China poised for first time to attract more venture capital than US for early-stage start-ups in 2018

  • As Chinese start-up stars attract more venture capital than American counterparts, 2018 will be remembered as the ‘year of the red unicorns’, says Preqin
  • Already in the first half of the year, China outpaced the US in venture capital for promising privately held companies worth at least US$1 billion
PUBLISHED : Sunday, 09 December, 2018, 4:54pm
UPDATED : Monday, 10 December, 2018, 12:11pm

2018 is likely to go down as the “Year of the Red Unicorns,” when for the first time China beats the US in attracting the most global venture capital for early-stage start-ups, private equity data provider Preqin said.

Already in the first half of the year, China outpaced the US in venture capital for promising privately held companies worth at least US$1 billion, raising US$56 billion versus US$42 billion, according to “The Year of the Red Unicorns” study by Preqin and graduate business school INSEAD.

China is home to some of the hottest unicorns in the world, sparking multibillion-dollar funding rounds this year for companies such as Ant Financial, bike-sharing start-up Mobike and Ping An Healthcare. Five of the world’s top 10 most valuable unicorns are Chinese.

The Preqin-INSEAD study tracks 321 unicorns, of which one third – or 98 – were Chinese and half – or 162 – were US. This means that, despite fewer in number, China’s unicorns tend to be highly valued by their investors.

“The success of the red unicorns has spurred a culture of entrepreneurship in China, inspiring millions of young Chinese to follow suit [as they are] encouraged by government efforts to support innovation and entrepreneurship,” the report said.

The study comes out at a dramatic moment when the world is witnessing a flare-up between China and the US that is putting a spotlight on their rivalry in next generation tech innovation. The chief financial office of Chinese telecom giant Huawei has been detained in Canada over US fraud allegations that she covered up her company’s links to a firm that tried to sell equipment to Iran in defiance of sanctions.

Beijing blames Canada for Huawei arrest and threatens ‘grave consequences for hurting feelings of Chinese people’

China is drawing huge global attention with its “Made in China 2025” programme that aims to transform the country into a hi-tech powerhouse, taking on the US and other Western tech giants in everything from robotics to aerospace to new material and new energy vehicles.

The Preqin-INSEAD study tracks 321 unicorns, of which about one third – 98 – are Chinese and half – 162 – are US. This means that, despite fewer in number, China’s unicorns tend to be highly valued by their investors.

“The success of the red unicorns has spurred a culture of entrepreneurship in China, inspiring millions of young Chinese to follow suit [as they are] encouraged by government efforts to support innovation and entrepreneurship,” the report said.

Five of the top 10 “mega-unicorns”, defined by Preqin as privately held, venture-backed companies with a valuation of at least US$10 billion and over, originate from China.

At the head of the list is Ant Financial, which has a valuation of US$150 billion. The fintech and third-party payment network affiliate of the Alibaba Group has this year raised a record-breaking series-C round at US$14 billion, from such leading investors as Temasek, CPP Investment Board, Carlyle Group and GIC. Alibaba is the owner of the South China Morning Post.

‘Made in China 2025’: is Beijing’s plan for hi-tech dominance as big a threat as the West thinks it is?

Holding second place is Didi Chuxing, a ride-hailing mobile app in China that has since expanded into autonomous driving. Valued at US$56 billion, its backers include Softbank, Tencent, Singapore sovereign wealth fund Temasek, GGV Capital and others.

In terms of investors with stakes in the largest number of Chinese unicorns, three Chinese so-called BAT tech giants – Baidu, Alibaba and Tencent – are among the top five.

Internet titan Tencent tops the list with equity stakes in 27 of the 98 Chinese unicorns that Preqin tracks. Alibaba and Baidu have 15 and 13 red unicorns, respectively. Second in ranking is Sequoia Capital, a US-headquartered venture capital firm, which has 25.

Underlining China’s increasing dominance in producing unicorns, Raymond Chan, Allianz Global Investors’ equity chief investment officer for Asia-Pacific, said China is also expected to surpass the US this year in research and development spending in 2018.

The five-year compound annual growth rate for China R&D spending up to 2016 was 9.88 per cent, compared to the US growth rate up to 2015 of 2.01 per cent, he said.

“Over the years there has been a lot of investment made in China in their R&D and intellectual property. Hence, for the current trade negotiations between China and the US on structural reforms pertaining to intellectual property protection, I believe that it is also in China’s interests to come to an agreement because it also needs to see its own IP protected ” said Chan, referring to the 90-day trade war truce recently agreed to by China President Xi Jinping and US President Donald Trump.

business-article-page