Author: Bohan, Chemistry

Translation: Rhythm BlockBeats

*Slightly shortened without changing the original meaning:

Last month, I visited China, meeting most of the first-tier investment firms and several management teams of leading robotics and biotechnology companies.

There is a popular narrative in Silicon Valley now: China is winning in several key fields of the future—open-source artificial intelligence, biotechnology, and robotics. The reasons supporting this concern are quite substantial.

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

In biotechnology, most projects in Chinese clinical trials are innovative therapies, while about half of the drugs in U.S. FDA clinical trials are authorized from China. In robotics, China not only has a structural advantage in mass-producing training data but, more importantly, its hardware development and feedback iteration speed is astonishingly fast.

But even with these advantages, the Chinese do not seem complacent. On the contrary, there is a strong desire to understand what Silicon Valley is thinking. Silicon Valley is still seen as the global center of innovation.

A top venture capitalist even told me that whenever Benchmark or Sequoia releases a new podcast episode, he makes it mandatory viewing for the entire company.

The Chinese are well aware of everything happening in the West. The content I post on X and LinkedIn is usually translated by mainstream Chinese AI media (such as New Intelligence, Machine Heart, or Quantum Bit) within hours. Even comments in the X comment section are often translated in screenshot form. You might not even realize that you have become somewhat well-known in China.

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

Overall, the maturity of China's capital market is relatively low, and it is much harsher on founders. This environment may foster stronger and more aggressive companies capable of defeating competitors in the global market; however, the immense pressure and personal responsibility may also stimulate more bubbles and fraud.

From Seoul to Tel Aviv, most global tech centers use Silicon Valley as a template. However, China, in many ways, constitutes a parallel universe. Understanding how China funds innovation provides an interesting path to observe how it has arrived at today and where it will head next.

Either go public or exit

During my meetings with numerous founders of robotics and AI companies, what surprised me the most was that nearly all of them are planning for an IPO next year and have already begun sprinting towards it.

None of these companies have reached the scale of Universe Tree Technology or Dark Moon, and even for the latter, getting listed on NASDAQ would likely not be easy—but all of them told me they are preparing for an IPO.

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

One of the most shocking facts for American founders is that many Chinese founders sign investment agreements stipulating that they must return investors' capital at a rate above a certain minimum return within a specified time frame. The timeline is sometimes six to eight years. If they cannot meet this, the company or even the founder personally may bear the responsibility for buybacks and repayments.

Chinese limited partners and general partners are less patient and have more direct demands for results. In Chinese, there is even a specific term to describe this phenomenon: "ming gu shi dai," which means superficially equity but practically debt.

It’s hard to imagine how innovation occurs in an ecosystem where founders must bear huge personal responsibilities for starting high-risk businesses. With stakes this high, who still has the courage to start a business?

But Chinese founders are indeed willing to stake everything.

This kind of incentive mechanism has shaped a batch of the most capable and toughest companies in the world and has fostered founders who fully commit themselves to their companies. When they cannot make money in China's harsh competitive environment, they often choose to expand overseas quickly and overpower local competitors.

They are not sophomores at Stanford, just participating in a Y Combinator program during the summer for the experience. For them, this is a game of either win everything or lose everything.

This also raises two questions.

Why are there no M&A exits?

Why must the exit method be an IPO? Can a company not be acquired, allowing investors to recoup their funds through a merger?

The answer is largely negative.

There is almost no truly mature M&A market in China, so startups can usually only exit through an IPO and must see it through to the end.

Chinese companies are relatively cheap in valuation, and labor costs are also low. Large companies prefer to replicate the ideas of a startup rather than acquire one, and they can likely do so much faster.

Chinese companies are usually very ambitious and accustomed to horizontal expansion. A smartphone company might simultaneously produce sports cars and develop enterprise software. These factors collectively reduce their willingness to acquire other companies, and there are also almost no opportunities to provide soft landings for entrepreneurial teams through "talent acquisition."

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

The lower threshold here does not necessarily refer to more lenient regulatory requirements, but rather the public market's higher acceptance level for these companies, meaning investors are more willing to buy their stocks.

In recent years, many tech companies in China have completed IPOs with almost no revenue or customers. According to current valuation standards of the U.S. tech market, their scale is far from sufficient, yet they still succeeded in going public.

Of course, the Hong Kong exchange is currently in a bull market. As one of the few pure large language model listed companies, Zhiyu’s stock price has also risen significantly. However, these companies would likely not be able to complete an IPO if placed in the U.S.

One explanation is that individual investors represent a higher proportion in Asian stock markets. Nonetheless, as the preferred listing place for tech companies, the Hong Kong exchange is still more institutionalized than the A-share market.

We do not know how long this bull market in Asia can last. Many local institutional investors have begun preparing for downturns that may occur in some of the hottest industries, hoping to buy stocks at low prices after the market falls.

Three types of capital pools

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

Isn't the free market competition among venture capital firms supposed to gradually become more founder-friendly, driven by institutions like Founders Fund and a16z, as in the U.S.?

This change is indeed happening. But China's venture capital ecosystem is still younger than that of the U.S. More importantly, the different sources of capital available to Chinese founders correspond to entirely different incentive mechanisms.

Chinese founders can usually access three types of institutional venture capital.

