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China’s startup and venture capital landscape grows with the support of the government

Over the past decade, the startup and venture capital landscape in China registered a significant increment, rivalling the same sector in the United States and claiming the second place in the world as the country with the largest number of “unicorn” companies.


In recent years, the Chinese government has offered attractive incentives to boost technological development and innovation and to increase venture capital investment. These supportive policies have lured young companies and entrepreneurs.

Incorporate in China

China’s goal to become a world leader in entrepreneurship, innovation, and investment is the force behind the government’s promise of rapid growth and returns. The amount of overseas venture capital (VC) investment poured into China over the past few years has placed the country second to the US in the highest number of “unicorn” companies in the world.


Artificial intelligence, integrated circuits and semiconductors, and biotechnology are some of the emerging industries supported by the government’s initiatives. In addition, fostering entrepreneurship could help alleviate underemployment, particularly among young people, which is another challenge that Chinese authorities currently face.


In 2022, China ranked 10th in the world and the first in East Asia for startup economies, according to the Global Startup Ecosystem Index by StartupBlink. The top cities for startups in China were Beijing, Shanghai, and Shenzhen, followed by other urban centers such as Hangzhou, Guangzhou, Chengdu, Wuhan, Changsha, and Nanjing.


There are no specific figures on the number of startup companies in China. However, according to Forbes China, there were over 368 “unicorns” in 2022 (privately held startup companies with a valuation of over US$ 1 billion), with 74 new ones added from the previous year. Chinese economist Ren Zeping estimates the total valuation of China’s unicorns in 2022 to be at RMB 9.4 trillion (approx. US$1345.5 billion).


Some of the major players in the Chinese startup sector are Shein, e-commerce, valued at RMB 97.5 billion (US$14.1 billion) in 2022, DJI, high-end hardware, valued at RMB 100 billion (US$14.5 billion) in 2022, WeBank, fintech, valued at RMB 200 billion (US$28.9 billion) in 2022, and ByteDance, new media, valued at RMB 2.3 trillion (US$332.8 billion).


The Ministry of Industry and Information Technology (MIIT) informed that in 2022, an average of 23,800 new companies were established every day, and the number of micro, small, and medium-sized enterprises (MSMEs) exceeded 52 million.


Among these were 70,000 so-called “specialized, refined, special, and innovative” small and medium-sized companies. These included 8,997 “little giants”, which are pioneer companies that dominate certain market segments and have great potential for innovation.


The biggest concentration of startups can be found in a small group of high-tech industries, such as high-end hardware, new vehicles, medicine and healthcare, enterprise services, software services, supply chain logistics, e-commerce, fintech, new media, and “new consumption” (consumer business models enabled by digital technology).


The largest fraction of unicorns was in e-commerce, healthcare, and hardware, with around 12.9 percent of unicorns being in e-commerce and healthcare and 12.1 percent in hardware, according to Ren Zeping data.


New media was by far the biggest, with 28.2 percent of the total valuation of all unicorns in China, although this may have been influenced by the inclusion of TikTok owner ByteDance, which is the single largest unicorn by valuation in both China and the world.


This was followed by fintech, with unicorns accounting for 16.1 percent of the total valuation. Other areas in the startup sector that received financing in 2022 are biotechnology and drug manufacturing, integrated circuits (IC), new materials, new energy, and metaverse industry applications.


Some startups in more niche and emerging industries also received funding in 2022, such as companies operating in the NFT, pet services, sodium-ion batteries, camping, and perovskite materials for solar energy batteries.


Just as the investment in Chinese startups, the interest in the Chinese market from venture capital firms has also grown. A report from Crunchbase stated that China surpassed the US as the number one destination for venture capital (VC) investment for the first time in 2018, though this was motivated largely by Ant Financial’s funds.


According to Statista, the number of new VC investments in China has risen steadily since 2010 and reached 5,208 investments worth a combined RMB 371 billion (approx. US$53.7 billion) in 2021, following a slowdown in 2019 and 2020.


Inflation and high rates in international markets had an impact in most of the world’s economies and caused a downward trend in VC funding in China, with total funding falling from US$88.5 billion in 2021 to US$44.2 billion in 2022.


However, there were a few major investment projects in China, which included US$2.5 billion raised by EV company GAC Aion New Energy Automobile and US$1.5 billion raised by Shein.


Currently, American VC firms continue to lead, but several Chinese companies have emerged and are leaving their mark in the industry. Among the 121 top VC firms that were included in the Hurun Global Venture Capitalists 2022 Half-Year Report, 86 were in the US and 24 in China. Among the top 10 VC firms (invested in the largest number of unicorn and “gazelle” companies), two were Chinese – Tencent and China International Capital Corporation (CICC).


Important VC firms that have invested in China include Sequoia Capital (ByteDance, Shein, and Envision Energy), Softbank (ByteDance and Guazi.com), and IDG-Accel, a joint venture between Chinese investment firm IDG Capital and US VC firm Accel.


Chinese firms investing in startups include Tencent, CICC, Qiming Venture Partners, and CITIC Capital.

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Young entrepreneurs in China tend to be highly educated, with 85 percent college graduated. According to a study by the University of International Business and Economics (UIBE) in Beijing, 70 percent of entrepreneurs were starting a company for the first time, whereas 50 percent of those over the age of 33 already had experience starting two or more companies.


The most common structures for a startup were sole proprietorships and partnerships, while the funding of 90 percent of the startups came from personal or family savings or loans from relatives and friends, and financing was mainly from bank loans and partnerships.



On average, entrepreneurs start making a profit within three years of starting the company, and more than half of startups achieve significant expansion in the initial stage.


To foster innovation and entrepreneurship, the Chinese government announced programs and incentives such as several low-cost, convenient, and open “maker spaces” or incubators, that offer strong professional services and encourage the cultivation of angel investors and VC institutions.


By the end of 2022, there were 212 such bases or incubators in China, according to the National Bureau of Statistics (NBS).


Other policies include preferential tax rates for technology firms and for micro, small, and medium-sized enterprises (MSMEs) and small and low-profit enterprises (SLPEs), which some startups may be eligible for (depending on annual profits and the size of their workforce).

The preferential tax policies for MSMEs and SLPEs include:


All types of SLPEs in China can enjoy a reduced corporate income tax (CIT) rate of 20 percent in combination with a reduction of their tax base;


VAT incentives, including reduced VAT levy rate, increased VAT threshold, and VAT exemptions, in some cases; and IIT incentives for small business owners.

There are also tax incentives aimed at encouraging tech innovation, which include:


A reduced 15 percent CIT rate for high-tech and new technology enterprises (HNTEs); and

A reduced 15 percent CIT rate for advanced technology service enterprises (ATSEs). ATSEs are also eligible for a zero VAT rate for the provision of certain offshore services.


China also provides a super deduction on R&D expenses for various types of enterprises, such as technology SMEs (TSMEs), and manufacturing enterprises, among others,

In addition to this, the Chinese government published a notice supporting employment and entrepreneurship of graduate students, which include funding for innovation and entrepreneurship education, tax incentives for graduates who become self-employed in a year, preferential tax policies, and increasing the maximum loan amount for graduates, among others.

Despite this significant growth, some obstacles may challenge in the future the startup landscape in China, such as difficulties in the US-China relations and an unstable global economy.


 

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