Funding the future
China’s US dollar-dominated venture capital market may see a moderate rebound this year after fundraising plunged to a ten-year low in 2024.
“We expect more funds will be back for fundraising this year with some high quality general partners, but the overall fundraising level in China will remain moderate compared to the historical average,” Scolet Ma, senior investment director at global investment firm Cambridge Associates, says in an interview with Asia Asset Management.
Figures from data provider PitchBook show that venture capital fundraising in China was less than US$1 billion last year, the lowest since 2014, and a sharp plunge from a record $25 billion in 2020. Total investments by venture capital managers dropped to a four-year low of around $5 billion.
Ma says some investors and limited partners are staying on the sidelines due to global geopolitical risks such as former President Joe Biden’s executive order on investing in technology, and the tariffs imposed by his successor Donald Trump.
“Whether or not the Trump administration will have a new executive order [on tech investments outside of the US], the current macro environment requires managers to be aware of and constantly adapt to the changes,” she says.
She expects funds with strong capabilities to invest in artificial intelligence to gain better momentum than their peers, especially since Chinese startup DeepSeek upended the global technology market with an AI model that has low operating costs and relies less on advanced chips.
Although some venture capital managers still find the capital market and regulatory environment challenging for exits through initial public offerings, Ma says regulatory easing on mergers and acquisitions will create more exit opportunities via trade sales in the longer run.
Introduced last September, the rules streamline review procedures for restructuring assets of listed companies to encourage M&As.
Hub of innovation
The quality of Chinese innovations in AI, robotics and healthcare is rising and becoming comparable to their global peers, which Ma believes will attract more capital into these sectors.
“China is emerging as a global innovation centre in life sciences, evidenced by recent global acquisitions of Chinese assets. It has become a hub of innovation in AI, robotics and smart manufacturing,” she says. “With improvement in market sentiment and investment opportunities in those innovative sectors, venture capital fundraising and investment activity should increase in 2025.”
She believes limited partners from outside the US will be the major source of additional funding for Chinese venture capital since many US institutional investors are cutting back on investments in China as they become more sensitive to geopolitical risks, though non-US investors are unlikely to completely fill the void.
“There are still a lot of limited partners that are not subject to [geopolitical] risks. Some of them are racking up their allocation towards private investments [and] some of them are re-evaluating their manager selections. They want to have exposure to Asia, and China is one of the major markets in the region,” she says.
According to Ma, China’s venture capital industry landscape is undergoing changes as a tough fundraising environment and changing market opportunities will require managers to reinvent themselves.
She says venture capital managers need to have good understanding of technology innovation and regulatory and geopolitical risks, as well as possess the investment skills to invest in this changing market.
Ma believes there is opportunity for a new generation of Chinese venture capital managers to emerge as strong contenders in the fast changing market environment, while some established managers that reinvent themselves will also remain competitive.