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Home Latest News Chinese Startups Face Pull Back From U.S.-Based Investors
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CHINESE STARTUPS FACE PULL BACK FROM U.S.-BASED INVESTORS

December 7, 2023


As China reopens its borders after three years of COVID-19 restrictions, U.S.
funds managing investments in the country are reassessing their strategies due
to shifting global and domestic landscapes. The once common practice of seeking
investment targets in China equivalent to those of Silicon Valley giants is
becoming less effective. Factors such as China's tech crackdown, escalating
U.S.-China tensions, and restrictions on U.S. investments in critical sectors in
China have prompted some U.S. investors to explore opportunities beyond China.

Uncertainties resulting from Beijing's regulatory actions have affected the
traditional strategy of U.S. funds investing in Chinese startups. China's tech
crackdown, which includes the cancellation of Ant Group's IPO and the delisting
of Didi, has created a sense of unpredictability for venture capital investors.
Additionally, the tightening grip on overseas IPOs by Chinese authorities has
raised concerns for investors relying on such exit channels.

On the U.S. front, escalating tensions and restrictions on the flow of U.S.
money into China have further complicated the investment landscape. The U.S.
government, in an effort to address national security concerns, signed an
executive order in August restricting investments in strategic sectors in China,
including artificial intelligence, quantum computing, and semiconductors.

As a result of these challenges, U.S. funds in China are practicing increased
discretion and slowing down capital deployment. The uncertainty has led to a
significant decrease in investment activity, with U.S.-headquartered VCs
investing only $14.5 billion in Chinese companies in 2022, compared to $45.4
billion the previous year. The number of deals also nearly halved, and the share
of deals with U.S. investor participation dropped to 18.2% in 2022.

In response to the changing dynamics, some U.S. funds are exploring
opportunities beyond China's borders. This shift aligns with a new generation of
Chinese-founded startups that are proactively expanding overseas. Chinese
startups, faced with regulatory hurdles and an unpredictable business
environment at home, are increasingly looking to global markets from the outset.

U.S. funds are following the trajectory of Chinese talent that has embraced
global expansion. Chinese-founded startups, sometimes referred to as "sea
turtles," are venturing abroad early in their journey, aiming to avoid the
challenges presented by China's regulatory landscape. The trend of Chinese
entrepreneurs studying or working overseas and returning to China is evolving as
some entrepreneurs opt to establish themselves overseas, earning them the
moniker "return from overseas" or "haigui."

While this trend offers opportunities for U.S. funds to explore investments
beyond China, challenges remain. Chinese entrepreneurs with Western education
and training may face skepticism from U.S. investors, particularly in light of
geopolitical risks. The changing landscape presents both opportunities and
uncertainties for U.S. funds as they navigate the evolving dynamics of the
Chinese startup ecosystem.

As U.S. funds assess their strategies amid the changing investment landscape,
the coming years will likely witness a continued exploration of opportunities
outside China, with a focus on markets that provide more predictable
environments for investment and growth. The current transitory phase reflects
the broader challenges and opportunities facing U.S. investors in the dynamic
and evolving landscape of Chinese startups.

Jirehl Carlos

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