Or put differently: does the crackdown on Chinese tech icons make it less likely that new, ambitious young people in China will become entrepreneurs in the first place? Could this have longer-term macroeconomic effects we’re not seeing yet? How might Beijing go about gaming this out?
Founding Managing Partner at Qiming Venture Partners
Simply — not yet. We are seeing record investments into core technology and health care sectors. We are continuing to see robust fundraising by U.S. dollar and RMB funds. We at Qiming are early-stage investors, so most of our portfolio companies are quite small when the initial investment is made. They are “under the radar” of the regulatory agencies.
On the positive side of the regulatory intervention is the fact that we now have a more open and fair playing field. Alibaba, Tencent, Baidu, JD.com, et al. had created major choke points for startups trying to enter the market. Having this dismantled is overall a positive for entrepreneurs just entering the market today.
As a sector, our TMT portfolio has seen more impact than our health care portfolio.
Our entrepreneurs have to be aware and diligent of the regulatory changes. Certainly too heavy a hand by regulators trying to control listing venues and unclear or arbitrary enforcement of rules on data ownership and management could result in an impact on VC investment velocity and scale, but as I said at the beginning — not yet.
No, China's entrepreneurial fervor is at an all-time high. There is a difference between reigning in giants and stifling startups, and regulations are primarily focused on the former. In addition, China’s economy has evolved and new, wider avenues of entrepreneurship are available for pursuit. The digital platforms that were chastened this year were largely birthed a decade ago, but for the past five years the top three sectors of investment have been health care, enterprise software and advanced manufacturing. This fundamental shift and expansion in the kinds of companies that are being created will continue as China matures into a more diversified ecosystem beyond the consumer internet.
In addition, two other trends are spurring startup activity. First, Chinese supply chains have become sufficiently advanced, and years of competition have trained enough talent in design and branding that domestic brands are now delivering user experiences comparable or even superior to their international counterparts. The domestic market is reeling from the rise of these new "national stars." Second, in both the digital and physical realms, Chinese companies are increasingly confident in their ability to expand and lead internationally. TikTok and Shein won't be the last Chinese global phenoms, and the ones who come after them will be from many different sectors. Climate tech is a good example: Chinese automakers will likely never dominate, but Chinese EV makers will have a much better chance.
The opportunity is actually greater for entrepreneurs, especially for early-stage startups, because the market’s opening up more.
I think calling it a tech crackdown is an oversimplification. There are some regulatory shifts, and they have happened across pretty broad axes. Overall, I think it's a positive for the China entrepreneur and the early-stage investment market. The general effect is to break down monopolistic practices by big internet companies that have made it difficult for startups and large companies to compete. This has been a less-and-less level playing field over the last four or five years in China.
And at SOSV, we think you can already see greater competition in the market. You can search WeChat from Baidu, which was impossible before. You can cross-promote Alibaba on Tencent, and vice versa. You can pay with any payment platform on any internet platform.
The pace of change is simply much greater in China than in other markets. The amount of concentrated capital flowing into technology is No. 2 in the world. And sometimes it’s No. 1 — just in the third quarter of this year, China had a [near-]record in terms of the amount of venture capital investment, as well as the number of investment deals.
It seems clear that Chinese financial and internet regulatory officials, along with senior Party and government officials, have not communicated the goals and drivers of the rectification campaign targeting technology companies, and the associated “common prosperity” campaign in ways that are designed to alleviate the concerns of China’s entrepreneurs. So in this sense there does not seem to have been an attempt by Chinese regulatory officials to “game out” the potential consequences of particular regulatory moves, let alone the entire campaign. We have seen a number of founders of leading tech firms step back from managing the company, while other long-time technology industry leaders have remained in their positions but adopted lower profiles or issued statements supportive of government and Party priorities. The manner in which the Party communicates its new vision for China’s technology sector in early 2022 will be key to watch for signs that Beijing understands the need to ensure that its regulatory rectification campaign does not go too far, and will work to discourage new tech entrepreneurs from taking risks and pursuing innovative approaches.
Looking forward, it seems that Chinese entrepreneurs are very resilient and unlikely to be heavily impacted across all technology sectors. The opportunities created by the new emphasis on the 14th Five-Year Plan on so-called “hard tech” will appeal to a group of younger, tech-savvy entrepreneurs, as will the continued development of the capital markets in China, particularly the high-tech STAR board in Shanghai and the Beijing Stock Exchange for small and medium-sized enterprises. But it will be a new breed of entrepreneurs who will tackle development of innovative approaches in areas such as semiconductors, quantum computing and AI, and will have to have different skills that the pioneers of China’s ecommerce, fintech, online education, social media and logistics industries needed. And all entrepreneurs will need to be much more attuned to the political winds emanating from Beijing.
David Wertime is Protocol's executive director. David is a widely cited China expert with twenty years' experience who has served as a Peace Corps Volunteer in China, founded and sold a media company, and worked in senior positions within multiple newsrooms. He also hosts POLITICO's China Watcher newsletter. After four years working on international deals for top law firms in New York and Hong Kong, David co-founded Tea Leaf Nation, a website that tracked Chinese social media, later selling it to the Washington Post Company. David then served as Senior Editor for China at Foreign Policy magazine, where he launched the first Chinese-language articles in the publication's history. Thereafter, he was Entrepreneur in Residence at the Lenfest Institute for Journalism, which owns the Philadelphia Inquirer. In 2019, David joined Protocol's parent company and in 2020, launched POLITICO's widely-read China Watcher. David is a Senior Fellow at the Foreign Policy Research Institute, a Research Associate at the University of Pennsylvania's Center for the Study of Contemporary China, a Member of the National Committee on U.S.-China Relations, and a Truman National Security fellow. He lives in San Francisco with his wife Diane and his puppy, Luna.