China-focused venture capital fundraising is heading for its weakest first half year in at least eight years, data from researcher Preqin showed, as a teetering economic recovery and Sino-U.S. tensions unsettle investors and startups.
Concern about the impact of a weak business environment on startups' prospects and valuations means a turnaround in fundraising may take time as venture funds take longer to evaluate potential deals, investors and advisers said.
"The current market presents bifurcated fundraising paths: U.S. dollar funds continue to face a challenging environment with their much more risk-averse investors while RMB (yuan) funds are increasingly relying on state-owned or government-backed investors," said Weiheng Chen, senior partner and head of Greater China practice at law firm Wilson Sonsini.
"Geopolitical de-risking overhang and economic uncertainties have also been impacting the deal making," he said.
The drop reflects a turn in fortune for startups in China after years of rapid growth fuelled by ample funding. U.S. security concerns and tit-for-tat trade restrictions have left dollar investors on the sidelines while domestic yuan funding diminished amid China's post-COVID-19 economic woes.
U.S. dollar-denominated fundraising focused on China has reached $610 million so far this year, while yuan-denominated funding totals $1.65 billion, Preqin data showed.
That compared with $4.11 billion and $4.34 billion equivalent in yuan over January-June last year, and was a far cry from their respective peaks of about $5.52 billion in dollar funds raised in the first half of 2018 and $48.22 billion in yuan funds raised in the same period in 2017.
Venture deals by value, at $27.2 billion as of May 30, dropped to the lowest since 2020, when the onset of the coronavirus pandemic derailed business activity.
Only two unicorns - or startups with valuations of $1 billion or more - have been minted in the world's second-largest economy so far this year, CB Insights data showed.
Consumer sector startups face a prolonged fundraising cycle, said Ji Xing, managing director at financial advisor Lighthouse Capital.
Chip designers could be less attractive to investors, too, due to weaker demand for downstream products, Ji said.
Declining valuations of publicly listed firms and lukewarm investor appetite for initial public offerings have also made it difficult for startups to seek funds, dealmakers said.
"Companies have not been able to achieve desirable valuations in their offshore listings, which have factored into startups' early stage capital raises as investors assess their exit prospects," said Ming Jin, managing partner at boutique investment bank Cygnus Equity.
However, a nascent artificial intelligence-generated content (AIGC) sector could spawn meaningful deal activity in the second half of this year, especially for U.S. dollar-denominated venture funds, investors and advisers said.
"Dollar investors tend to focus more on the disruptive opportunities brought by the underlying infrastructure evolvement and are willing to pay more premiums for such opportunities," said Lighthouse's Ji.
Wayne Shiong, partner at venture firm China Growth Capital, said he expected a pick-up in venture deals this year mainly driven by top-league, cash-ample funds keen to deploy dry powder that they have been sitting on throughout the pandemic.
