China pips US in attracting highest venture capital funding at $56b in H1 | #VentureCanvas

Pramugdha Mamgain | DealStreetAsia – VC

For the first time, Chinese startups have attracted more funding than their counterparts in the US by snagging $56 billion from investors in the first half of 2018, revealed a joint study by Preqin and INSEAD.

The huge investment flow into China was driven by multi-billion-dollar funding rounds in China’s Ant Financial, Mobike, Manbang Group, Pinduoduo and Ping An Healthcare. Ant Financial raised the largest single fundraising round in history with a Series C funding of $14 billion.

US-based startups, on the other hand, were left behind with an aggregate $42 billion funding during the first six months, the report added.

For China, the growth had been meteoric compared with 2010 levels when early-stage companies secured just $4.6 billion in venture capital funding. In 2017, an aggregate $64 billion was deployed in Chinese startups, almost 14 times more than in 2010 (when aggregate investment was a mere $4.6 billion).

While the US is home to the largest number of venture capital unicorns – 162 out of 321 that exist globally – five of the 10 largest are based in China. Of the total unicorns globally, 98 were from China. Ant Financial Services Group is the largest and currently valued at $150 billion, followed by Uber at $71.5 billion.

Unicorn is a moniker used for privately held startups that are valued at $1 billion or more.

“China’s emergence as a hub of innovation and entrepreneurship has been the major venture capital narrative of the past five years. Conditions in the country are well-suited to promote large technology firms – China boasts more mobile phone users than any other country, and technology like e-commerce and mobile payments are deeply embedded in the lives of many people. With several unprecedentedly large funds in market to raise capital for investment in the sector, the prospects are bright for further developments in the China-based startup market,” Christopher Elvin, Head of Private Equity at Preqin said.

Rise of the red unicorns

Opportunities in China’s growing tech sector have prompted many domestic and foreign VC firms to enter the market. While domestic firms have close connections to government bodies, universities and local enterprises, there is a shortage of experienced local venture capitalists with track records. Foreign firms often have more experience in VC management, but face investment restrictions and lack local connections, the report said.

Of the 465 investors globally that invested in the 98 Chinese unicorns that form Preqin’s dataset, interestingly 66 per cent had a local presence in Mainland China and a further 9 per cent in Hong Kong. Only 13 per cent of investors were investing directly from the US, and barely any were located in Europe.

Globally, the three Chinese tech giants – Baidu, Alibaba and Tencent (or the BAT trio) – were among the top five with most red unicorn holdings. Red unicorns are companies with valuation in excess of $10 billion. Tencent topped the list with equity stakes in 27 of the 98 Chinese unicorns. Alibaba Group and Baidu had invested in 15 and 13 unicorns, respectively.

Excluding the BAT trio, the investor with the most red unicorn holdings in China was the US venture capital firm Sequoia Capital with 25 investments. It was followed by IDG Capital, which was one of the first firms to bring VC into China, with 14 red unicorn holdings.

High net worth individuals (HNWIs) and families are also a key source of VC funding in China. The predominance of local HNWIs in the
Chinese VC market is owing to the rising size of their assets, a lack of attractive alternative investment opportunities in China, as well as restrictions on investing capital abroad, the report said.

IPOs, the most frequent exit option

China-based companies accounted for three of the five largest IPOs of venture capital unicorns, including the largest – Alibaba Group, which had a value of $231 billion when it held its IPO in 2014. Facebook was the next with a valuation of $104 billion  and raising $16 billion, followed by Meituan-Dianping, which recently listed its company with a valuation of $55 billion at IPO, where it raised $4.2 billion.

Talking of the exits, the report said that the most frequent exit channel for Chinese portfolio companies was the IPO. As of Q3 2018, 57 Chinese companies had undergone an IPO with an aggregate exit value of $21 billion globally, 2.3x the amount exited in 2017. Some of the well-known IPOs include Xiaomi, iQiyi, Pinduoduo as well as NIO.

However, none of these examples were listed in Mainland China – iQiyi, Pinduoduo and NIO were all listed in the US, and Xiaomi in Hong Kong. One of the reasons for companies to list overseas is that their brands become better known internationally, helping the business to expand and attract a global investor base, the report said.

The second most common exit route for Chinese portfolio companies was the trade sale. As of Q3 2018, 17 Chinese companies had exited through trade sale with an aggregate exit value of $7.3 billion, 3.3x the amount exited in 2017.

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