China’s hardware startups get more VC attention as Beijing expands regulation on software

August 31, 2021, 4:49 AM UTC

China’s hardware startups are getting more venture capital funding this year, helped by Beijing’s effort to drive investments in strategically important technology as well as its crackdown on the Internet sector.   

Venture firms pumped $5.4 billion into hardware startups such as chip producers and robotics makers across Greater China during the first half of the year, according to a report by Seattle-based data provider PitchBook on Tuesday. That’s already surpassed the $5.1 billion raised in total last year and is almost quadruple the $1.4 billion total for 2016.   

That’s likely to provide a boost to China’s efforts to drive spending and research in key industries like cutting-edge chipmaking. The country enshrined its ambitions to achieve tech self-sufficiency in its latest five-year economic blueprint published earlier this year, while one of President Xi Jinping’s most trusted aides has been tapped to lead the chip battle against the U.S. The sector also looks like a safer bet, as Beijing’s campaign to rein in Internet firms in areas from e-commerce to ride-hailing and online education wipes out billions of dollars in market values. 

New initiatives in China’s 14th Five-Year Plan “aim to increase scientific and technical capabilities within areas such as renewable energy, quantum computing, biotechnology, and semiconductors,” PitchBook said in its report. “Investors with the network and capacity to invest in these companies in their earlier stages will reap great financial benefit as governments and economic development councils within the region look to boost capital deployment into these industries.”

The data indicate that venture activity remained strong during the early months of Beijing’s crackdown on its tech sector. Startups in Greater China drew $56 billion during the six months ended June, compared with 2020’s $75 billion, the firm said, even as investors fled from the likes of Tencent Holdings Ltd. and Meituan, wiping out hundreds of billions from the Internet giants’ market value.

Still, the year’s biggest venture deals—including ByteDance Ltd.’s $5 billion round and a $3 billion fundraising by grocery startup Xingsheng Selected—took place in the first quarter, with activity slowing in the second quarter just as regulatory scrutiny intensified, the data showed. 

New rules limiting the ability of firms to seek foreign initial public offerings will also fuel uncertainty. In the first half, there were about 99 VC exits, compared with 216 deals last year, PitchBook said.

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