Next generation investment: how China VC focus is shifting from internet to hard and smart tech

As valuations take a hit and policy uncertainties remain, GPs are working hard to demonstrate the long-term growth potential of their portfolio companies.
Next generation investment: how China VC focus is shifting from internet to hard and smart tech

In the wake of China’s regulatory crackdown - which effectively put the brakes on foreign limited partner investment in the country's internet and private education sector - general partners are now working hard to showcase the next big theme for private capital investment: hard and smart technologies.

The past year has seen a huge shift in US dollar funding away from China’s internet sector and towards hard technologies (tangible components that can be purchased and assembled into assistive-technology systems) and smart technologies (which make use of data to understand how improvements can be made), say analysts.

The subject of a severe regulatory crackdown in 2021, US dollar fundraising slumped in the first half of 2022 since most of it was focused on China's internet sector.

Preqin data showed that as of July 2022, aggregate capital raised for China-based venture capital was just over $7 billion, less than one-third of the total $31.76 billion raised in 2021.

According to State Street’s head of alternatives and insurance client segments for Asia Pacific, Eric Chng, travel restrictions, the slowdown in economic growth, and regulation tightening on the internet and technology space have created a perfect storm for investment in China.

“I think this is the the main driver behind the huge fall in private market activity in China as an investment destination,” Chng told AsianInvestor.

“[Asset owners] don’t express a view as to whether this will be a short, medium, or long-term thing. But it keeps them awake at night for sure. Unless there’s policy certainty, the investable assets in China remain a challenge,” he added.

Eric Chng, State Street

China's private market has also affected by Sino-US tensions, the poor performance of US-listed Chinese equities, and challenges in exit through initial public offerings (IPOs).

“Last year's regulatory changes sent strong signals to private markets that paying attention to China’s long-term, top-level policy decisions is key to investing in the region.

"Policy-aligned sectors include electrical equipment, information and technology, robotics, and new energy vehicles,” a Preqin report in April wrote.


As a result, most venture capital funds in China have started transitioning towards hard technologies and smart technologies over the past year.

For funds that were focused on the hard-hit consumer or internet sector, the transition could be painful.

Jui Tan, BRV China

According to Jui Tan, managing partner of Beijing-based BlueRun Ventures (BRV) China, challenges include building up investment expertise and know-how in new industries since many innovative technologies these days are inter-disciplinary.

For example, robots built for semiconductor manufacture require AI, but those who know AI may not know semiconductors, Tan noted.

“It is a constant challenge and improvement to keep people in the investment team on the same page and reach an agreement quickly on projects that are cross-disciplinary,” Tan told AsianInvestor.

Unlike some of its competitors, BRV China started pivoting its sector focus back in 2017, when it began to set foot in robots and new energy cars. Part of those investments came from US dollar funds.

BRV China manages more than $2 billion through multiple US dollar and renminbi funds. It has more than 150 portfolio companies, including US-listed Li Auto and healthcare technology platform WaterDrop.

“Although the macro environment has changed and the fundraising slowed down, we still see many quality projects in the innovative technology space,” said Tan.

Key areas include artificial intelligence, robotics, and new energy solutions, including vehicles. The company is also bullish about biotechnology powered by innovative algorithms to expedite the development of medicines.

Most recently, BRV China led the early-stage financing of two service robots companies, Wissen Technology and RoboCT, to the tune of  $10 million and $14.5 million respectively. It declined to disclose asset owner participation in the fundraising.

BRV China is bullish about the industry’s long-term prospects as China’s labour shortage, on the back of an increasingly ageing population, creates opportunities for robots and industrial automation.

As the impact of Covid eases and the economy starts to recover, Tan believes fundraising activities in China will gradually pick up in the second half of 2022.


He said the key factor that foreign LPs care about is whether China can sustain rapid growth. "Their focus is whether we can ride on the next big growth wave,” Tan noted.

LPs also want to make sure portfolio companies of VC funds won’t step over the line of regulation in the face of tightening rules on data and privacy protection.

“So, we must convince them that the sectors we invest in are both high-growth and regulatorily safe,” Tan said. “After all, the priority is always the performance of our funds. Without performance, none of the others matter…We are working hard to make sure our performance is well presented and acknowledged.”

It is also easier for Chinese start-ups that have exposure to overseas markets to attract funding overseas. For example, a cleaning robot company BRV China invests in, Gaussian Robotics, which targets logistic centres, hotels, and airports, has half of its clients based overseas.

This type of investment gives the impression to foreign LPs that the company is not dependent on the domestic market but has growth potential globally. “This will help boost LP confidence in China’s innovative assets,” Tan said.


Typical foreign LPs that are looking at China’s private equity and venture capital investment are sovereign investors, insurance, endowments, and family offices from Asia, Europe, and North America.

Notably, Tan said more Asian family offices, especially in mainland China, Hong Kong, and Singapore, are showing interest in China’s early-stage investment due to the fact that the younger generation of entrepreneurs are retiring and setting up their own family offices and have already developed expertise in the space.

Agreeing with Tan, State Street’s Chng believes venture capital investment in Asia will continue to be powered by high-net-worth individuals, family offices, and medium-sized asset owners who are prepared to take a little bit more risk because the ticket size of venture capital investment is smaller compared with private equity.


Though BRV China has established good long-term relationships with many foreign LPs - and online meetings are now quite normal - it would be easier for LPs to get a better idea of the latest development of their portfolio companies and the actual macro environment of China if they could visit the country in person, Tan noted.

Second-hand information on the internet, he said, can sometimes exaggerate the impact of the pandemic on corporate growth.

“Hence, we need to work hard to convince LPs that despite short-term disruptions, Chinese start-ups we invest in have great potential in the long run,” Tan said. This includes setting up more meetings between LPs and portfolio companies, and keeping LPs updated on the latest growth data.

Echoing Tan, Chng said: “I think the inability of investors to get into China and do due diligence is one of the dimensions that's affecting deal flow.”

He said he believes the slowdown in fundraising in the private capital market is going to continue across Asia into the year-end.

As interest rates go up, the previously expensive valuations of venture capital investment are taking a hit. In the secondary market, unless there’s a distressed buyer, the valuation will keep plummeting, Chng said.

But he says the dry powder is still there as asset owners continue to increase allocation into the private market.

By end 2021, China saw a record $107.9 billion of dry powder, with assets under management standing at $868.9 billion, way above the $480.3 billion by end 2020, Preqin data showed.

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