Alt Investments
US Overtaken As Venture Capital Powerhouse

China has leapfrogged the US in the money start-ups receive from venture funds, a key trend as young businesses spawn the high net worth wealth management clients of tomorrow.
China’s venture capital sector is not in the slipstream of the US
any longer because new figures show that Chinese start-ups are
attracting more funds than US peers. The change underscores how
the economic centre of gravity is moving to the East. The figures
may also be a warning that US entrepreneurial dynamism – a motor
for future wealth – cannot be taken for granted.
In the first six months of this year, $56 billion was invested in
China-based early-stage firms, leaving the US in second place, at
$42 billion. The data comes from Preqin, the research firm
tracking venture capital, private equity and hedge funds, and
European business school INSEAD.
The US is still home to the greatest number of venture capital
unicorns – defined as privately held, venture capital-backed
companies with valuations of $1 billion or more. The US is home
to 162 such unicorns out of 321 that exist globally. But five of
the 10 largest such entities are in China, including Ant
Financial Services Group, valued at about $150 billion.
China-based firms also account for three of the largest initial
public offerings of venture capital unicorns, including the
largest of all, Alibaba Group. That firm had a value of $231
billion when it floated on the New York Stock Exchange in 2014.
Perhaps fittingly, the authors of the report call the latest
developments The Year Of The Red Unicorns.
“China’s emergence as a hub of innovation and entrepreneurship
has been the major venture capital narrative of the past five
years. Conditions in the country are well-suited to promote large
technology firms – China boasts more mobile phone users than any
other country, and technology like e-commerce and mobile payments
are deeply embedded in the lives of many people,” Christopher
Elvin, head of private equity at Preqin, said.
Growth pace has been rapid: In 2010 China-based early-stage
companies secured just $4.6 billion in venture capital funding –
in 2017 they secured $64 billion. Of the 321 venture
capital-backed unicorns currently active worldwide, 98 are based
in China while 162 are based in the US.
Coupled with recent data from UBS and
PricewaterhouseCoopers that China is the strongest driver
globally for new billionaires, such data bolsters the idea that
the country is the best place for wealth managers to find new
clients.
(Source: Preqin)
As of July, the largest unicorns globally are: Ant Financial;
Uber Technologies; Didi Chuxing; Airbnb; Tongcheng Network
Technology Co; WeWork Companies; Palentir Technologies; Toutiao;
Shanghai Lujiazui International Financial Asset Exchange, and
Pinterest.
The Preqin/INSEAD report’s authors throw in a few words of
caution, however: “For example, China has difficulty conquering
the global labor market compared to the US. Whereas Silicon
Valley attracts top talent from around the world, China is not
quite on the list of preferred start-up locations. Stumbling
blocks include the language barrier and cultural differences.
Additionally, despite new policies having been implemented to
protect patents and endorse intellectual property rights, China
is still criticized for – and some may argue being held back by –
a lack of strong intellectual property and trademark laws.”
The report also noted that a high number of VC investors in
Chinese firms operate in the country. Of the 465 investors
globally that invested in the 98 Chinese unicorns that form
Preqin’s dataset, 66 per cent have a local presence in mainland
China and a further 9 per cent in Hong Kong. Only 13 per cent of
investors are investing directly from the US, and barely any are
located in Europe.
The report also names the top-10 investors in China when ranked
by the number of unicorn holdings: Sequoia Capital (8);
Morningside Venture Capital (7); Matrix Partners (7); ZhenFund
(6); IDG Capital (5); Qiming venture Partners (4); CDH
Investments (4); Shunwei Capital Partners (4); Lightspeed Venture
Partners (4), and GGV Capital (3).
(Editor’s note: The findings certainly show that China’s
start-up sector is in rude health and is clearly positive news
for wealth managers in the region. Given the country’s rapid
growth – despite all the headwinds from tariffs and other factors
– it is not perhaps surprising that it is matching and even
overtaking the US. That said, it is notable, and sobering, that
very few European VC funds appear to be involved in this
story.
The figures also reinforce some worries that the great motor of
American capitalism is misfiring. A recently-published book,
Capitalism in America: A History, by former US
Federal Reserve Chairman Alan Greenspan and journalist Adrian
Wooldridge, lays out some of the problems. For example, new
business formation rates are, the book says, as low as they have
been for more than two decades, and labor mobility and
productivity have been waning. Such numbers might not immediately
alarm wealth managers, but in the long run, a healthy wealth
management sector needs new millionaires coming through. And it
may well be that the sort of data Preqin and INSEAD show
highlights a deeper, and potentially concerning, trend. Needless
to say, there appears to be little visible discussion of it in
Washington DC or the capitals of Europe.)