The outlook for investment in China is suddenly brightening as the country is phasing out its draconian zero COVID policy, which has caused disruption to businesses of all kinds and kept the country’s borders closed for the past three years.
For venture capitalists, the pandemic has been a tumultuous ride. Tony Wu, a partner at Northern Light Venture Capital, a China-focused venture capital firm with $4.5 billion in assets under management, calls 2022 “the toughest” of his 15 years of investing in companies. Chinese startups.
“Now spring is finally bringing new life to the withered trees. There is a lot of optimism for 2023,” Wu, who focuses on the consumer internet area at the company, said in an interview. NLVC’s extensive portfolio includes Chinese on-demand services titan Meituan, BGI, the country’s gene giant, and Black Sesame Technologies, one of the few local auto chip makers.
What happened in 2022? And what makes Wu more optimistic for the coming year?
Herald of Spring
Over the past few years, China’s regulatory crackdown on its internet industry, coupled with COVID restrictions that have caused great uncertainty in the economy, has significantly undermined investor confidence. Venture capital deals fell 44% year-on-year to $62.1 billion in the first 10 months of 2022, according to research firm Preqin. Equity investment fell 33.9% in the first three quarters of the year, shows another report from Chinese market researcher Zero2IPO.
The bearish mood of 2022 “was on par with 2008-09,” Wu believes. But unlike the 2008 financial crisis, he argued, this downturn cycle “has fundamentally damaged the vitality” of the market. country’s venture capital investment. “Money fled, talent left, and many internet bosses moved to Singapore.”
Regulation is nothing new in the Chinese tech space, as authorities are always rushing through new legislation to curb the reckless growth of emerging sectors. But the recent crackdown, which began around 2020 when the government put Ant Group’s colossal IPO on hold, is widely seen as the toughest in decades, forcing left and right tech companies right to rethink their strategies.
Companies operating in heavily regulated areas, like social media, video games and Web3, have seen a narrowing window of opportunity domestically, so many of them have packed their bags and headed to Singapore, culturally familiar and geographically close. Their investors, especially those raising funds from international sponsors, have followed suit and established outposts in the city-state. An era of rising tensions between the United States and China has further prompted Chinese companies with overseas ambitions to sever ties with their country.
The abrupt end of the zero COVID policy and the first signs of regulatory relaxation give investors hope that some aspects of the tech industry may finally be back on track. At least investors can casually meet founders in another city without worrying about being quarantined on the way home.
Clouds also appear to be slowly dispersing into regulation space. In December, China granted a batch of licenses to 44 foreign games, ending an 18-month hiatus that plagued gaming giants like Tencent. Wu believes regulators will also start lifting some of the restrictions on Ant Group, which has revamped its fintech business at the behest of regulators to act more like a traditional financial group.
Chasing the web3
While the darkest days of regulation may be behind us, renewal has limits. The reckless, high-growth era of social media, ridesharing, and other consumer-driven businesses is over. In web3, one of the few remaining technology areas that was still offering stunning returns for VCs until the recent stock market crash, “there is no discernible future for China, yet,” suggests Wu.
This is a conclusion shared by many founders and investors. Over the years, China has moved to ban much of the underlying Web3 infrastructure, and most importantly cryptocurrency trading. As a result, many serious web3 projects have moved offshore.
Despite the talent drain, Wu continues to support web3 entrepreneurs from China. In 2023, he plans to allocate at least 60% of his “energy” to web3, which he considers just as disruptive for venture capital as for the internet.
“Web3 has fundamentally changed the way investing is done,” observes the investor. “In the past, you invested Chinese founders with operations in China. Now, a web3 startup might have its R&D in China, but its product is global, and the rest of its team might be in Singapore or the US. It takes capital as well as token investments. And instead of 10%, we only take 1% of his stake.
Like others who remain bullish on Web3 despite the crash, Wu thinks the bear market is a good time to “build” when people ultimately don’t view crypto as a speculative asset class. “We should instead be looking at the number of users and new developers crowding into web3,” he notes.
China also remains key to the global development of Web3, even though there is no domestic market for the decentralized technology. Two decades of unbridled growth at tech giants like Tencent, Alibaba, and ByteDance have spawned a skilled group of software engineers who are known for delivering results under pressure and to strict deadlines, and who, on average, cost only one-fifth of their American counterparts.
China’s Internet talents are also experienced in handling large-scale and rapidly expanding Internet services, Wu asserts. “Solana is known for being fast and cheap, isn’t it?” But it also had a few breakdowns. The blockchain just manages over a thousand nodes. But name any major Chinese internet company – they easily operate hundreds of thousands of servers.
He keeps on. “The question is how to unleash the supply of Chinese developers for the global web3 industry.”
Electric car racing
As Wu follows China’s web3 founders overseas, he’s also betting on domestic players in another exciting field: electric vehicles. Even in the relatively new electric vehicle industry, he believes racing has already entered “the second half” and competition is getting “fierce”.
China shipped around 20 million vehicles in 2022, of which 6.5 million or 32.5% were running on “new energy” such as electric or hybrid, according to the China Passenger Car Association. “Give or take the EV penetration rate reaches 60-70% – because there will still be petrol cars – [a 30% penetration means] the industry is entering the second half,” says Wu.
So far, none of China’s electric vehicle companies has come close to the level of brand recognition enjoyed by German luxury automakers. But they each offer their unique selling point. Upstart Nio puts a lot of effort into customer service and rival Xpeng prides itself on advanced tech like self-driving.
Wu singles out BYD, the 28-year-old battery and electric vehicle giant, as the pioneer in the globalization of Chinese electric vehicle companies because of its incredible affordability. In December, BYD’s overseas sales topped 10,000 units, which doesn’t sound like a lot. But the automaker is already well established in China, often battling with Tesla for the top spot in the world’s biggest electric vehicle market.
“The globalization of Chinese electric vehicles is inevitable. We have a complete supply chain and our price advantage is already quite obvious,” says Wu, pointing out that BYD is the only Chinese electric vehicle manufacturer to control the entire supply chain, like Tesla, which gives it leeway to lower prices. “You have to remember that these Chinese automakers are coming out of an extremely competitive environment.”