China’s Early-Stage Venture Capital Faces Uphill Battle: Only Four Funds Returned Investments

In recent years, China’s early-stage venture capital sector has faced significant challenges, with only a handful of funds managing to provide returns to their investors. A report by Preqin, titled “China’s Private Capital Landscape,” reveals that among U.S. dollar-denominated venture capital funds established between 2015 and 2020, just four have successfully returned the capital invested in them.

Preqin assessed the performance of these funds using a metric called distributed paid-in capital (DPI), which measures how much capital has been returned to investors. The report also lists the top 10 funds in this category, shedding light on the industry’s struggles.

The difficulties faced by many venture capital funds in China can be attributed to the limited number of initial public offerings (IPOs) in recent years. While the sector experienced robust fundraising between 2015 and 2018, the focus has now shifted toward generating returns and exiting investments.

In early-stage investing, limited partners, typically institutions, provide capital to general partners, often venture capital funds, to invest in startups. The funds aim to exit these investments profitably, either through IPOs or acquisitions, allowing them to distribute returns to their investors.

However, the scarcity of IPO opportunities has prolonged the investment cycle, requiring funds to hold onto their portfolios for extended periods. As a result, alternative exit strategies, such as mergers and acquisitions or general partner-led deals, have gained prominence.

Among the U.S. dollar-denominated venture capital funds established between 2015 and 2020, only a select few have managed to outperform. Funds like Fengshion Capital Investment Fund, LYFE Capital USD Fund II, and GGV Capital V have not only returned all investor capital but have also generated additional returns.

However, not all funds have achieved similar success. BioTrack Capital Fund I, for instance, has only returned 8.1% of capital to its investors as of March, despite being launched five years ago.

China’s venture capital landscape continues to evolve as investors seek ways to navigate regulatory challenges and market dynamics. While IPOs have been a traditional exit strategy for venture capital-backed startups, alternative approaches are gaining traction. General partner-led deals and diversifying away from reliance on IPOs are seen as crucial steps in generating returns for long-term investors.

Despite the regulatory changes and market shifts in recent years, investors in China’s venture capital sector are looking beyond the challenges to identify opportunities for growth. The future of venture capital in China will likely involve a blend of regulatory compliance, innovative investment strategies, and a focus on long-term success.