I went to China last month and visited most of the tier 1 investors and the management teams of many major robotics and biotech companies.
There is a narrative in Silicon Valley that China is winning in the domains of the future: open source AI, biotech, and robotics. There are formidable arguments for this fear. Open source Chinese models are the most popular models in Silicon Valley startups and as the US government locked down Fable, China ironically took up the mantle of powering the open AI stack of the world. On biotech, the majority of Chinese clinical trials are novel therapies and half of American FDA clinical trials are drugs licensed from China. Finally on robotics, China has structural advantages in both scaled data production and most importantly, warpspeed hardware development and feedback loops.
But despite these advantages the Chinese don’t seem to be resting on their laurels and there was a widespread eagerness to hear what Silicon Valley was thinking about and the Valley is still perceived as the center of innovation. A top VC even told me whenever a new Benchmark or Sequoia podcast comes out he assigns it as required viewing of the firm. The Chinese know exactly everything that’s happening in the West. Updates on my X/LinkedIn are translated by one of the top three Chinese tech outlets (新智元，机器之心，量子位）within a few hours and even X comments are translated in screenshots (you might already be famous in China!). This information asymmetry contributes to their learning rate and may help close the gap eventually, but in the meantime, they look up to the Valley. Maybe the grass is always greener.
At a high level, the Chinese capital markets are less developed and much harsher on founders, which may breed more competent and ruthless companies that can out-execute globally, but may also create incentives for more froth and fraud due to the amount of pressure and liability founders face. Most of the world's tech hubs are modeled on Silicon Valley, from Seoul to Tel Aviv, but China is an alternative universe in many ways. Understanding how China funds innovation has been a fascinating heuristic into comprehending China's path to here and beyond.
Go Public or Go Home
The first thing that stood out to me when meeting many robotics and AI founders was that they were all planning and sprinting for an IPO next year. None of these companies were at the scale of Unitree or Moonshot (and even they would have had a hard time listing on the NASDAQ) but they all said they were going public. Why? Because they had to.
In China, many startups don’t go public because they can and conditions are ripe. They list because they are forced to. One of the most shocking facts for American founders is that many Chinese founders sign term sheets where they must return capital beyond a hurdle rate within a time limit (sometimes 6-8 years) or else the company and even the founder personally could be liable to pay back the money. Chinese LPs and GPs have less patience and they demand results. There’s even a Chinese idiom describing this phenomenon: 明股实债, translatable as “ostensibly equity, in reality debt”. It baffles one to think that there is even any innovation in an ecosystem where a founder has to take on massive personal liability to start a high risk venture. With stakes this high, who has the guts? But these Chinese founders are willing to risk it all, and incentives like this breed some of the leanest and meanest companies in the world with founders who are truly all in. When they can’t make money in China’s ruthless arena, they often expand globally, dominating local competition. They are not Stanford sophomores doing YC for a summer just for funsies. This is all or nothing.
Two questions spring from this.
Why No M&A?
Why does it have to be an IPO? Can’t they get acquired and that would return money? Turns out no. In China, there is basically a non-existent M&A market and so startups can only exit through IPO, going all the way. Chinese companies are cheap and so is labor. They can just copy any idea you have faster. They’re also extremely ambitious and horizontally integrated (a smartphone company will make sports cars and SaaS), all contributing to low acquisitiveness. No acquihires handed out there.
However, one silver lining for the founders there is that the barrier to IPO is generally lower than NASDAQ or NYSE, not necessarily from a regulator’s perspective, but from the public market’s sentiment towards those companies, meaning whether people are willing to buy into those companies. Many of the public Chinese tech companies of recent years have nearly no revenues or customers, and are sub-scale by current American tech valuations. However they had successful IPOs and of course we are seeing a bull market in the HK exchange now and maybe Zhipu (GLM creator) skyrocketed as one of the only public-listed pure-play LLM companies, but these companies couldn’t go public here in the US. One explanation is that retail constitutes a larger percentage of Asian stock markets, though the Hong Kong exchange (the preferred market) is still more institutional than the mainland A shares. We don’t know how long this bull market will last in Asia and many institutional investors there are already bracing for downturn in some of the most hyped industries, hoping to scoop up shares post-crash.
The Three Pools of Capital
The other question is why would any founders take these terms, and wouldn’t the free market competition between the VCs trend towards founder friendliness just like it did in America with Founders Fund and a16z? This is somewhat happening but China’s VC ecosystem is still younger than America’s and most importantly, there are large incentive differences attached to the different pools of capital that a founder can take. There are generally three pools of institutional VC capital available to Chinese founders:
- Local RMB funds. These funds are often backed by provincial or municipal government money and they carry with them the most onerous terms, and oftentimes include requirements to establish offices/factories in their jurisdiction to create jobs and attract talent. Chinese RMB funds often have a mandate beyond just capital returns to also help juice the local economy of their LP locality, creating different incentives than Western returns-focused funds. Oftentimes these expectations are in job creations and talent attraction, which also stabilizes the local real estate market. So why would founders take this pool of money? Well if you want to invest in the sexiest fields like AI, semiconductors, and robotics, those are nationally sensitive industries and sometimes only RMB funds are allowed to invest, just like how the US has CFIUS. Deepseek is only allowed to take Chinese money for example.
