A “digital innovation service center” in downtown Shenzhen, a sprawling tech hub in southern China, was designed to cater to the local startup scene. A poster in the office promises legal, recruitment and other help for “advanced enterprises in the digital content industry” looking to gain a foothold in the Greater Bay Area, an economic cluster encompassing Shenzhen and its neighboring cities, as well as Hong Kong and Macao.
A recent visit, however, revealed few signs of anything digital or particularly innovative. Many of the small offices designed for startups were empty. Some of the few tenants were offering yoga and Pilates classes, with brightly lit logos outside their doors and photos of instructors on the walls.
This is unlikely to be what late Premier Li Keqiang had in mind when he launched the slogan “massive entrepreneurship and innovation by all,” back in 2014. It worked for a while, sparking a vast effort to nurture startups that attracted top global venture capital funds and put China hot on the heels of the US by number of unicorns—privately held companies valued at USD 1 billion or more. Incubators and coworking spaces for fledgling businesses sprouted nationwide.
Now, the space is shrinking.
Venture capital and private equity investment in China fell 38.7% on the year in the first half of 2024, to RMB 196.7 billion (USD 28 billion), according to research company Zero2IPO. Money raised by fund managers also dropped 22.6% to RMB 622.9 billion (USD 88.7 billion).
By comparison, venture capital and private equity investment in the U.S. fell 3% to USD 418.5 billion during the same period, while fund managers raised 3.3% more.
The decline in startup funding has raised concerns that China is falling behind the US in cutting-edge technologies. Chinese artificial intelligence startups have landed some of the biggest funding rounds in the country this year, including Moonshot AI’s USD 1 billion round and a USD 400 million splash by Zhipu AI, according to Zero2IPO. But the scale pales in comparison to its US rival, OpenAI, which, on October 2, said it raised USD 6.6 billion from investors including Microsoft and Japan’s SoftBank Group.
Ripples from the slowdown are spreading to businesses like the Shenzhen innovation center or 3W Coffee in Beijing’s Zhongguancun district, once known as the “center of the universe” for its proximity to top universities.
Investors used to gather at 3W to meet with entrepreneurs. The cafe was featured in state media when Li visited in 2015. This year, it closed.
“The property was emptied” and returned to its management after the lease expired, read a letter dated March 12 and posted on the window of the vacant building. A nearby cafe with a similar concept was still open, but had only one customer on an afternoon in May.
“Business is unstable,” said a worker behind the counter.
Observers say that efforts to decouple the US and China are the biggest contributor to the decline in startup investing. Chinese venture capital funds used to raise dollars from US institutions such as university endowments and pension funds, investing them in Chinese startups that set up offshore entities. The funds would generate a profit when an entity listed on a US stock exchange with a high valuation, returning a portion to the US investors. That lucrative playbook fell out of favor as the US government stepped up scrutiny of investments into high-tech industries in China, while its Chinese counterpart strengthened data regulations, making it harder for domestic companies to list in the US.
WeRide, a Chinese autonomous driving company that counts the venture capital fund of the Renault-Nissan-Mitsubishi Alliance among its investors, postponed an IPO on the Nasdaq exchange after filing paperwork to go public in late July. In an updated draft prospectus, it said that China’s securities regulator needed to issue a new notice before it can go public because the previous one expired. Meanwhile, Waymo, a US peer, secured a USD 5 billion investment from its parent company, Alphabet, in July.
As overseas backers of venture capital funds retreated from China, they were replaced by domestic investors. A Shenzhen-based venture capitalist said a key source of funding is local governments, but many aim to generate jobs and taxes, not big returns over a long period of time. These requirements make lean, asset-light businesses—usually considered an advantage for fast-growing startups—unfavorable. Instead, companies that build factories, such as robot makers, drone producers and companies in the semiconductor supply chain, are sought after.
One Chinese startup founder who has raised millions of dollars in venture capital said their company now focuses entirely on the overseas market, partly out of fear that providing services within the country will make them subject to arbitrary fines by local authorities. And given the difficulties raising money at home, some founders are trying to obtain residency in places like Singapore to attract US investment, the person added.
“China is clearly moving towards stronger state involvement, and some of the bottom-up enthusiasm is not so easy to organize top down,” said Jeroen Groenewegen-Lau, head of the science, technology, and innovation program at the Mercator Institute for China Studies. “There’s a mismatch between the state plans and what the companies actually want to do.”
One China-based fund manager focused on fintech companies outside the country raised a yuan-denominated fund from domestic investors in 2022. That fund targets startups in areas like smart manufacturing, which are more in line with government policy, according to a person close to the fund. Another popular investment theme is domestic replacement, which refers to startups developing high-end machinery currently imported from overseas.
State-owned venture capital firms are increasingly active, too. Shenzhen Capital Group, which is controlled by Shenzhen’s municipal government, was China’s most active venture capital fund in the third quarter, with 16 investments, according to data provider CB Insights. It backed companies like AscenPower, a semiconductor startup focused on the auto industry, and Molecule Mind, a biotech company that uses AI to design proteins.
“The era where anybody could become an entrepreneur is over,” said a longtime consultant in China’s startup sector.
The person added that significant investments are flowing into research labs at universities that work on cutting-edge technologies. Most people interviewed for this story declined to be named due to the sensitivity of the topic.
There are signs that Beijing is loosening its grip on the broader private tech industry. On August 30, the State Administration for Market Regulation, the antitrust regulator, said that Alibaba Group’s three-year “rectification” process over its monopolistic practices is over. The crackdown on Alibaba, which followed founder Jack Ma’s critical remarks about financial regulators in 2020, led to the scrapping of a blockbuster listing of fintech affiliate Ant Group and a record RMB 18.2 billion (USD 2.6 billion) fine against the e-commerce giant.
But when it comes to venture capital, the Chinese government is doubling down on the state-led approach. Premier Li Qiang chaired a State Council meeting on September 18 that studied initiatives to advance the development of venture capital. The meeting pointed out that “state capital needs to become more responsible, long-term, and patient capital.”
The policy was reflected in the lobby of a “venture capital building” managed by the Shenzhen government. “Follow our party, start your business” read a slogan posted on the wall, along with the emblem of the ruling party.