China’s $336 billion VC fund is a recipe for disaster

It has been clear for quite a while now that China’s government is very interested in the potential of the startup scene. And it has been inspired by the Singapore government’s hands-on approach when it comes to supporting tech startups. But last week we learned that Chinese authorities have really gone above and beyond: collectively, China’s state venture funds now total more than US$336 billion.

That number is spread out through national and local funds of various sorts, of course, and the spending will be spread out; the government’s not just going to dump $336 billion into the startup scene this year. But this news should still set your alarm bells ringing. Here’s why:

Incompetence

Having money is not the only quality required to be a VC. You also need to understand the industries you’re investing in, have a good eye for talent, and have a strong grasp of macroeconomic trends and what the market is going to look like in the future. Doubtless, China’s government has many skilled VCs on its payroll. But does it have enough to effectively deploy US$336 billion in an intelligent way? Absolutely not.

Actually, China’s government bodies have a pretty checkered record when it comes to tech investments, and you don’t have to look back into the future very far to find examples. On Thursday – the same day news about the US$336 billion fund broke – Guangzhou authorities spent a couple hundred thousand dollars to buy a ridesharing app they hope will compete with Didi and Uber.

I’ll wait for a minute while you finish laughing.

To put it frankly, there is simply no way that some no-name local player is going to beat Uber or Didi in any major Chinese city at this point. The ridesharing race between those two companies is still on, but anyone who is only now entering the game has already lost. Admittedly, the acquisition didn’t cost Guangzhou much. But in the long run, it’s almost certainly US$200,000 flushed down the drain. Is it really a good idea to give these guys billions to play with?

(And of course, there’s also the fact that this much money could very easily create bubbles in China’s tech sector that could then pop rather painfully when it becomes clear many firms have been over-funded).

Corruption

Of course, losing a lot of your investments is par for the course in venture capitalism, and China must be prepared for this, especially given that the government will be intentionally targeting riskier investments than most VCs are comfortable with. But I fear that a lot of the losses from this US$336 billion in funds will not be related to investments at all.

Although Xi Jinping’s regime has been cracking down on corruption in serious and sometimes quite harsh ways, make no mistake: corruption is still alive and well in China’s bureaucracy. And government funds with massive sums of money tasked with investing that in risky ventures with the expectation that many will fail? That’s corruption waiting to happen.

This isn’t just bad for China’s government. It could be equally bad for consumers.

Imagine, for example, that I’m a government bureaucrat. My boss gives me US$2 billion to invest in local startups, with the expectation that many will fail. I may invest a lot of that money in real startups, but I could also pretty easily funnel it to friends and family. Maybe my cousin starts a “promising” startup that I fund shortly before it goes under. Whoops, I can tell my boss, that investment was a loss. Meanwhile my cousin has funneled virtually all of that money into family bank accounts.