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U.S.-based investors have reduced their investments in Chinese startups to the lowest levels in recent years due to rising political headwinds. In Q1 2023, U.S. investors backed 17 Chinese startups. At this rate, Crunchbase estimates that U.S. investors will complete fewer than 150 deals by the end of this year. Due to rising political headwinds, the deal count had already dipped to 283 deals in 2022 from 426 in 2021. 2019 and 2020 saw over 300 deals each.
Last month, President Joe Biden confirmed that he would be signing an executive order limiting investments in critical sectors in China in the next few weeks, likely around the time of the G7 summit, which is scheduled to start on May 19 in Japan. The executive order is aimed at reducing U.S. investment in Chinese high-tech industries, such as AI, semiconductor, and quantum computing startups. The U.S. cited national security concerns as the reason behind the move. At the end of 2021, cumulative U.S. investment into China was worth $120B. Investors have shrugged off the move, saying that the investors have already curbed their investments in China after the ban on the export of key American technology to China and the tariffs imposed on Chinese imports. Besides the upcoming executive order, investors have cited the rising political tensions between the two nations, China's regulatory clampdown on tech startups, and doubts over the listing potential of Chinese startups in U.S.-based stock exchanges as the reason behind the retrenchment. Some limited partners in funds have also shown concern about the environmental, social, and governance sectors, an unnamed investor told Crunchbase. Investors had already curbed their investments before the executive order was announced. Menlo Park, California-based VC firm GGV Capital has backed only two Chinese startups this year, down from over two dozen last year. Since 2019, the firm has backed 133 Chinese startups. BlueRun Ventures, formerly known as Nokia VC, has not invested in a single Chinese company this year. The firm has made 71 investments to date, 19 of which were inked in the last year. Early-stage VC firm GSR Ventures and sports tech VC firm GL Ventures have backed 13 and 11 Chinese firms, respectively, over the previous 16 months. Over the past three years, GSR and GL had invested in 60 and 62 startups, respectively. SOSV and OrbiMed have a combined one investment this year. In the past four years, both have inked 40+ investments each. While Sequoia Capital has a separate arm to invest in Chinese startups called Sequoia Capital China, both entities have a profit-sharing agreement. The impact of the upcoming executive order on that link remains to be seen. In January earlier this year, the firm hired national security advisor Beacon Global Strategies to assess the impact of the impending restrictions on their tech investments. Sequoia Capital China has backed 19 Chinese startups this year, taking its total count of investments in the nation to over 400. The pullback of funding from U.S.-based investors has impacted the VC funding in the nation, resulting in a 38% YoY drop in funding to $8.1B in Q1 2023, its lowest total in years. Last year, funding declined 47% from $87B in 2021 to $46.3B. |
