Alongside strong GDP growth, China made some much-anticipated progress in both startup financing and IPO activity in the first three months of 2023.
Startups headquartered in mainland China, Hong Kong, Taiwan, and Macau raised about $14.7 billion from private equity (PE) and venture capital (VC) investors in the first quarter of 2023, up 1.7% from the previous quarter, according to data from DealStreetAsia DATA VANTAGE‘s latest report Greater China Deal Review: Q1 2023.
The number of PE-VC transactions, however, fell 2% to 618 in the period.
The rise in deal value, despite the declining deal volume, shows that investors have become more selective in deploying their capital. However, their willingness to write fat cheques for top companies continued as evidenced by two billion-dollar-plus deals sealed in the quarter.
On a year-on-year basis, the Chinese venture market demonstrated a strong rebound, following the end of most COVID controls in December. Startup fundraising was up by 19.3%, while deal volume soared 70.2%, compared with Q1 2022.
China’s economy grew 4.5% in Q1 2023 compared with the same quarter last year, the fastest pace in a year, and the government continues to set ambitious targets for the nation’s growth for the rest of the year. This could further strengthen market confidence.
Megadeals account for the bulk of financing
Capital is increasingly being concentrated in front-runners. Megadeals, or investments worth at least $100 million, secured over $9.5 billion in Q1, up 6.8% from the earlier quarter and representing 65% of the total fundraising in the January-March period.
Only 24 startups managed to seal an investment worth $100 million or more in Q1, versus 26 in Q4 2022 and 36 in Q3 2022, suggesting investors wrote bigger cheques across a lesser number of startups when it comes to megadeals.
Q1 recorded two billion-dollar-plus deals. COFCO Fortune, the agri and grain business arm of China’s largest food manufacturer COFCO Group, raised $3.1 billion. Meanwhile, Ant Group’s online lending subsidiary Ant Consumer Finance raised $1.2 billion in new funding.
Enthusiasm around early-stage dealmaking remains but investors are less generous than before towards emerging entrepreneurs and many of them have scaled back cheque sizes for the sake of risk management.
Series A and earlier deals were an investor favourite in Q1 with 333 startups raising more than $3.2 billion at this funding stage. They contributed to 53.9% of Q1’s total deal count and 21.9% of the total financing.
Compared with Q4 2022, investors completed 4.7% more Series A deals in Q1 but the overall financing into this stage went down by a significant 45.2%. This shows investors are writing smaller cheques and deal values spread out more across the earliest funding stages.
Semiconductor, medical devices, and energy storage were the three most popular industries for venture investors with the completion of 94, 63, and 51 deals, respectively, in Q1. The Chinese government’s attempts to strive for self-sufficiency in chips, China’s ageing society, and a national goal to achieve carbon neutrality by 2060 have been some of the fundamental drivers behind the increased funding into these areas.
Signs of recovery in IPO activity
Initial public offerings (IPOs) by Greater China companies look set to make a come back this year amid a gradual revival in domestic economic and business activities.
In the first quarter, the total IPO funds raised by Greater China companies grew 5.6% sequentially to over $14 billion. With 86 initial share sales in the first quarter, IPO activity was still far below the peak levels seen in early 2021, but it was almost on par with that of Q1 2022.
Greater China issuers showed more resilience compared with their overseas counterparts. In Q1, the global capital markets tumbled due to rising interest rates, stubbornly high inflation, and unexpected banking industry turbulence. Globally, a total of 299 IPOs raised $21.5 billion in the March quarter, representing an 8% and 61% decline year-over-year, respectively.
The IPO market in mainland China had a strong start to the year, with Shenzhen’s startup board ChiNext and the main board of the Shanghai Stock Exchange ranking as the world’s largest and second-largest listing destinations by IPO funds raised. IPOs on the ChiNext board raised nearly $4.2 billion in Q1, followed by public listings on the Shanghai mainboard through which newly-listed companies collected $3.5 billion in total.
The momentum of domestic listings is expected to grow further in the remaining three quarters following Beijing’s full implementation of the registration-based IPO regime on February 17.
The Greater China Review: Q1 2023 report has extensive data on:
Quarterly and monthly startup fundraising trends
Top deals of Q1 2023
Most popular industries for venture investors
IPOs by Greater China firms in Q1 2023
Secondary listings & SPAC listings in Hong Kong
Insights from prominent investors on the fundraising scene
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