Original Title: How China‘s Venture Ecosystem Works
Original Author: Bohan, Chemistry
Translation: BlockBeats

Editor's Note: China's tech industry is becoming a reference that Silicon Valley cannot ignore.

From open-source large models, biotechnology to robotics, a group of Chinese companies are gradually changing the global tech competition landscape with lower costs, faster hardware iteration speeds, and a more intensive industrial chain collaboration. However, attributing this change solely to the number of engineers, manufacturing base, or policy support is still insufficient to explain the true competitiveness of Chinese tech companies.

This article attempts to start from the capital system to understand how the Chinese innovation ecosystem operates.

In Silicon Valley, funding for startups is usually seen as a long-term bet on future growth, with IPO, acquisition, or continuing independent development all possible exit paths. The situation in China is more urgent. Many startups do not choose to go public when conditions are ripe but are forced to treat IPOs as almost the only endpoint due to fund deadlines, buyback terms, and investor exit pressures. The system of "selling shares while promising future debt," personal buyback obligations, and an inactive M&A market together form a financing mechanism that is more stringent on founders.

This institutional arrangement clearly has its costs. It may compress long-term R&D space, trigger short-term packaging, overfunding, and even financial risks. However, on the other hand, when entrepreneurship becomes a game of almost "all-in," companies are also forced to maintain lower costs, faster execution speeds, and stronger commercialization capabilities. The price competitiveness and expansion capabilities demonstrated by Chinese companies in overseas markets are largely a result of the screening in this high-pressure domestic environment.

This article also reveals several structures in the Chinese venture capital market that are often overlooked by foreign observers: local RMB funds pursue not only financial returns but also undertake investment attraction, employment, and industrial landing goals; USD funds seek a balance between capital returns and globalization; and the direct participation of foreign funds continues to decline. At the same time, Financial Associates (FA) take on the functions of project discovery, financing packaging, and relationship matching, filling a market gap that lacks a public professional network and relies on introductions through acquaintances and WeChat relationships.

Of course, there are deeper variables, such as national industrial policies.

Of course, this article carries a distinct Silicon Valley observer perspective rather than a rigorous institutional study. However, it provides a core perspective worthy of discussion: China is not merely copying Silicon Valley but is forming a completely different way of organizing innovation.

This system may not be gentle enough, nor is it necessarily suitable for all entrepreneurs, but it can concentrate resources, accelerate iteration, and shape a group of companies with extremely strong execution in specific strategic industries.

To understand China's technological competitiveness, one must look beyond model parameters, funding amounts, and IPO valuations and also understand the capital timeline, local governments, relationship networks, and exit pressures behind these companies. What may truly drive China's tech industry forward is perhaps this set of contradictions: on one hand, it creates pressure and risk, while on the other hand, it pushes speed, efficiency, and industrial ambition to the extreme.

The following is the original text, with slight reductions made while preserving the original meaning:

Last month, I visited China, met with most top-tier investment firms, and also met with the management teams of several leading robotics and biotech companies.

There's currently a narrative in Silicon Valley: China is winning in several key future areas—open-source AI, biotech, and robotics. The reasons supporting this concern are quite substantial.

The Chinese open-source model has become a batch of models most commonly used by Silicon Valley startups. Ironically, after the U.S. government restricted Fable, China has taken on the role of supporting the global open AI tech stack.

In biotech, most clinical trials in China are for innovative therapies, while in the U.S., about half of the drugs in FDA clinical trials are licensed from China. In the robotics field, China not only has a structural advantage in producing massive-scale training data but more importantly, its hardware development and rapid feedback iteration speed are astonishing.

However, despite having these advantages, the Chinese do not seem complacent. On the contrary, there is a widespread strong desire to understand what Silicon Valley is thinking. Silicon Valley is still seen as the global innovation hub.

A top-tier VC figure even told me that whenever Benchmark or Sequoia releases a new podcast, he lists it as required viewing for the entire company.

The Chinese are well informed about everything happening in the West. The content I post on X and LinkedIn is usually translated by mainstream Chinese AI media (Synced, SyncedReview, or QbitAI) within a few hours. Even comments in the X section will be translated into screenshots. You may not even realize that you are somewhat famous in China.

This information asymmetry accelerates their learning speed, which may eventually help China narrow the gap with Silicon Valley. But for now at least, they still look up to Silicon Valley.

Overall, the maturity of the Chinese capital market is relatively low, and it is much stricter on founders. This environment may breed companies with stronger execution and fierceness, giving them the ability to outperform competitors in global markets; however, the immense pressure and personal responsibility may also stimulate more bubbles and fraud.

