How did 1H2021 in Chinese Venture Capital actually go?
As we have entered July and many in the Northern Hemisphere have started their summer vacations, it is a good moment to look back at a breathtaking first half of 2021 in which the global VC industry reached new all-time highs.
Indeed, providers of private funding data such as Crunchbase (CB) and Dealroom released analysis these days reporting between $260–290B in total global funding volume so far this year, up from $110–150B (an increase of 95%-130%) last year.
There is no doubt that it was an impressive half year for the industry by any measure, especially for the US and European markets which grew an impressive 130% and 190% respectively from a high basis but also Latin America which grew an incredible 450% to reach $8B (close to India by now).
However, when reading the reports what stood out most to me as an industry observer with experience investing in different regions, were the numbers for China which (once again) just did not add up. Whether it was the total investment volume / growth (i.e., at just around $30B, YoY: +60%), new unicorn count (i.e., China only creating 10 new unicorns so far this year) or activity of Chinese investors (i.e., Sequoia China only doing 60 deals in 1H2021) — I felt all numbers were significantly lower than my personal perception. I believe there are various possible reasons for this, all with poor data quality at the heart of the issue:
- Many deals in China are never announced: It is obviously a global issue that many deals are just never made public in the VC industry. Sizing this issue correctly is also impossible, by definition. However, from attending various pitch meetings, I have the belief that much more deals in China are just never made public. Partly this can be explained by the fact that there are stronger links between certain funds covering multiple stages, which can easily pass along good deals without alarming competition in the market or other investors (e.g., ZhenFund / Sequoia or K2VC / Matrix).
- Many deals are announced in China but not captured by Western data-providers: For those reports from CB, Dealroom and others to give any meaningful insights, there is an underlying assumption that they more-or-less get a rather complete picture of deals that are announced in any given region. However, given that fact that China is operating in its distinctive internet ecosystem combined with language barriers, this assumption is likely wrong at least for China. For example, Dealroom reports that Sequoia China did some 60 deals so far in 2021 whereas the real number of announced deals is beyond 150 (thus, missing 60%+). Looking at early-stage deals, the share of missing deals is even more severe, often 80–90%. To illustrate: Chinese data-providers recorded 50+ deals for early-stage investor Plum Ventures to date while CB only captured 5.
- Captured deals are misunderstood: Sometimes, given different systems and language, data is captured but inaccurately. One example to highlight this problem is the Series F of KK Group, led by JD.com. Given a probably incorrect machine reading algorithm, CB captured this deal from 36Kr but put the valuation initially at $27B pre-money, while the real valuation was $2.7B. This misunderstanding arose from the different logic of Chinese numerals in which 亿 does not stand for billion but hundred-million, so that 投后估值30亿美金 (as written in the source) means $3B post-money, rather than $30B. The mistake was corrected ever since on the CB page but this might not be the case for all those issues.
Below is my take on how 1H2021 in China actually looked like based on data from reliable local databases on VC activity, such as IT Juzi:
- An extremely strong 1H2021: 1H2021 was the strongest first-half in the past three years. Tracking a selection of 25 leading large funds, their numbers of deals is up YoY 100%+ and the investment volume is up 80%+ (total of $35B just for these large funds). Those numbers probably come closest to the overall sentiment in the industry. The total investment volume of deals announced was around $100B, up 55%.
- New unicorns at a reasonable pace: According to statistics from local databases, there were around 300 unicorns going into the new year and China recorded around 40 new unicorns born in the first six months of 2021 (+13%).
- Tencent, Sequoia and Matrix each reaching 100 deals: Tiger Global did an impressive 144 investments in 1H2021 at a record-breaking deal-making pace, according to CB. However, there is competition in deal-making pace from China where Tencent did more than 160 deals, closely followed by Sequoia China with ~150 announced deals so far this year, and, a bit behind, Matrix (~100). Average investment amount among large funds, however, is rather stable compared to last year. This feature distinguishes the Chinese market from the rest of the world, where growth funds lately investing in earlier rounds have been pushing valuations (and thus investment amounts) up.
There is little doubt that 2021 will be the best year for global VC ever in terms of investment volumes. While it is yet to be seen if China´s VC industry will reclaim the highs of 2018 in terms of funding volume, which was though followed by a ~40% drop in capital deployed in 2019, it is certain to say that 2021 will be the busiest year out of the past three years. As of today, the odds of overtaking 2018 are promising. The rather stable average investment amount shows that there are opportunities for significant returns for investors in the years ahead, even though new regulations might affect the likelihood for certain exit events, such as overseas listings.
About the author: Alexander Kremer is an incoming Partner at Picus Capital, where he will be the Head of China. He is a personal investor in learn-from-China business models in emerging markets around the world. Previously, he was a Director in JD.com´s online grocery division. In the past, he worked at Mobvoi, a Chinese AI company, McKinsey & Company and IBM.
