The Global Reach of China’s Venture Capital – The Diplomat

Over the past few months, the Chinese government has made critical efforts to quash its $12.9 trillion shadow banking system and slowly break up its most influential business conglomerates. Last Wednesday, the China Banking and Insurance Regulatory Commission made public a notice ensuring that companies would become regulated on a trial ranking system. This regulation comes on the back of the last-minute block of Ant Group’s planned November IPO – set to be the largest IPO in world history – and Alibaba co-founder and tech giant Jack Ma’s subsequent unexplained disappearance from public life. The Chinese government is clearly encouraging the consolidation of smaller companies while breaking up bigger ones.

This push will impact how China’s corporate tech giants leverage their massive global influence abroad. Some of the first companies likely to see any changes work first are those who are receiving massive Chinese venture capital (VC) funding across South and Southeast Asia.

Despite global concerns that COVID-19 may reduce VC funding volume in 2020, accelerating a slowdown that had been building over the past few years, the third quarter of 2020 showed steady continuation of large-scale investments. While investors globally are shifting away from seed and Series A investments, later-stage deals remain a steady bet. This is because the global market is becoming saturated with less traditional investors – most notably Middle Eastern sovereign funds and family offices – who tend to be more risk-averse. Across the world, VC investors are likely to remain cautious as the geopolitical shifts of Brexit, the U.S. presidential election and transition, and COVID-19 conditions leak into 2021. But they remain bullish on sectors that are likely to remain relevant as geopolitical tides turn: remote work, e-commerce, food delivery, biotechnology, healthcare, and/or software.

Chinese VCs are no exception, particularly when it comes to South and Southeast Asian markets. In China, perceptions of venture capital as commercial activity supporting commercialization of products and services – rather than direct government funding – only emerged in the late 1990s. Now China represents over 40 percent of global VC investments, with Silicon Valley still leading the world at 44 percent. Major Chinese investors also tend to be offshoots of China’s tech giants, including Baidu, Alibaba, and Tencent, referred to collectively as BAT. When one of these big companies invests in a startup, the startup can then join their company’s unique startup ecosystem. These tech giants then form their own “cliques” of small companies abroad. Each small company has access to their Chinese tech parent’s payment and social media platforms but are excluded from those of their competitors. Joining one of these firms’ “cliques” is compelling for a small company with ambitions to grow. But up-front sacrifices can hinder their long-term success, limiting companies to a fraction of China’s massive market. The major exception to this “clique” rule is domestic company Didi Chuxing – China’s most popular ride-hailing app – which accepts both AliPay (Alibaba) and WeChat pay (Tencent).

The Chinese government’s interest in breaking up conglomerates could push Chinese VCs associated with tech giants to fragment these “cliques” of companies abroad. This could directly impact markets across South and Southeast Asia in 2021, at a time when they are just returning to health. Chinese VCs quadrupled their investments in Southeast Asian startups in 2019 alone. While the total number of deals fell to around 4,000 in 2020 , down from 7,659 in 2019, the pace of deals rebounded in the second half of 2020 and is set to increase in 2021. Vietnam and Indonesia’s digital economies alone are growing in the double digits and are set to increase by 23 percent and 29 percent respectively over the next five years. Sudden fragmentation could lead to management and financial challenges for some of these smaller companies, sending a shock through the markets.

But a more hopeful test case for reducing Chinese VC funds came last year with the loss of access to a major market: India. At the start of 2020, China pumped an estimated $4 billion into 90 Indian startups, funding 18 of India’s 30 unicorns, which are privately held startups valued at over $1 billion. Back in 2015, Chinese VC investment giant Alibaba first invested in SnapDeal and Paytm, now two of India’s major e-commerce companies. But following tensions between China and India due to border clashes in the Himalayas, India banned many forms of Chinese investment into the country last July, forcing Chinese VCs to look elsewhere.

Now that Chinese VCs are excluded entirely from participating in the market, Indian companies have been successfully raising their own capital without China’s help. E-commerce giant Flipkart raised $1.3 billion in an October deal with Walmart. Back in July, Google created a $10 billion fund to promote digitization of goods and services for the country’s massive customer base over five to seven years. The case of India could signal to other South and Southeast Asian economies that they have capacity to raise their own funds from domestic and foreign sources outside of China, promoting more robust domestic VC markets in the long run.

Now, some of China’s major VC investors are turning their investments toward the Southeast Asian economy with the largest number of billion-dollar startups: Indonesia. According to a recent Financial Times article, Chinese venture capital investors who were once focused on India have set their sights on Indonesia, whose digital economy saw a 55 percent surge in the first half of 2020. Recently, Chinese VC and tech investors in Indonesia have become bullish on the country’s domestic e-commerce sector, particularly companies such as Mucho, a “social” e-commerce platform that resembles Chinese giant Pinduoduo.

If the India case is any indication, emerging markets fueled with China’s initial startup cash may soon develop the base to raise their own funds from U.S. or domestic investors who come knocking. In the long run, this might make these Chinese “cliques” of investors less integral to the long-term success of South and Southeast Asian companies’ products. But Jack Ma’s mysterious disappearance following the Ant IPO block last November still foreshadows a more long-term problem in the ecosystem: should Chinese VCs – particularly in the tech space – get too big for their britches, the Chinese government is likely to maintain the resources and capital necessary to dictate company operations.

Sophie Zinser is a researcher focusing on China’s role in the Middle East, South, and Central Asia.