Local RMB funds

This type of fund is often supported by provincial or municipal government funding, with the accompanying conditions usually the most stringent. They frequently require companies to set up offices or factories locally to create jobs and attract talent.

The goal of Chinese RMB funds is often not only to achieve capital returns but also to drive economic development in the limited partners' localities, and their incentive mechanisms differ from those of Western funds that focus solely on investment returns.

These requirements often focus on job creation and talent attraction, which in turn help stabilize the local real estate market through population inflow.

Given this, why would founders still accept this type of funding?

The reason is that if you want to enter the hottest fields like artificial intelligence, semiconductors, and robotics—industries that are also highly prioritized by the state—sometimes only RMB funds can invest, like DeepSeek.

Local USD funds

This type of institution includes traditional first-tier Chinese venture capital such as Sequoia China, Hillhouse, ZhenFund, Qiming Venture Partners, and IDG. Qiming Venture Partners has actually little relation left with American Matrix Partners. Many of these institutions manage both USD and RMB funds.

Compared to the first type of capital, these funds are generally more founder-friendly. Many well-known Chinese companies of the last twenty years have relied on their support.

This is the funding source that Chinese founders most desire, especially for those planning to go global. By the way, from its establishment until its later split with Sequoia, Sequoia China was the part of the Sequoia system with the best investment performance.

Foreign funds

The last type is pure Western funds like ours.

Historically, many Western funds have made significant profits in China, such as Coatue and Tiger Global. However, direct investment of foreign capital in Chinese companies has significantly decreased.

Benchmark's B round investment in Manus is an exceptional case and likely the last deal of its kind. Obviously, the repercussions of this deal further dampened foreign investors' enthusiasm.

Of course, investors always hope to think outside the box. Perhaps investing in China has become the last truly contrarian investment proposition in the market.

I once asked a member of the Founders Fund what investment directions could still be considered contrarian. He also admitted that cryptocurrency and defense tech were already very crowded, and China might be the only remaining contrarian proposition.

The role of FA mediators

The existence of financial advisors (FA) is also a unique feature of the Chinese venture capital industry.

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

They are not wealth management institutions as the name might imply, but investment bankers serving early-stage financing, responsible for packaging and marketing projects and facilitating transactions between startups and venture capital firms.

The existence of such a massive layer of intermediaries in the financing ecosystem confuses me greatly.

Venture capital firms have effectively outsourced project sourcing and initial due diligence to FA. FA are often the first stop for founders to access capital. Many founders prefer to collaborate with FA, letting them help negotiate with savvy and powerful venture capital firms.

However, there are clearly conflicts of interest.

FA cannot continuously push inadequately vetted, low-quality companies onto a venture capital firm; otherwise, they will lose that firm's trust and eligibility. FA usually charge a commission of 2% to 5% of the financing amount. In that system, this has almost become a fixed tax.

I asked a top investor why venture capital firms allow such situations to exist. Does relying on FA not risk losing the excess returns from exclusive project sources and no longer being able to see good projects earlier than others? His answer was: this is how the industry operates.

They will also invest in projects without FA involvement, but many of the best projects are coordinated by FA in the initial rounds of financing. FA may even design a complete financing relay scheme in advance: Sequoia China handles the seed round, Hillhouse takes the A round, and both participate in the B round. This way, the company can build financing momentum and really start operating quickly.

Invisible relationship networks

China's social relationship network is neither public nor easily understood by outsiders. This results from China's relationship-oriented culture and, in turn, continues to reinforce this culture, profoundly influencing the way daily business activities operate.

China is a society that operates on "relationships."

LinkedIn has never truly entered the Chinese market, and local imitators have not succeeded. You usually can only get to know others through acquaintances, or at best, join larger group chats. WeChat groups have a limit of 500 members, whereas for comparison, the iMessage group chat limit of 32 is hardly worth mentioning.

Imagine a scenario with no cold emails, no LinkedIn DMs, and practically no proactive outreach. This may partly explain why China has never really developed a mature B2B SaaS industry. This culture has naturally shaped the way interactions occur between venture capital firms and founders. Generally, investors do not DM a founder directly.

This is also another reason FA exist: they provide "relationship liquidity" to a closed relationship network.

Most Chinese people maintain some form of anonymity online and on WeChat. If you add someone on WeChat, they are likely to use anime, cartoon, or scenic images as their profile picture, with a username that is either a nickname or a pseudonym. I have even encountered some Chinese individuals who refuse to disclose their real names and prefer to use nicknames or relatively impersonal English names instead.

The hand of the state

The final factor is the development direction and goals set by the state, which are driven by state-planned industrial policies. Western attitudes toward this model depend on whether you ask someone on Capitol Hill or in Silicon Valley, or which faction among them.

The government plays a far more crucial role in China's innovation ecosystem than in the West. The government is a major limited partner in many funds and attracts startups to settle locally by formulating attractive regulations, providing tax incentives, and offering land benefits. The government also influences the investment direction of venture capital firms by clearly indicating which industries it hopes to develop. Over the past decade, the most typical case has been China's domestic semiconductor industry.

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

Because a local government supports brain-computer interface technology, I have communicated with members of the investment institutions under its umbrella, who have invested in many startups in this field. They explained that their primary goal is to establish this strategic industry rather than pursue venture capital returns. It's somewhat like In-Q-Tel in the U.S.