VC investment in China sees growing optimism, KPMG analysis finds

China bucks trend of global decline in VC fundraising

07 August 2023

2 min read

4 August 2023, Hong Kong (SAR), China ("Hong Kong") – While venture capital investment in Asia remained relatively soft in the second quarter of 2023 (Q2’23), there is growing optimism heading into Q3’23 among venture capital (VC) investors in Asia, particularly the hope for stronger IPO activity in the Chinese Mainland and Hong Kong during the second half of the year.

In Q2’23, VC-backed companies in the Asia region raised USD 20.1 billion across 2,395 deals, according to the latest KPMG’s Venture Pulse Q2 2023 report. China proved a major outlier in fundraising, bucking the downward trend significantly at mid-year. VC fundraising in China during first half of 2023 totaled USD 43.4 billion, compared to USD 46.9 billion in 2022, meaning this year could see a resurgence in funds for investors to dispense to growing companies.

The alternative energy, energy technology, and battery storage space continued to be a very attractive area of VC investment in the region—particularly in China, where lithium-ion battery component company Libode raised USD 374.7 million, solar technology firm Qingdian Photovoltaic raised USD 217.5 million, and fusion technology company Neo Fusion raised USD 216.1 million during the quarter.

Egidio Zarrella, Partner, Clients and Innovation, KPMG China, says:

Generative AI start-ups continue to attract incredible investor attention globally. While the advances in generative AI have been impressive, strong investment in broader AI-based technologies, in particular by large unicorns, has long been part of the Chinese start-up ecosystem. We anticipate this trend will continue to accelerate for the foreseeable future.

Investment in AI and generative AI remained hot in Q2’23 as one of the few resilient areas of investment in the current market. As of Q2’23, Alibaba said that it had received a significant number of trial access requests for its generative AI tool Tongyi Qianwen, while Baidu announced that it had submitted its own generative AI tool Ernie bot for regulatory approval.

Zoe Shi, Partner, KPMG China, says:

VC investment remained muted in China this quarter, although the overall economy in the country continued to make a slow rebound. Despite the sluggish VC activity, we continued to see investor support for the energy and green technology sectors, particularly any solutions related to battery production. We also saw local governments increasingly collaborating with VC firms to invest in startups and provide various types of support to the overall ecosystem.

In recent quarters, both China’s central government and a number of local governments have worked to support technology development and startup growth, particularly in critical industries. This government participation is likely one reason why fundraising in China has bucked the downward fundraising trend seen in other regions of the world—and in other jurisdictions within Asia. It is hoped that this fundraising will help spur VC investments in the country heading into the second half of the year.

There is optimism in Asia heading into Q3’23, particularly in the Chinese Mainland and Hong Kong, although there is no certainty that this optimism will quickly translate into increasing VC investment. There is also some hope for stronger IPO activity in Hong Kong and the Chinese Mainland during the second half of the year, particularly given the planned spin-offs of a number of tech giant Alibaba’s business units. The success of these spin-offs could spur other IPO activity, while potentially also driving a new wave of interest in technology companies in China.

Irene Chu, Partner, Head of New Economy and Life Sciences, Hong Kong Region, KPMG China, says:

We are seeing more companies starting to undertake the work required to conduct an IPO—which will hopefully bode well for the IPO market in Hong Kong heading into the second half of the year, although actual exits may take time to materialize. If some of these early movers see good demand and results, then others will follow—which should start to improve the VC market as funds are recycled back into the secondary market.

-Ends-

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