPs to choose qualified VCs in the Chinese market.

Focused sector for early-stage funds

Capital is concentrated in popular sectors like IT and Internet. Nearly 50% of capital invested in IT and Internet. Biotech and healthcare also account for a large part of 10% which ties with Automotive and Machinery Manufacturing. The following focused sectors are Semiconductor & Electronic Equipment (8%), telecom (5%), Entertainment & Media (4%), Education (3%), retail (3%) and the rest (8%).

Exit Methods

Over a half of exits are done by Equity transfer with IPO (19%) taking the second place. The reason of equity transfer being so popular in China is because of the lack of an effective exit mechanism in the Chinese market. NEEQ in China is developing and receiving lots of government support these years. However, other exit channels need to be expanded as well.

Top players of early stage VC funds in China

According to Zero2IPO research, top 10 early-stage investment firms of the year 2018 are:

  1. Zhen Fund
  2. Sinovation Ventures
  3. K2VC
  4. Bluerun Ventures
  5. Legend Star
  6. Panda Capital
  7. Plum Ventures
  8. Future Capital
  9. Ameba Capital
  10. UnifyVC

The Geographic distribution:

Among the top 10 funds, 7 are based out of Beijing, 3 are based out of Shanghai. Within the 85 funds we’ve researched, 42 are based out of Beijing, 33 are based out of Shanghai, 10 are based out of Shenzhen. Beijing and Shanghai are the VC hubs in China with Beijing being the frontrunner.

Among top early-stage funds, which show polarization regarding fund size, 67% have a fund size below $200m while 33% above $500m. Majority of the funds focus on TMT and some also have a focus on healthcare with 4 funds being generalists.

References:

  1. https://report.pedata.cn/1572868280700090.html
  2. List of unicorn startup companies https://en.wikipedia.org/wiki/List_of_unicorn_startup_companies
  3. China Venture Capital/Private Equity Annual Ranking 2018 by Zero2IPO
  4. https://xueqiu.com/8302426719/134954218
  5. http://51jinke.com/news/5e1c1e03e7863e00019a1074