China is being called a new Silicon Valley, striving for global domination through companies covering a wide array of technologies. In the second quarter of this year alone, its startups reportedly attracted 47 percent of all global venture capital, compared with the 35 percent that companies in the United States and Canada cumulatively raised.
For the first time, Chinese entrepreneurs took the lead in venture fundraising, proving that the nation’s combination of long-term state planning – as well as specialization in areas such as robotics, new-energy vehicles and biotechnology – may be paying off.
Yet venture capitalists say there’s a dark side to China’s tech sector, stemming from something other industries and countries would envy: Too much money from both the government and the private sector is pouring into startups, regardless of a company’s merits.
The overflow of money into China’s tech sector reflects how companies in all of the country’s industries have trouble assessing risk, a result of following government priorities, not market forces, experts say. The landscape rings eerily familiar to the internet bubble that formed in the U.S. in the 1990s, and as a result, China’s decadeslong economic boom is also fueling massive debt.
“You have like $70 (billion)-$80 billion a year going into venture (capital), but you are getting funded not just the good companies but also the bad companies,” says William Bao Bean, managing director of Chinaccelerator, a Shanghai-based startup accelerator for software companies in China. That’s happening, Bao Bean says, because of the pressure put on VCs to invest from shareholders and owners.
A bad company is not necessarily one that is unprofitable, experts say. Entities that are poorly conceived and put together present a much higher risk of never being successful. Such companies, although having the potential to temporarily create jobs, might ultimately hurt investors and damage consumer confidence.