Where are China’s new unicorns? Xi shows ‘concern’ for dwindling start-ups (2024)

With a falling number of unicorns – start-ups valued at more than US$1 billion – having caught the eye of China’s top leaders, analysts expect more domestic resources to be deployed to nurture home-grown enterprises amid shifting geopolitics.

At a rare face-to-face meeting with entrepreneurs last week, President Xi Jinping asked why the number of new unicorns had been dwindling in recent years, the People’s Daily revealed in a report on Tuesday.

“Now that the president has signalled his concern, I think state support will be beefed up to nurture them,” said Xin Qiang, a professor with Fudan University’s Institute of International Studies in Shanghai.

Analysts expect domestic venture capital and resources to be mobilised, especially related to technology, while a reliance on foreign venture capital would also be reduced having previously been the driving force behind the growth of China’s unicorns.

At last month’s meeting, China’s Politburo had already called for “patient capital” – funds oriented towards the longer term with greater risk tolerance – to support emerging industries.

Earlier last week, China also set up its third planned state-backed investment fund with a registered capital of 344 billion yuan (US$46 billion) to boost its semiconductor industry.

Overall, China boasts 369 unicorns with an average value of US$3.8 billion, with firms specialising in artificial intelligence (AI) and semiconductors dominating the list, according to a report compiled by professional services network KPMG and the Zhongguancun Unicorn Company Development Alliance in Beijing last month.

But China continues to lag behind the US in terms of the size of its unicorn cluster, according to the 2024 Global Unicorn Index published by the Hurun Research Institute last month.

From a global total of 1,453, there were more than 700 unicorns in the US, compared to 340 in China, according to the index, while the number of new unicorns in China stood at 56 last year, down from 74 a year earlier.

Between 2015 and 2018, the world’s second-largest economy had been seen as a fertile land for unicorns, when its vast market and rich application scenarios spawned more unicorns.

But since 2018, due to the trade war between China and the US, intensifying geopolitical competition, Western tech containment efforts and de-risking and decoupling strategies, the growth of Chinese unicorns slowed.

“The tech landscape in China is no longer a safe haven for the innovative minds,” said James Zimmerman, a partner at international law firm Perkins Coie in Beijing, pointing to Beijing’s policy shift in recent years.

Start-ups that sought to follow in the footsteps of previously successful firms have watched as Beijing “crushed the ambitions of tech companies”, he added.

“One after another, Beijing crushed them into submission as instrumentalities of state corporatism,” said Zimmerman, who is a former chairman of the American Chamber of Commerce in China.

The report also found that more than 70 per cent of the 369 Chinese unicorns received investment from funds with an international background, although Zimmerman warned that China’s waning ties with the West would impede future cross-border collaborations.

“Start-ups are also weary of Beijing’s position in the world, as geopolitical tensions continue to isolate Chinese companies from integrating around the world. Start-ups need a path to global integration,” he said.

Xin also lamented the collapse of a “common ecosystem” between China and the US that used to nurture unicorns and other tech start-ups.

“The US’ expertise lies in zero-to-one innovation and inventions of originality, while China is good at application and commercialisation,” said Xin.

“Such collaboration drummed up excitement and acted as a cradle of unicorns, many have both American and Chinese backgrounds.”

But last year, US President Joe Biden signed an executive order to curtail American investment in sensitive technologies in China, including semiconductors and AI.

A US congressional panel last year also launched an investigation into four US venture capital firms over their semiconductors and AI businesses in China.

Xin said that the decoupling trend had affected would-be unicorns in China, and that it needed to devise ways to lessen dependence on the US while also leveraging more domestic venture capital and resources to nurture firms.

Zimmerman also said that, to form a competitive and successful landscape in China, start-ups needed to see a policy environment that promoted a vibrant ecosystem of innovation and information sharing.

And against such a backdrop, patient capital is being tapped by Beijing to fund China’s start-ups and tech self-sufficiency drive.

Xi highlighted at April’s Politburo meeting the need for longer-term capital to fund emerging industries, stressing a more forward-looking mindset and high-risk tolerance.

“To develop new quality productive forces and strengthen the development of future industries … we should actively develop venture capital and scale up patient capital,” said a readout from the meeting convened on April 30.

On Tuesday, an editorial in the state-backed Economic Daily newspaper further spelled out the need for funnelling more patient capital to bankroll start-ups.

“We should guide patient capital to increase investment in tech-intensive [small and medium-sized enterprises] … the government should formulate policies and create a good environment to encourage medium- and long-term funds to invest at an early stage, invest in small and micro businesses and invest in real technologies,” according to the editorial.

“Patient capital does not ignore returns, but by extending the evaluation cycle and planning in advance, it can grasp the growth potential of start-ups.”

Qiu Yufeng, co-founder of Hangzhou-based robot start-up Zorpia Robot, said companies like his needed money that had the patience to wait for returns.

“There’s a long way to go for a patent [in robotics] to be applied in the market,” he said.

“I hope that major funds and big investors can invest in new technologies. If there are no funds waiting, no one or start-up will bother making new inventions.

“There’s a preference now among investors for short-term, quick-money projects, which I think is detrimental to the development of science and technology.”

Additional reporting by Mandy Zuo