From Seoul to Tel Aviv, most global tech hubs follow the Silicon Valley model. China, however, represents a parallel universe in many ways. Understanding how China fuels innovation is an intriguing path to witnessing how the country has arrived at where it is today and where it may be headed.

Either IPO or Bust

In meeting with many founders of robotics and artificial intelligence companies, the most surprising thing to me was that they were almost all planning to IPO next year and had already begun full-speed ahead.

These companies are not at the scale of Uber or Airbnb—indeed, even achieving the scale of the latter two would be challenging for a Nasdaq listing—but everyone told me that they were preparing to go public.

Why? Because they have no other choice. In China, many startups go public not because they are ready or because the market timing is right, but because they are forced to.

One of the most shocking facts for American founders is that many Chinese founders sign investment agreements that stipulate they must return the investors' capital within a specified period at a rate higher than a certain minimum return. Sometimes the timeframe is six to eight years. If they fail, the company or even the founder personally may be subject to buyback and repayment obligations.

Chinese limited partners and general partners are less patient and more directly demand results. There is even a specific term in Chinese to describe this phenomenon: "equity on the surface, debt in reality."

It is hard to imagine how innovation can occur in an ecosystem where founders have to take on substantial personal liability to establish a high-risk venture. With stakes so high, who would still have the courage to start a business?

Yet Chinese founders are indeed willing to risk it all.

Such incentive mechanisms have shaped a group of the world's most elite and resilient companies, as well as founders who truly devote themselves entirely to their companies. When they cannot make money in China's fierce competitive environment, they often choose to expand overseas and swiftly overwhelm local competitors.

They are not sophomore students at Stanford University just dabbling or joining Y Combinator for a summer internship. For them, this is a game of either winning everything or losing everything.

These points also raise two questions.

Why No M&A Exit?

Why does the exit strategy have to be an IPO? Can't companies be acquired to allow investors to recoup their funds through mergers and acquisitions?

The answer is mostly negative.

There is virtually no mature M&A market in China, so startups usually can only exit through an IPO and must go all the way.

Chinese companies have low valuations and labor costs. Instead of acquiring a startup, a large company may find it easier to simply replicate its idea, likely at a quicker pace.

Chinese companies are often very ambitious and tend to engage in horizontal expansion. A smartphone company may also produce sports cars and develop enterprise software concurrently. These factors collectively reduce their willingness to acquire other companies. There, almost no opportunity exists for a soft landing for entrepreneurial teams through "acqui-hiring."

However, a relatively favorable factor for Chinese founders is that the IPO requirements are generally lower than those of NASDAQ or the New York Stock Exchange.

The lower threshold does not necessarily mean more relaxed regulatory requirements but rather a higher market acceptance of these companies, meaning investors are more willing to buy their stocks.

In recent years, many Chinese tech companies have had almost no revenue or customers. Based on current U.S. tech market valuation standards, their scale is far from sufficient, yet they have still successfully completed IPOs.

Of course, the Hong Kong stock market is currently in a bull market. As one of the few pure-play language model public companies, Smartype has also experienced a significant increase in stock price. However, these companies might not be able to go public if they were in the U.S.

One explanation is that individual investors have a higher proportion in the Asian stock market. Nonetheless, despite being a preferred listing venue for tech companies, the Hong Kong stock market remains more institutionalized than the A-share market.

We do not know how long this bull market in Asia will last. Many local institutional investors have started preparing for a potential downturn in some of the hottest sectors, hoping to buy stocks at a low price after a market crash.

Three Types of Capital Pools

Another question is: Why are founders willing to accept such harsh terms?

Shouldn't the free market competition among VCs gradually become more founder-friendly as in the U.S., driven by institutions such as the Founders Fund and a16z?

This change is indeed happening. However, the venture capital ecosystem in China is still younger than that in the U.S. More importantly, the different capital sources available to Chinese founders come with vastly different incentive mechanisms.

Chinese founders usually have access to three types of institutional venture capital.

Local Currency Funds

These funds are often supported by provincial or municipal government funding, and the associated conditions are usually the most stringent. They often require companies to establish a local office or factory to create jobs and attract talent.

The goal of Chinese currency funds is usually not only to obtain a capital return but also to undertake the task of driving the economic development of the limited partners' location. Their incentive mechanism is different from Western funds that focus solely on investment returns.

These requirements often focus on job creation and talent attraction, which in turn contribute to stabilizing the local real estate market through employment and population inflow.

So why would founders still accept this type of funding?

The reason is, if you want to enter the hottest sectors such as artificial intelligence, semiconductors, and robotics, which are also industries of high national attention, sometimes only currency funds can invest, such as DeepSeek.

Domestic USD Funds

These institutions include traditional top-tier Chinese VCs, such as Sequoia China, Hillhouse, ZhenFund, Qiming Venture Partners, and IDG. Qiming Venture Partners actually has little relation to U.S.-based Matrix Partners. Many of these institutions manage both USD and RMB funds simultaneously.

