In a report by the Financial Times, it was stated that the once thriving startup industry in China, which had garnered international attention through companies like Alibaba and Tencent, is now rapidly declining. Several top executives have expressed a grim outlook for the industry.
According to data from mainland provider “IT Orange,” during the peak of venture capital investment, China saw the establishment of 51,302 startups in 2018. By 2023, this number had decreased to 1,202, with projections indicating an even lower figure for 2024.
The crisis in the startup industry is seen as reflective of China’s continuing economic slowdown, impacted by factors such as prolonged COVID lockdowns, a bursting real estate bubble, stagnant stock market, and escalating tensions between the US and China leading to significant divestment by American investors.
In interviews with 11 venture capital firm executives, both state-owned and private funds, industry experts, scholars, and entrepreneurs, a unanimous sense of pessimism was shared about the future prospects of the startup landscape in China. Many declined to reveal their identities but painted a consistent picture of bleak prospects.
The shift in policies by the top echelons of the Chinese government, aimed at curbing the tech industry and cracking down on private enterprises under the guise of monopoly practices or conflicting with Communist Party values, has significantly altered the environment for private businesses in China. Events like the cancellation of Ant Group’s US IPO and the detainment of its founder, Jack Ma, signaled a downward trajectory for China’s startup sector.
Entrepreneurs who once embraced risk-taking now find their optimism eroded by the party’s regulatory controls. One Shanghai-based serial entrepreneur expressed to the Financial Times, “There’s no good reason to start a company. Why take the risk? We’ve already experienced five years of startup failures.”
American Ambassador to Japan, Rahm Emanuel, highlighted how China’s economic structure was built on an entrepreneurial spirit that used to inspire confidence and investment from the world. However, recent actions by the Chinese leadership, including stifling the entrepreneurial drive, have eroded global confidence in China.
The growing influence of state-owned funds in the market, estimated by three risk investment executives to make up around 80% of market capital, indicates a departure from the traditional ethos of venture capitalism focusing on high-risk, high-potential enterprises.
Author of “The Red Roulette” and former real estate tycoon Shen Dong remarked that the party is “choking off the private sector.” Successful entrepreneurs find themselves under intense scrutiny, restricted in moving their funds overseas, with their transactions and public statements subject to review as their wealth is perceived as state-owned.
The shrinking pool of funds available to Chinese venture capital firms is pushing investors away from engaging with China due to perceived risks, leading to a significant reduction in investments from foreign investors, wealthy Chinese individuals, and corporate investors.
Even industries deemed critical for national security are struggling to attract investments. Data from IT Orange shows a 60% decrease in funding for biotechnology and pharmaceutical startups in 2023 compared to the peak in 2021.
Venture capital firms such as Sequoia Capital, Hillhouse Capital, 5Y Capital, DCM Ventures, Linear Capital, Shunwei Capital, Genesis Capital, and Qiming Venture Partners are either increasing investments overseas or actively seeking opportunities in markets like the US and Europe, suggesting a shifting focus away from China.
Amidst this landscape, a senior executive from Shanghai remarked that people are voting with their feet, casting doubt on whether the Chinese venture capital scene can return to its former glory. Stuck in a sinking ship, with their teams and investments rooted in China, some individuals feel they have no choice but to stay and weather the storm, akin to waving a flag on the sinking Titanic.