VC investment in Asia fell from $25.5 billion in Q4’22 to just $13.5 billon in Q1’23—the lowest quarter of VC investment seen in the region since Q2’15. The quarter was challenging from multiple angles, as several factors combined to stifle VC investment across the region. In China, a surging COVID-19 wave hindered VC activity in advance of its New Year holidays, while Hong Kong felt the impact of rising interest rates and a slowdown in IPO activity, and India saw investors becoming pickier with their investments. Only Japan saw increasing investment in Q1’23, although the total remained far below Q1’22.

Alternative energy hot across Asia, particularly in China and Hong Kong

VC investment in alternative energy and electric vehicles remained very robust across Asia in Q1’23, with China and Hong Kong accounting for the largest deals in the space, including a $750 million raise by EV vehicle manufacturer Zeekr, a $445 million raise by AI company PhonePe, a $442 million raise by solar energy technology company SolarSpace, a $400 million raise by fossil fuels decarbonization company EcoCeres, and a $290 million raise by United Aircraft.

Interest in alternative energy also remained robust in India during Q1’23, with VC investors particularly focused on the two-wheel EV market. Given India’s role as a major automotive manufacturing hub, it is expected that alternative energy will remain a key priority for VC investors for some time. India’s government has also been very supportive of the EV space, introducing subsidies to support EV adoption.

VC investment in China falls sharply quarter-over-quarter

VC investment in China was particularly hard hit this quarter as the country battled a major COVD-19 wave in the wake of its autumn reopening, although VC activity picked up somewhat in the second half of the quarter once the wave diminished. VC investment during Q1’23 totalled only $7.4 billion—less than half of the $15 billion seen in Q4’22.

As VC investors questioned high valuations, late-stage funding in China dropped considerably in Q1’23; by comparison, pre-seed and Series A funding was much more stable. Corporate VC investment in China also declined considerably during the quarter as corporates focused their capital on supporting their own operations rather than on growth and expansion. 

VC investment in India remains subdued, but long-term outlook positive

VC investment in India remained relatively soft in Q1’23 as VC investors intensified their scrutiny of potential deals. While FOMO drove a lot of VC investment in India in 2021 and early 2022, VC investors have since enhanced their focus on startup performance and profitability. Fintech continued to drive many of the largest deals in India in Q1’23, including a $445 million raise by PhonePe, a $218 million raise by NoBroker, a $200 million raise by KreditBee, and a $150 million raise by Insurance Dekho. India also saw growing interest in agtech and gaming during the quarter. After a long period of euphoria, interest in edtech in India died down considerably during Q1’23.

Despite the current slowdown in VC funding, macro factors in India remained relatively strong compared to other jurisdictions, which is driving optimism that the country will see a bounce back in VC investment in the later half of 2023.

Japan sees slight uptick in VC investment in Q1’23

Japanese VC investment saw slight increase during the quarter compared to global downward trend in VC investment, although it remained soft compared to the level of investment seen during the same quarter in 2022. VC investors in Japan became more selective with respect to post Series C deals during Q1’23, although appetite for seed and Series A deals remained quite robust.

The Government of Japan made a strong commitment to fostering innovation in its Integrated Innovation Strategy 202212. In Q1’23, it moved forward with several of the initiatives included in this strategy, including funding for R&D at universities and centers of excellence and funding to support local governments as they establish startup hubs and clusters. In addition to Tokyo, Sapporo and Sendai have rapidly emerged as startup hubs in Japan. Osaka, Hiroshima, and Fukuoka are also aggressively using funds to attract startups to their prefectures.

AI gaining significant attention, particularly in Hong Kong

Investor interest in AI has been relatively robust in Asia historically, although it increased further in Q1’23 in the wake of the global buzz generated by ChatGBT. The applicability of AI to many diverse sectors makes it a particularly attractive area for investment. In Hong Kong, AI solutions are maturing quite rapidly, particularly in building management—such as the use of AI to manage building operations, energy use, and security, and in health and biotech—including the use of AI for drug discovery and the modeling of disease spread.

Trends to watch for in Q2’23

 There is cautious optimism across much of Asia heading into Q2’23, with several jurisdictions seeing some positive signs for the future, if no actual pick-up in deals at present. While VC investment in the region is not expected to bounce back remarkably over the next quarter, should the sense of positivity continue, VC activity could begin to see some recovery heading into the second half of the year.

While IPO activity was slow in Asia during Q1’23, it could see some renewed interest as a result of the new Chapter 18C listing rules in Hong Kong. China is also working to strengthen the attractiveness of its mainland stock exchanges for tech-driven businesses in sectors like deeptech, EV, and biotech.

Venture Pulse Asia

The IPO market in Hong Kong continues to be slow this quarter, but the new Chapter 18C listing regime that came out in Q1’23 will make it easier for specialist technology companies—startups focused on AI, robotics, alternative energy, agritech, and other similar areas—list on the Hong Kong Stock Exchange. This could help spur some new activity later in 2023.

Irene Chu
Partner & Head of New Economy and Life Sciences,
Hong Kong, KPMG China

  • Venture Capital investment falls to $13.5 billion across 1773 deals

  • Median deal sizes begin to slide – particularly at later rounds

  • Earlier-stage deals stay surprisingly resilient

  • First-time fundraising remains more resilient than other regions

  • Chinese companies pull in 8 of the top 10 deals in Asia

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