VC investment in Asia dropped to an eight-quarter low in Q2’22, driven by a steep decline in deal volume. Geopolitical uncertainty, a quiet IPO market across the region, and a lack of $1 billion+ mega-deals likely contributed to the decline.

Energy sector remains hot area for VC investment in Asia

Energy continued to be one of the hottest sectors of investment across Asia, with companies raising large funding rounds even at early deal stages. During Q2’22, China-based Gokin Solar raised a $251 million Series A round. The large early stage funding rounds seen in recent quarters likely reflect the fact that energy startups —Including those focused electric vehicles, alternative energy, and energy storage — are capital intensive compared to startups in other sectors.

ESG remained a high priority in Hong Kong (SAR) (SAR) during Q2’22, with the Hong Kong (SAR) Monetary Authority continuing to work on ways to drive green finance initiatives forward through its work with Hong Kong (SAR) (SAR) and international banks.

VC investment in Japan remains solid as market continues to mature

Japan attracted a solid amount of VC funding in Q2’22 as the country’s VC market continued to evolve and mature. Companies from across a variety of sectors attracted funding during the quarter, including wireless power transmitter company Space Power Technologies ($200 million), diagnostics company AIM ($70 million), pick-assist robotics company Rapyuta Robotics ($50 million), and B2B fintech services provider Upsider ($42 million). At a sector level, fintech continued to attract significant interest from VC investors, including areas like payments, asset management, blockchain and Web 3.0.

During Q2’22, the government of Japan also released the draft of its economic growth strategy, which included a number of measures to spur innovation, support startups, and foster VC investments

Anticipation of funding issues driving startups in India to focus on cash preservation

VC investment in India dipped in Q2’22, driven in part by global geopolitical uncertainties and rising inflation. VC-backed companies in India shifted their focus to cash preservation in anticipation of funding becoming less easy to obtain over the next few quarters and VC investors requiring companies to strengthen their paths to profitability and lower their cash burn.

Fintech remained the hottest area of investment in India during the quarter, in addition to e-commerce, social commerce, and gaming. Agritech also attracted a growing number of deals in Q2’22; while the majority of these deals occurred at very early deal stages, the space is expected to see deal sizes grow as the sector evolves. 

Domestic VC funds taking stronger role in supporting China-based startups

China saw VC funding continue to tilt away from US dollar-based VC funds to Yuan Renminbi funds during Q2’22 as domestic VC funds took a large role in supporting fast growing startups in the country. As US investors have become more cautious about making VC investments in China, the shift towards domestic funds has been quite noticeable — particularly for unicorn and near-unicorn companies.

The time to complete deals also lengthened in Q2’22 as some startups in China struggled to attract necessary funding. This was particularly true for companies in sectors seeing downward pressure on valuations as it is becoming more difficult for startups in China to raise funds at lower valuations because of sentiment from earlier-stage investors. 

Trends to watch for in Q3’22

Across Asia, M&A activity could get a boost heading into Q3’22 as investors and corporates look to take advantage of the lower valuation environment and tightening funding environment to find inorganic growth opportunities and opportunities to gain market share.

VC investment in China is expected to remain relatively soft in Q3’22, given the ongoing COVID-19 situation and the fluid geopolitical and macroeconomic environments. Fundraising activity is also expected to remain quite low. In mainland China, the energy and semiconductors sectors are expected to remain attractive for investors. In Hong Kong (SAR) (SAR), VC investments are expected to continue in a broad range of areas, including healthtech, insurtech, and greentech.

While VC investment in India may be muted over the next quarter or two due to the global reduction in money supply and other factors, the country is expected to remain quite attractive to VC investors over the medium to longer term due to its relatively positive macroeconomic environment and market demographics. 

Venture financing in Asia

Overall venture capital investment in China has slowed considerably in the first half of the year. Given current global macro challenges, Covid 19 restrictions, and overall uncertain inflationary and economic conditions have put created some nervousness in the market. However, we continue to see strong investment in areas such as robotics, semiconductors and ESG –all key areas at the heart of the Central Government’s most recent 5 year plan.

Egidio Zarrella
Partner, Clients and Innovation
KPMG China

  • Venture Capital investment drops to $24.5 billion across 2,206 deals

  • Corporates remain active

  • Sluggish fundraising in first half of year

  • Venture financing in India surpasses $6.5 billion for the 4th consecutive quarter

  • Top 10 deals spread between China (5), India (4), Indonesia (1), Singapore (1)