China’s startup scene is facing a collapse as investors withdraw their support. The number of new companies started in China each year has dropped dramatically, and fundraising by Chinese venture capital firms has also plummeted.
A report from the Financial Times paints a bleak picture of the Chinese startup landscape. Founders, investors, and venture capitalists, who spoke on condition of anonymity, are expressing their concerns.
“The whole industry has just died before our eyes,” said a Beijing-based executive. “The entrepreneurial spirit is dead. It is very sad to see.”
Data from IT Juzi shows that just 260 companies were founded in China this year. This is on track to dip below 2023’s tally of 1,202. It marks a 99% decline from a peak of 51,302 in 2018. IT Juzi’s CEO noted that the data might not capture all startups.
He added that while China’s VCs and founders have faced challenges recently, the country still has some creativity and entrepreneurial spirit. Venture capital fundraising has also seen a big decline. Yuan-denominated funds have raised the equivalent of $5.38 billion year-to-date.
This is a stark decrease from nearly $125 billion in 2017. Dollar-denominated funds have raised less than $1 billion, down from a high of $17.3 billion in 2022, according to Preqin.
China’s venture capital downturn
The downturn in startup creation coincides with broader economic struggles in China. Fresh data shows continued cooling across various sectors. President Xi Jinping’s crackdown on the private sector, anti-corruption campaign, and “common prosperity” drive have further dampened entrepreneurial activity.
Sources said that state-run VCs have increased their efforts to reclaim investments from startups that became insolvent or failed to go public within a specified time. Stricter requirements holding founders personally responsible for loans have also hindered VC deals. This has led both foreign and domestic investors to reduce their exposure.
“In the past, US limited partners looking at Asia only wanted to meet China funds. Other markets like India struggled to get their attention,” one investor said. “Today, we are like lepers. They don’t want to touch us with a 10-foot pole.”
As more investors withdraw, state-run funds have taken a larger role. They now account for about 80% of the capital in the market. These funds are also demanding investment managers guarantee returns.
This prompts them to seek low-risk opportunities or direct funds towards Beijing’s established priorities. “It is contradictory to the VC spirit of engaging in high-risk and high-potential ventures,” a Chinese innovation expert explained. “In a portfolio of 10 companies, you would expect one or two to be a mega success and the rest to die.
But now VC firms have to explain to the state why their companies failed and why they have lost the country’s money.”
The challenges facing China’s startup scene and venture capital market reflect broader uncertainties and caution in the economic environment. This casts a shadow over future entrepreneurial endeavors in the country.