Compared to the first type of capital, these funds are usually more founder-friendly. Over the past two decades, many well-known Chinese companies have had their support.

This is the funding source that Chinese founders most hope to access, especially for companies planning to enter the global market. By the way, from the establishment of Sequoia China to its later split from Sequoia, it has always been the best-performing part of the Sequoia system.

Foreign Funds

The last type is pure Western funds like ours.

Historically, many Western funds have made a fortune in China, such as Coatue and Tiger Global. However, direct foreign investment in Chinese companies has significantly decreased now.

Benchmark's Series B investment in Manus is an exceptional case, and it is likely to be the last of such transactions. Apparently, the consequences that followed this deal further dampened the enthusiasm of foreign investors.

Of course, investors always hope they can think contrarian. Perhaps, investing in China is already the last truly contrarian investment proposition in the market.

I once asked a member of Founders Fund what other investment thesis could still be considered contrarian. He also acknowledged that the cryptocurrency and defense technology sectors are already very crowded, and China may be the only remaining contrarian proposition.

FA Middle Layer

The existence of FAs is also a unique feature of China's venture capital industry.

FA stands for Financial Advisor, but everyone directly refers to them as FAs.

They are not the wealth management firms that the name might suggest, but rather investment bankers who specialize in early-stage financing. They are responsible for packaging, marketing, and matchmaking deals between startups and VC firms.

The fact that such a large intermediary layer exists in the financing ecosystem has left me quite perplexed.

VC firms actually outsource project sourcing and initial due diligence to FAs. FAs are often the first point of contact for founders seeking capital. Many founders also prefer to work with FAs to help them negotiate with savvy VC firms.

However, there are clearly conflicts of interest at play.

FAs cannot continuously pitch poorly screened, low-quality companies to a VC firm, or else they will lose the trust and eligibility for access to that firm. FAs typically charge a commission of 2% to 5% of the fundraising amount. In that system, this has become almost a standard fee.

I asked a top investor why VC firms would allow this situation. Wouldn't relying on FAs lead to missing out on the excess returns from exclusive deal flow and the ability to see good deals earlier than others? His answer was: That's just how this industry operates.

Of course, they also invest in projects where no FAs are involved, but many of the best projects are led and coordinated by FAs in the initial funding rounds. FAs may even design a full set of financing relay plans in advance: Sequoia China is responsible for the seed round, and Hillhouse leads the Series A, with both participating in the Series B. This way, the company can build financing momentum and truly accelerate.

The Invisible Network of Relationships

China's social relationships are neither transparent nor easily understood by outsiders. This is both the result of China's relationship-oriented culture and, in turn, continually reinforces this culture, profoundly influencing the way daily business activities are conducted.

China is a society that operates based on "guanxi," or social connections.

LinkedIn never truly entered the Chinese market, and local imitators were not successful either. Usually, you can only meet new people through introductions by mutual acquaintances, and at best, you can only join larger group chats. The maximum number of members in a WeChat group is 500, while in comparison, the iMessage group chat's limit of 32 members is insignificant.

Imagine a world where there are no cold emails, no LinkedIn messages, and hardly any outbound calls. This might partially explain why China has never fully developed a mature B2B SaaS industry. This culture has also naturally shaped the way VC firms interact with founders. Generally, investors do not reach out to founders directly.

Another reason FA exists is due to this: they provide "relationship liquidity" for closed networks.

Most Chinese people maintain a certain level of anonymity online and on WeChat. If you add someone on WeChat, they are likely to use an anime, cartoon, or scenic picture as their profile photo, and use a nickname or pseudonym as their username. I've even encountered some Chinese individuals who refuse to reveal their real names and only want to use a nickname or a relatively non-personal English name.

Hand of the State

Finally, the last factor is the development direction and goals set by the state, which are industry policies driven by national planning. Western attitudes toward this model depend on whether you ask Capitol Hill, Silicon Valley, or one of their factions.

In China's innovation ecosystem, the government plays a far more crucial role than in the West. The government is not only the primary LP in many funds but also attracts startups by enacting attractive regulations, providing tax incentives and land benefits. The government also influences VC investment direction by clearly indicating which industry they want to see develop. In the past decade, the most typical example has been the local Chinese semiconductor industry.

The Chinese brain-computer interface industry provides a more vivid and personalized example of industrial policy.

As a certain local government supports brain-computer interface technology, I have had discussions with members of their affiliated investment institution, which has invested in many startups in this field. They explained that their primary goal is to establish this strategic industry rather than chase venture capital returns. This is somewhat similar to the U.S.'s In-Q-Tel.

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