附近上门

The strained tensions between the U.S. and China has affected nearly everything between the two superpowers 鈥� and venture capital and the tech startup ecosystem is no exception.

Just last month, it was President will sign an executive order to limit investment in sectors such as semiconductors, artificial intelligence and quantum computing in China by U.S. investors.

The U.S. already has put a deeper restriction on exports of key American technologies to the country.

However, even before any order is signed, tech investors in the U.S. seemingly already have backed away from The Red Dragon.

This year is on pace for the lowest amount of dealmaking in China by U.S. investors in recent years, according to 附近上门 data. While 2019 and 2020 saw well over 300 investments in China-based startups by U.S.-based investors, that number jumped to 426 in 2021 鈥� when the venture capital market was at a fever pitch.

However, as political headwinds grew stronger, that number dipped to only 283 investments last year. And through April of this year, U.S.-based investors were on pace to make fewer than 150 investments into China-based tech startups.

Investors do not see those numbers picking up any time soon.

Changing climate

An unnamed investor said a plethora of issues led to his firm putting the brakes on investing in China 鈥� including political strain, government action toward some Chinese tech companies, and questions around the ability for some China-based startups to list on the largest exchanges in the U.S.

In addition, there were some concerns from LPs in relation to environmental, social and governance sectors-, he added.

鈥淭here is uncertainty to begin with investing in this business, and this just added another level of uncertainty,鈥� he said.

The largest U.S.-based investors in China have significantly slowed their investment pace in the region in recent years, according to 附近上门.

• Menlo Park, California-based has made the most deals in China since 2019 at 133,聽 but only two so far this year, after two dozen in 2022, per 附近上门 data.
• Another Menlo Park firm, 鈥� formerly Nokia VC 鈥� has made 71 investments since 2019, but only 19 last year and none so far this year.
• San Francisco-based sports tech and online gaming-focused firm has made 62 deals in China since 2020, but only 11 in the past 16 months.
• Similarly, Palo Alto, California-based , which focuses on early-stage technology companies developing AI-enabled tech, has completed 60 deals in China since 2019, but only 13 in the past 16 months.
• and both announced more than 40 deals each in the past four-plus years, but only one deal combined this calendar year.

The numbers do not include firms such as , since it is its own legal entity 鈥� separate from Silicon Valley鈥檚 鈥� and based in China. However, , Sequoia has a profit-sharing arrangement which allows its U.S. partners to benefit from its China-based counterpart鈥檚 investments.

Sequoia Capital China is a major investor in the tech scene in that country 鈥� having made more than 400 investments in China-based companies since 2019 and 19 so far this year.

Drop in funding

Even with those big totals from Sequoia Capital China and other China-based investors, the migration out of the most-populous country in the world by U.S.-based firms seems to have affected funding in the country.

Venture funding in China nearly doubled in 2021 鈥� despite struggles with COVID still occurring in the country 鈥� hitting a record of more than $87 billion, according to 附近上门.

However, last year those numbers fell nearly 47% to $46.3 billion.

In the first quarter of this year, venture dropped to $8.1 billion 鈥� its lowest total in years and聽 essentially a 38% drop both year to year and quarter to quarter.

No predicting

Whether or not that precipitous drop will continue is difficult to say, even for those who know the market extremely well.

, general partner at and head of its China office since 2006, said since China joined the in 2001, U.S. investors have eyed the gigantic opportunities in the region.

However, around the time of COVID, investor perceptions of the region changed and political tensions have not helped the situation.

鈥淚 think there was a cooling-down period as the media (reporting) of China changed,鈥� he said. 鈥淭hat 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.鈥�

Lin acknowledged while Chinese regulations around tech companies and difficulties to go public on foreign exchanges likely affect investor sentiment, those issues have always existed.

Lin co-founded , which eventually became the first Chinese internet company to successfully list on the . The listing was accomplished through a variable interest entity 鈥� which can still be done now although they are regulated by the government.

With the limited access to foreign exchanges, the have tried to fill the gap, Lin said. Just recently, tech giant said it was already moving along with plans for two other business units 鈥� and 鈥� to have IPOs in Hong Kong.

However, the Hong Kong exchange has drawbacks. It is more known for retail investors and markets such as real estate and manufacturing, Lin said. There also is not the research analyst coverage that tech companies need to inform potential investors 鈥� a significant drawback for startups seeking a public listing.

鈥淲ill this turn around?鈥� Lin asked, 鈥淚 really don鈥檛 know.鈥�

While U.S. investment in the China market is not at an all-time low, it is at low ebb for the robust investing cycle that has occurred in the past several years, Lin added.

鈥淲e鈥檒l see how this plays out,鈥� he added.

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Clarification: This story has been updated to clarify investments made by U.S.-based investors.