VCs still see gold in China startups despite Beijing's tech clampdown

Industrial automation and deep tech remain hot themes, despite country's Internet platforms facing unprecedented pressure

Dec 09, 2021

CHINA'S tech crackdown could extend into 2022, but venture capitalists are not zipping up their wallets. With the consumer Internet space in turmoil, they are refocusing on long-term themes, including automation and deep tech.

Despite the rout in Chinese tech stocks - worsened by Didi's move to delist in the United States - the private market is buoyant.

The mainland and Hong Kong have seen over 1,640 venture capital (VC) deals thus far in 2021 worth US$36.3 billion, according to research firm Preqin (see chart). This is the highest level since 2018.

While deal activity has cooled since the second quarter, it is expected to hold steady into 2022.

"Investors are a little bit more wary and you've seen that the growth of venture investing has slowed in China relative to some other markets. But it's not fallen off the cliff at all," said Ravi Vijayaraghavan, who heads the Asia-Pacific tech and cloud services practice at Bain & Company.

Ian Goh, managing partner at China-based 01vc, echoes this. "There's a lot of dry powder in China right now and a lot of the funds are still able to raise money," he said, citing how VC giant Lightspeed China Partners last week raised US$920 million for two funds.

Deal valuations are going up as more money chases the same number of startups, added Goh. He is bullish on the business-to-business tech space, especially in robotics, given the country's productivity push amid slowing population growth.

One of his bets is Shenzhen-based Hai Robotics, which raised US$200 million earlier this year and is expanding its warehouse automation solution abroad, including in Singapore.

Shanghai and Malaysia-based Gobi Partners is similarly sanguine. Managing partner Ku Kay-Mok said: "Deep tech companies with export potential will continue to be promoted, as they continue to generate wealth for the country."

Ku added: "So it is a matter of VCs selecting the right investment sector moving forward."

Gobi is also focused on the macro theme of China's decoupling from the US tech ecosystem. The country is rebuilding its own tech stack, from semiconductors to software applications.

"As a result, we have shifted investment to supply-side technology that are either targeted at import substitution or deep tech investments in sectors where Chinese tech startups are likely to dominate in the future, for example, robotics and electric mobility," said Ku.

On the import substitution front, Gobi has made a bet on online design platform Chuangkit, which Ku describes as a localised version of Australia's Canva.

The optimism among VCs stands in sharp contrast to the sell-off in Chinese tech stocks this past week. The impending withdrawal of Didi Global from the New York Stock Exchange has stoked fears that China could ban the Variable Interest Entity (VIE) structure, a loophole that has allowed Chinese tech companies to list abroad.

China has since denied reports of a VIE ban, but the market is spooked. The Nasdaq Golden Dragon China Index, which tracks key Chinese tech players listed in the US, is down 38.1 per cent this year as of Dec 7.

There is apprehension over Chinese Internet platforms in particular. Big names hit by China's regulatory overhaul include the BAT trio - Baidu, Alibaba and Tencent - and a slew of other tech companies in e-commerce, fintech, social media, gaming and edtech (see table).

The latter sector was hit especially throttled, as after-school tutoring now has to be non-profit driven - crippling the edtech business model.

Li Jianggan, chief executive of Momentum Works, noted that other education segments, such as vocational training, "will unfortunately never be as big as K-12 (kindergarten to 12th grade) tutoring."

Meanwhile, consumer Internet ventures, especially those tapping gig workers, remain in regulatory uncertainty. "Finding the next Meituan or Pinduoduo will be a lot more challenging," acknowledged Goh.

This could lead pre-IPO investors to be more tepid, especially large institutional players. SoftBank in August announced a pause in China investments. Singapore's Temasek last month said that it is taking a cautious stance on Internet platforms. It has also slashed its stakes in Alibaba and Didi, and exited Baidu and edtech players TAL Education Group and New Oriental Education.

But similar to VCs, Temasek still continues to look at high-growth tech sectors in China, including medtech, electric vehicles and renewable energy.

It may not be all gloom for China's Internet giants, as their march into South-east Asia is expected to continue. This is especially so for those whose tech prowess is so dominant in China that they are now "export powerhouses" using Singapore as their expansion base, said Ku.

"I would not be surprised if every Chinese tech company which has international exposure would want to set up their regional or global headquarters in Singapore," agreed Li.

Many China-focused investors may have been burned this year, but as Li sees it, that's par for the course in a market where regulations can change swiftly.

"Being overly dismissive or overly cautious is not constructive," he added.

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