Summary:
Startup creation in China has dropped to just 260 companies in 2024, down 99% from 2018's peak.
Venture capital fundraising has fallen from $125 billion in 2017 to only $5.38 billion this year.
Government policies and economic slowdown have severely chilled entrepreneurial activity.
State-run funds now account for about 80% of capital in the market, shifting investment dynamics.
VC firms face stricter regulations that contradict the traditional high-risk investment model.
The Dire State of China's Startup Scene
The number of new companies founded in China has plummeted dramatically, mirroring a severe drop in fundraising from Chinese venture capital firms. A recent report from the Financial Times paints a grim picture of the entrepreneurial landscape in China, with many founders and investors expressing their discontent anonymously.
"The whole industry has just died before our eyes. The entrepreneurial spirit is dead. It is very sad to see," said a Beijing-based executive.
Startups in Numbers
Data from IT Juzi reveals that only 260 companies have been founded in China this year, a stark decline from 1,202 in 2023 and a 99% drop from the peak of 51,302 in 2018. The CEO of IT Juzi indicated that while challenges persist, China's creativity and entrepreneurial spirit remain intact despite the recent downturn.
Venture Capital Fundraising Takes a Hit
Venture capital fundraising has also seen a steep decline. Yuan-denominated funds have raised approximately $5.38 billion this year, a significant decrease from nearly $125 billion in 2017. On the other hand, dollar-denominated funds have raised less than $1 billion, down from $17.3 billion in 2022.
Economic Slowdown and Government Policies
The downturn in startup activity coincides with an economic slowdown in China, with no signs of recovery in sight. Recent data shows consistent cooling across various sectors. Additionally, government policies have created imbalances within the economy, further stifling entrepreneurial activity. President Xi Jinping's crackdown on the private sector, alongside an anti-corruption campaign, has added to the chilling effect on startups.
The Shift in Investment Dynamics
Sources indicate that state-run venture capitalists (VCs) are increasing efforts to reclaim investments from insolvent startups. New regulations forcing founders to personally guarantee loans have deterred many VC deals, leading to a reduction in both foreign and domestic investments.
"Today, we are like lepers. They don’t want to touch us with a 10-foot pole," said an investor reflecting on the drastic shift in interest from US limited partners.
As more investors withdraw, state-run funds have taken on a more significant role, now comprising about 80% of the market capital. These funds impose strict requirements on investment managers, compelling them to pursue low-risk opportunities that align with Beijing's priorities.
Challenges for Venture Capitalists
The shift in investment strategy contradicts the traditional VC model of taking risks for potentially high rewards. A Chinese innovation expert remarked, "In a portfolio of 10 companies, you would expect one or two to be a mega success and the rest to die. But now VC firms have to explain to the state why their companies failed."
Correction, Sept. 16, 2024: A previous version of this article misspelled Preqin.
This story was originally featured on Fortune.com.
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