As brought to attention by Crunchbase on 11 May 2023, unsettled relations between the United States and China have reverberated across venture capital and technology startups. Coupled with North America’s tightened export controls on crucial technologies made for China, President Joe Biden is poised to sign an executive order restricting U.S. investment in key Chinese sectors like semiconductors, artificial intelligence, and quantum computing. As tensions rise, investors in the U.S. are apprehensive, resulting in a notable decline in dealmaking.
This year is projected to witness the lowest number of investment deals by U.S. investors in China in recent years. According to Crunchbase, while the venture capital market broke records with a total of 426 deals in 2021, the figure plummeted to just 283 last year. The downward trend has persisted through April of this year, and industry experts expect the trend to continue.
A political rivalry, Biden’s executive order, and uncertainties surrounding the listings of Chinese startups on major U.S. exchanges have created a climate of hesitation. A possible explanation returns to foreign media’s reportage of China during Covid-19, which may have swayed investors’ minds. As Hurst Lin, general partner at DCM Ventures, and head of its China office, commented, “I think there was a cooling-down period as the media [reporting] of China changed [...] That led to a drying up of foreign capital. LPs started to change their perspective, and as an investor you need to be concerned about that”.
The migration of U.S.-based firms away from China appears to have affected venture funding in the country. After a record-high of over $87 billion in 2021, funding dropped by nearly 47% to $46.3 billion in 2022. The future trajectory remains uncertain, when asked about the possibility of a turn around, Lin stated to Crunchbase, “I really don’t know”.
While the full extent and duration of this shift are blurry, it is clear that the dynamics between these two global powers are reshaping investment strategies and shaping the future of tech startup ecosystems in both countries.