The third quarter was far from favorable for Chinese startups looking to raise money. Data shows that for upstart tech companies in the country, Q3 2022 was the worst time to raise venture capital since Q1 2020, with far less capital invested than either the rest of 2020 and 2021, or for most of 2018 and 2019.
China is hardly alone in seeing its domestic startup scene see slowing capital inflows, but recent news puts the country-specific information into new context: Given today’s Chinese tech share sell-off, there is fresh pressure on technology companies’ valuations in the country, and that could impact startup fundraising.
If China saw fundraising decrease 10% in Q4 2022 from Q3 2022 — measured in dollar terms, not the number of funding events — we’d see startups facing the slowest quarter since the onset of 2018, according to CB Insights data. A steeper decline would put Q4 2022 as the nadir in the nation for the last five years.
Why are Chinese tech stocks suffering today? After a period when the sale of the nation’s equities onshore was at least somewhat meddled with, the value of major and minor Chinese tech companies fell today in the wake of the Chinese Communist Party’s every-five-year confab. This time ’round, current Chinese Premier Xi Jinping secured not only another five years in power, he also solidified a cabinet of like-minded allies.
The context is clear: The Xi method of managing China remains ascendant. And investors in tech companies, still licking wounds brought on by a regulatory barrage led by Xi — which included some reasonable ideas like dismantling certain anti-competitive practices along with some less enticing policies — are not enthused.
The result? A bloodbath (American share price changes as of the time of publishing):
- Alibaba: -16% today.
- Baidu: -14% today.
- Pinduoduo: -26.5% today.
- NASDAQ Golden Dragon China Index: -16% today.
CNBC quoted Bernstein analyst Mark Schilsky as saying Chinese equities are “uninvestable.”
There has been a bull-bear game afoot in the Chinese stock market this year. As shares of China’s companies were sold off, value investors hunting for a market bottom have discussed these stocks as potentially tempting investments. Today’s sell-off could cloud such optimism.
But what about startups? Are companies looking to take on the Chinese tech incumbents that are immune to the massive public-market sell-off? Probably not. Recall what we have seen here in the United States in recent years:
- Cheap money and the pandemic’s economic disruptions led to rising tech stock prices, and huge venture capital inflows to startups.
- In response, the value of startup equity went up.
- Later, money became more expensive and the pandemic faded from domestic business calculations, capital flowed to other equities, and the value of tech shares tanked.
- As a result, the value of startup equity went down.
Sure, that’s simplified to the nth degree, but it works for our purposes. Notably, China also had the same run-up in the value of private-market tech investment as other markets, and 2021 was a cracking year for startup deal-making.
The question before us is not whether other startup markets will continue to suffer while tech stocks remain depressed. The apparently delayed Instacart IPO is a good indication of where sentiment lies here at home, after all. Instead, we are curious if the latest sell-off in Chinese tech stocks means that the country’s companies could be under not unique pressure, per se, but uniquely strong negative pressure from its public markets.
If that’s the case, we could see China’s tech startup investment landscape fare a bit worse than others. From recent peaks ($27.7 billion invested in Q4 2021, per CB Insights), the value of Chinese startup deals fell by around 63% in Q3 2022, when $8.5 billion was invested, according to CB Insights.
Globally, startup deals’ value declined by a more modest 58% in that period; the United States saw a near 60% decline in Q3 from its zenith.
Before today’s sell-off, then, China was doing a bit worse than the United States and the collective global market when it came to dollar-value declines in startup investment, measured on a quarterly basis. How much worse could China do in Q4 in the wake of today’s sell-off?
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