HONG KONG (BLOOMBERG) - When China’s government launched a sweeping crackdown on the technology industry over the summer, panicky venture capital investors stopped writing cheques and start-up valuations began to plummet. It looked like the country's historic innovation boom was over.
Then a strange thing happened: In just a matter of weeks, the start-up machine kicked back into gear. In fact, venture capital investments in China reached US$130.6 billion (S$177 billion) in 2021, according to research firm Preqin. That set a new record for the country - about 50 per cent higher than the US$86.7 billion total the year before.
The performance is stunning given the devastation wrought on the industry’s marquee players. Alibaba Group Holding, Tencent Holdings, ByteDance and ride-hailing provider Didi Global were all battered in turn over the past few months.
The entire online tutoring sector, once a hot spot for venture dollars, was forced to turn non-profit. Yet, entrepreneurs and venture firms pivoted to new opportunities with startling speed.
They have turned away from softer Internet businesses and towards hard-core technologies like semiconductors, robotics and enterprise software. The amount of money going into biotechnology hit US$14.1 billion last year, up tenfold from 2016.
“Investors’ appetite for China tech remains intact. What has changed, however, is where they park their money,” said lawyer Jiang Jingjing, who specialises in fund-raising at King & Wood Mallesons in Hong Kong. “It has become quite clear that more and more funding has flowed to start-ups with cutting-edge technology.”
China is still well behind Silicon Valley in venture investing overall. The US reached its own new record of US$296.6 billion last year, more than twice the total for the Asian country.
But in certain fundamental technologies, China has already surpassed the United States. For example, Chinese chipmakers, integrated circuit designers and other semiconductor start-ups received US$8.8 billion in funding last year, more than six times the US$1.3 billion invested in comparable companies in the US, according to Preqin data.
While President Joe Biden has been desperate to lift US semiconductor manufacturing capabilities, Chinese chip start-ups have been overwhelmed by funding offers.
“In China right now, it’s getting crazy,” said Mr Yong Luo, a former Intel engineer who raised money for a new semiconductor start-up, though he is probably two years from generating revenue. “The chip sector is really hot.”
This is almost precisely how President Xi Jinping’s central planners would have imagined it in their five-year plans. The Communist Party has decried the corrupting influence of games (Tencent) and online videos (ByteDance), while pushing for more resources to be allocated to fundamental research.
That shift is aimed at helping reduce the country’s dependence on US suppliers - a top priority for Mr Xi’s administration after American blacklisting hit key players such as Huawei Technologies and SenseTime Group.
In its latest five-year economic blueprint unveiled in March, Beijing sketched out plans to boost national research and development spending by more than 7 per cent annually and singled out seven technological fields in which it hoped to achieve “major breakthroughs”. They included space exploration, brain science and quantum information - all sectors where American firms now hold sway.
The Chinese government is also making big bets on emerging technologies like hydrogen vehicles and biotechnology, while working to help its semiconductor industry narrow the gap with the likes of Intel and Taiwan Semiconductor Manufacturing Company.
There is no guarantee the strategy will work. China built a generation of tech giants by letting talented entrepreneurs like Alibaba’s Mr Jack Ma and ByteDance’s Mr Zhang Yiming choose their own path to success. Now, that private-sector innovation has been subordinated to a much more government-directed model.
In a sign of the need for caution, the country’s one-time semiconductor champion collapsed in 2021 after years of government financing and political support. Tsinghua Unigroup spent a decade bingeing on easy credit and buying up foreign assets, only to implode as the government recognised its multibillion-dollar debts had not gotten the country any closer to building a sustainable chip business.
Beijing’s crackdown has narrowed the range of sectors considered safe for investment, leading to inflation in start-up valuations as venture capitalists all compete for the same kinds of deals.
Investors joke about the money lavished on “PPT companies”, or start-ups with nothing more than a PowerPoint presentation.
“The acceleration and the pronounced emphasis of the government on these areas have just driven so much capital in this direction,” said Mr Chibo Tang, a managing partner of Gobi Partners. “It has a risk of becoming overheated.”
Easier access to capital, combined with a greater demand for made-in-China tech solutions, has lured more talent to entrepreneurship. One prominent example is Associate Professor Yuan Jie of the Hong Kong University of Science and Technology. The long-time academic spent much of his career helping global giants like Intel advance their chip technology.
Now, Prof Yuan has founded Atom Semiconductor Technologies to make his own silicon. Established in late 2020, the start-up has completed two rounds of fund-raising and quadrupled its valuation, paving the way for the professor to commercialise his years-long research.
Mr Gary Rieschel, founding managing director of Qiming Venture Partners, said deep-tech start-ups now account for about 40 per cent of his firm’s portfolio, compared with 10 per cent in 2014. “That’s what you’re seeing with all the venture firms now,” he said. “They’re making those transitions.”