China VC market surpasses US

For the first time, the Chinese venture capital (VC) market has surpassed the U.S. VC market in total dollars invested in Q2 of 2018, according to Crunchbase. Driven by mega rounds and strong corporate VC, Chinese startups were able to raise more VC money in Q2’18 than their American counterparts. The strong Q2 for Chinese’s firms was driven by a very strong April. Chinese companies attracted approximately $15.6 billion that month. In comparison, U.S. companies attracted an average of U.S. $9.4 billion per month in Q1’18. In total, Chinese firms attracted approximately 47 percent of all reported VC dollars invested in Q2’18. If this trend continues, 2018 may become the year of the Chinese VC market.

This milestone marks over a decade of rapid growth by the Chinese VC market. Since 2007, the market has grown over ten-fold from approximately $5 billion in 2007 to over $50 billion in 2016. In 2017, Chinese companies attracted 36 percent of total deal value with $65 billion. This was second to U.S.-based companies that attracted more than $76.4 billion, or 42 percent of deal value for the year. Chinese companies also accounted for five of the 10 biggest venture capital financing deals including the largest investment round of the year – $5.5 billion to Didi Chuxing.

The rapid ascent has been driven by government support for R&D, government-backed VC funds, strong domestic fundraising, and strong commitment to corporate VC by the country’s tech giants. R&D spending in China is growing by 18 percent annually, compared to 4 percent in the United States. Analysts also found that approximately 75 percent of dollars invested in Chinese companies come from domestic investors – a decade ago it was only 25 percent. The VC market also has been bolstered by a growing number of high-worth individuals and the emergence of successful serial entrepreneurs.

While China’s overall economy faces concerns, the Chinese VC market may be well-positioned to compete with the U.S. market for years to come. Several factors driving this healthy market include:

• The number of IPOs continues to grow. There were 17 IPOs by Chinese companies in 2017 and more than 20 Chinese companies are projected to result in an IPO in 2020.
• Chinese investors have targeted companies in emerging industries such as artificial intelligence. In 2017, Chinese AI companies attracted nearly $6 billion (approximately 48 percent of all deal value).
• China has overtaken the U.S. in scientific articles published, with 18.6 percent of the total, compared with 17.8 percent for the United States.
• China is now second to the U.S. in the number of patent applications filed in 2017 with 8,882 applicants (20 percent of world totals).
• China benefits greatly from untapped potential in their domestic market due to a growing middle class.
• Unlike U.S. firms who focus mostly on U.S. and European consumers, Chinese firms also are committed to tailoring their services to attract users in developing countries.