China’s economy: Startup scene dead as investors pull back

A recent one Financial Times report described a dire landscape of Chinese startups, with founders, investors and VCs offering grim commentary on condition of anonymity.

“The whole industry just died before our eyes,” said one Beijing executive FT. “The entrepreneurial spirit is dead. It’s very sad to see.”

According to data from IT Juzi cited in the report, the number of companies founded in China this year is just 260, on track to fall below the 2023 number of 1,202 and a 99% drop from a peak of 51,302 in 2018.

VC fundraising has seen a similar evolution. Yuan-denominated funds have raised the equivalent of $5.38 billion year to date, down from a peak of nearly $125 billion in 2017. Meanwhile, dollar-denominated funds have raised less than $1 billion, down from a peak of $17.3 billion in 2022, according to Prequin.

The implosion of China’s startup creation comes as the economy has shown no signs of stopping its slowdown, with new data on Saturday pointing to a continued cooling across the board.

Meanwhile, Beijing’s industrial policies have exacerbated the imbalances in the economy that are contributing to the decline. And President Xi Jinping’s crackdown on the private sector, anti-corruption campaign and push for “shared prosperity” have also cooled entrepreneurial activity.

Sources also said FT that state-run private equity funds have recently stepped up their efforts to recover their investments from startups that have gone insolvent or not gone public by a certain time. Tighter requirements forcing founders to be personally in the crunch for any loans have also hampered venture capital deals. As a result, foreign and domestic investors reduced their exposure.

“In the past, US limited partners looking at Asia only wanted to meet Chinese funds. Other markets like India have struggled to get their attention,” said an investor FT. “Today we are like lepers. They don’t want to touch us with a 10-foot pole.”

As more investors bail out, sovereign wealth funds have taken on a larger role and now account for about 80 percent of market capital, according to the report.

These funds also require investment managers to guarantee returns, prompting them to seek low-risk opportunities or direct money to Beijing’s stated priorities.

“It is against the spirit of venture capital to engage in high-risk, high-potential projects,” said one Chinese innovation expert. FT. “In a portfolio of 10 companies, you’d expect one or two to be mega-hits and the rest to die. But now venture capital firms have to explain to the state why their companies failed and why they lost the country’s money.”

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