We’ve been underestimating the size of China’s VC market all along

Mao’s face adorns all the Chinese banknotes. Image credit: David Dennis..

Understanding the Chinese venture capital market can be difficult, as estimates for venture activity in the country often vary widely.

For example, two well-respected sources place the country’s 2015 venture capital deal volume at 403 and 1,555. The reporting groups, KPMG and Preqin, peg aggregate venture capital deployed in China during 2015 at $27.4 billion and $37 billion respectively. Unsurprisingly, the group that reported more deals also estimated more total aggregate investment.

While different tracking groups may disagree on China’s venture deal totals, there appears to be consensus among industry watchers that the Chinese venture scene lags behind the United States’ own ecosystem. For example, the same group that measured venture capital investment in China at $37 billion in 2015 placed similar activity in the United Sates at $68 billion over the same time period.

However, the variance between estimates of venture activity inside of China is significant. The implication of the gap between differing estimates is that the Chinese market is misunderstood in some way; 403 and 1,555 deals in 2015 cannot both be correct at the same time.

Building on our previous attempts to analyze the investment climates of the United States, Southeast Asia and India, we will take a closer look at the Chinese venture capital market in terms of aggregate capital deployment and deals executed.

A new dataset

To better understand the Chinese market, I turned to funding news articles reported in Chinese and numbers from reputable Chinese startup databases like Itjuzi and 36kr. By sieving through a massive amount of funding data, I was able to parse through several quarters of information to determine how large the Chinese venture market actually is.

My analysis of Chinese funding data has a simple conclusion: the venture market in China is massive. In 2015, there were 4,489 deals in the country. Compared to KPMG data covering the same time period, the Chinese figure is just 9 percent short of the United States’ own tally. The number of Chinese venture deals grew from the end of 2014 to the closing quarter of 2015, which posted the first sequential decline in more than a year.

Venture capital deployment in China totalled $60.5 billion in 2015. That’s around $7.5 billion lower than the Preqin estimate for the United States during the year. KPMG reports an even higher gap in favor of the United States’ market.

While the past year set records in China, capital deployment and deal volume in the country fell sharply in the fourth quarter of 2015. That decline was not isolated to China. Similar corrections appeared in other markets, such as the rest of Asia, and the United States.

Where was the money invested?

Looking ahead