Capital raising

Chinese state-backed funds bet on the VC market

Although the venture capital market has cooled down, state-backed funds have woken up and quietly expanded their networks.

Investment from Chinese RMB funds has continued to decline over the past quarter, but some state-backed funds have quietly woken up and are tapping the Chinese venture market.

In the third quarter of the year, Chinese state-backed funds invested in a total of 85 projects, making up about 10% of total investment in the market, according to research firm IT Juzi.

Shenzhen Guozhong Venture Capital made nine investments in that time and was the second most active fund in China's venture market.

The Chinese central government and Shenzhen municipal investment fund jointly set up Shenzhen Guozhong Venture Capital in 2016. The fund manages Rmb6 billion ($843 million) capital, with a focus on biotech and alternative energy vehicles. By June this year it had invested in 126 projects, totalling Rmb3.7 billion.

This fund is one of the four set up by the ministry of finance along with Rmb60 billion to help nurture innovation. Aside from Shenzhen Guozhong Venture Capital, there are two funds based in eastern Jiangsu province and another one in Shenzhen.

Another fund, CASH Capital, made six investments totalling more than Rmb152 million. CASH Capital is a subsidiary of state-backed Chinese Academy of Sciences which focuses on scientific research. It currently manages three RMB funds and one USD fund to invest in tech and innovation-driven business. All of its six investments in the third quarter focus on healthcare and biotech.

CASSTAR is another fund set up by the Chinese Academy of Sciences and has also been active. It invested in six projects in the third quarter, most of which provide hardware and industrial technology. The fund only nurtures startups with what it calls “hardcore” technologies.

“It is true that more state-backed funds have started to invest directly,” one investor from China Venture Capital told FinanceAsia. “But they are muddying the water here and may drive up the price.”

People used to see state-backed funds as LPs in the venture capital market. And indeed, most of them used to put their money into financial institutions and invest through them. But the environment has changed along with the slowdown in China's venture capital market. As state-backed funds put their money directly into startups, investors will have to stay alert as valuations in the market rise. 

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