- Local USD-funds. These are the traditional tier 1 Chinese VCs like Hongshan (Sequoia China), Hillhouse, Zhenfund, Matrix China (barely any relation to Matrix America), IDG, though many of them have split Dollar and Yuan denominated funds. These are generally more founder-friendly than the first pool and some of the backers of many household name Chinese companies over the last 20 years. This is the most sought-after source of funding for Chinese founders, especially for companies wanting to go global. Fun fact: Sequoia China has been the best performing part of Sequoia from their founding until their post-COVID split
- Foreign funds. Finally there are the full Western funds like us. Historically, many of them have made a killing in China, like Coatue and Tiger, but now there’s much less direct foreign investment. Benchmark’s Series B in Manus was an anomaly and probably the last, and clearly the consequences of that deal have now chilled foreign investors further. Although you want to be contrarian as an investor and maybe investing in China is the last contrarian thesis there is. I once probed someone at Founders Fund about what’s left that’s contrarian and they agreed that crypto and defense were saturated and China may be the only thesis left but of course they wouldn’t invest in it (or who knows given their China trip this month)
The FA Layer
The existence of FAs (it stands for Financial Advisor but everyone calls them FAs) is also a unique feature of Chinese venture. They are not wealth managers as the name implies, but early stage investment bankers who package, market, and broker deals between startups and VCs. The prevalence of this whole layer of the funding ecosystem baffled me. The VCs have outsourced sourcing and the first layer of diligence to these FAs who are the first point of contact with a founder and many founders prefer to work with FAs to help negotiate against the shrewd VC but conflicts of interest seem obvious given the FA can’t be shoveling adversely-selected companies to a VC or else they’ll lose access. FAs charge 2-5% take rates of the funding round and it’s just a tax in that world. I asked a top investor why they would let this happen because wouldn’t they lose the alpha of proprietary sourcing and seeing deals sooner, but he said that this is just the system and they will do non-FA deals but plenty of the best deals can have an FA quarterbacking the first few rounds, gameplanning out that Hongshan will do the seed, Hillhouse the A, they split the B, and then the company has some momentum to actually hit the ground running.
A Hidden Social Graph
China’s social graph is non-public and non-legible. This is both downstream of China’s relationship-based culture and also heavily reinforces it, affecting how business is done daily.
China is a society run on 关系 (Guanxi). LinkedIn never took off in China and neither did any of the local copycats. You only meet people through warm introductions, or at best larger group chats (WeChat has a 500 person limit for group chats versus the measly 32 on iMessage).
Imagine a society that has zero cold outreach. No cold emails. Cold LinkedIn messages. No outbound at all. Maybe it helps explain a bit of why China never had B2BSaaS. But this of course shapes how VCs and founders interact. There’s no DM-ing a founder generally. That’s another reason why FAs exist, to provide relationship liquidity.
Side note: for a country that has no privacy vis-a-vis the government, the average citizen is quite privacy-conscious and most Chinese are anon online and on Wechat. If you add a person on Wechat, they most likely have some anime/cartoon/landscape profile photo with a pseudonym handle as their name. I’ve even met Chinese people who refuse to reveal their real name only go by their nickname or their less personal English name.
The State’s Hand
Finally there is the role of the state’s directives and goals, which is the centrally-planned industrial policy that is either the envy or bane of the West depending on the Hill and Valley subgroup you ask.
There is a much larger role played by the government in the innovation ecosystem, from being a primary LP in many funds, to creating attractive legislation and tax/land credits to lure startups to their jurisdiction, and shaping what VCs invest in because the government cares about a certain sector rising: most notably homegrown semiconductors over the past 10 years.
There’s a belief in Chinese investment circles that you should just invest in what the government says must exist, because it will, just like divine will. It is hard to bet against the concerted will of a massive and highly-technical nation working towards a long term goal of national strategic importance. A more whimsical and personal example of this industrial policy is the Brain-Computer Interface (BCI) industry in China. The current Party Secretary of Shanghai Chen Jining (the top guy; the mayor is always second in command in a city) is a Western educated technocrat who got his PhD and post-doc in the UK. He is also a big believer in BCI and directed the funding of many BCI startups like StairMed and Neuracle when he was Mayor of Beijing and brought this fervor with him to Shanghai. I spoke with members of the Shanghai government’s venture arm who have funded many startups in this space explaining that their main goal is building this strategic industry rather than venture returns, kind of like In-Q-Tel in the US.
The Chinese may not be as AGI-pilled on average but they really do seem to believe in the sci-fi deeptech utopia more than Americans. Can you imagine the mayor of New York putting public funding into Neuralink? I guess it’s a country where the Three Body Problem is one of the most widely known series and we should expect Chinese Dynamism to operate with a techno-optimist flair.
P.S. If you're interested in chatting more about Chinese technology or visiting please reach out
