Editor's Note: China's tech industry is becoming a reference point that Silicon Valley can no longer ignore.
From open-source large models, biotech to robotics, a group of Chinese companies are gradually changing the landscape of global tech competition with lower costs, faster hardware iteration speed, and denser industrial chain coordination. However, attributing this change solely to the number of engineers, manufacturing base, or policy support still falls short of explaining the real competitiveness of Chinese tech companies.
This article attempts to understand how China's innovation ecosystem operates from the perspective of its capital system.
In Silicon Valley, funding for startups is usually seen as a long-term bet on future growth, with exit paths like IPO, M&A, or continued independent development all being possible. The situation in China is more urgent. Many startups do not choose to go public when conditions are ripe, but are forced to treat IPO as almost the only endpoint under pressure from fund terms, repurchase clauses, and investor exit demands. "Equity in name, debt in essence," personal repurchase liabilities, and a not-very-active M&A market collectively form a funding mechanism that is harsher on founders.
There are clearly costs to this institutional arrangement. It may compress long-term R&D space, induce short-term packaging, excessive fundraising, or even financial risks. But on the other hand, when entrepreneurship becomes a game of "all-in," companies are also forced to maintain lower costs, faster execution speed, and stronger commercialization capabilities. The price competitiveness and expansion capabilities Chinese companies show when entering overseas markets largely stem from this domestic high-pressure environment's selection process.
This article also reveals several structures in China's venture capital market often overlooked by overseas observers: local RMB funds pursue not only financial returns but also bear objectives like investment attraction, employment, and industry landing; USD funds seek balance between capital returns and globalization; direct participation of foreign funds continues to decrease. Meanwhile, FAs undertake functions like project discovery, fundraising packaging, and relationship facilitation, filling a market gap lacking a public professional network and relying on acquaintances and WeChat connections.
And of course, there are deeper variables: national industrial policy.
Admittedly, this article carries a distinct Silicon Valley observer's perspective, not a rigorous institutional study. But it offers a core perspective worth discussing: China is not simply replicating Silicon Valley; it is forming a completely different way of organizing innovation.
This system may not be gentle, nor suitable for all entrepreneurs, but it can concentrate resources, accelerate iteration in specific strategic industries, and shape a group of extremely execution-driven companies.
Understanding China's tech competitiveness cannot be just about model parameters, fundraising amounts, and IPO valuations; one must also understand the capital timelines, local governments, relationship networks, and exit pressures behind these companies. What truly propels China's tech industry forward might be precisely this contradictory system: on one hand, it creates pressure and risk; on the other, it pushes speed, efficiency, and industrial ambition to the extreme.
The following is the original text, slightly edited for clarity without changing the meaning:
Last month, I went to China, visited most of the top-tier investment institutions, and met with management teams from several leading robotics and biotech companies.
A narrative is popular in Silicon Valley now: China is winning in several key future fields—open-source AI, biotech, and robotics. The reasons supporting this concern are quite substantial.
Chinese open-source models have become some of the most commonly used models by Silicon Valley startups. After US government restrictions on Fable, ironically, China has taken on the role of supporting the global open AI tech stack.
In biotech, most projects in China's clinical trials are innovative therapies, while about half of the drugs in US FDA clinical trials are licensed from China. In robotics, China possesses not only the structural advantage of mass-producing training data but, more importantly, its hardware development and feedback iteration speed is shockingly fast.
But even with these advantages, the Chinese don't 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 center.
A top venture capital person even told me that whenever Benchmark or Sequoia releases a new podcast, he makes it mandatory viewing for the whole company.
The Chinese are keenly aware of everything happening in the West. What I post on X and LinkedIn is usually translated within hours by mainstream Chinese AI media (Xinzhiyuan, Jiqizhixin, or Quantum Bit)—including even comments from the X comment section, which get translated as screenshots. You might not even know you're somewhat famous in China.
This information asymmetry enhances their learning speed and 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 lower, and it's much harsher on founders. This environment might breed companies with stronger execution and fiercer competitiveness, enabling them to beat rivals in global markets; but the immense pressure and personal liability might also stimulate more bubbles and fraud.
From Seoul to Tel Aviv, most global tech centers use Silicon Valley as a template. China, in many ways, constitutes a parallel universe. Understanding how China funds innovation is an interesting path to observe how China arrived at today and where it's headed.
IPO or Bust
One of the most surprising things when meeting many robotics and AI company founders was: almost all of them are planning to IPO next year and have already started a full-speed sprint.
None of these companies are on the scale of Unitree or Moonshot AI—even the latter two would likely struggle to list on Nasdaq—but everyone told me they are preparing to go public.
Why? Because they have no other choice. In China, many startups go public not because they are IPO-ready, nor because the market timing is perfect, but because they are forced to.
One of the most shocking facts for American founders is that many investment agreements Chinese founders sign stipulate: they must return capital to investors within a set period, meeting a certain minimum rate of return. The term is sometimes six to eight years. If they fail, the company or even the founder personally may bear repurchase and repayment liability.
Chinese LPs and GPs have less patience and more direct demands for results. There's even a specific Chinese phrase describing this phenomenon: "Ming Gu Shi Zhai," meaning equity in name, debt in essence.
It's hard to imagine how innovation happens in an ecosystem where founders have to take on massive personal liability to start high-risk ventures. With stakes so high, who would have the courage to start a company?
But Chinese founders are indeed willing to bet everything.
Such incentives have shaped a group of the leanest, fiercest companies globally, and founders who truly put everything into their companies. When they can't make money in China's brutal competitive environment, they often choose to expand overseas and quickly overwhelm local competitors.
They aren't Stanford sophomores just experimenting by joining a Y Combinator batch over the summer. For them, this is a game where you either win everything or lose everything.
This leads to two questions.
Why No M&A Exits?
Why must the exit be an IPO? Can't companies be acquired, allowing investors to recoup funds through M&A?
The answer is basically no.
There is hardly any truly mature M&A market in China, so startups typically can only exit via IPO—they must go all the way.
Chinese company valuations are cheap, and labor costs are low. Large companies would rather copy a startup's idea directly, and likely do it faster, than acquire it.
Chinese companies are also typically highly ambitious and accustomed to horizontal expansion. A smartphone company might also produce sports cars and develop enterprise software. These factors collectively reduce their willingness to acquire other companies. There, opportunities for soft landings via "acqui-hires" are also almost non-existent.
However, a relatively favorable factor for Chinese founders is that their IPO threshold is generally lower than Nasdaq or the New York Stock Exchange.
Here, "lower threshold" doesn't necessarily mean laxer regulatory requirements, but a higher acceptance level in the public markets—investors are more willing to buy these companies' stocks.
In recent years, many Chinese tech companies have managed to complete IPOs despite having little to no revenue or customers. By current US tech market valuation standards, they are far too small.
Of course, the Hong Kong Exchange is currently in a bull market. Zhipu, as one of the few pure LLM public companies, saw its stock price surge significantly. But these companies probably couldn't list in the US.
One explanation is the higher proportion of retail investors in Asian stock markets. Still, the Hong Kong Exchange, the preferred listing venue for tech companies, is more institutionalized than the A-share market.
We don't know how long this Asian bull market will last. Many local institutional investors are already preparing for a potential downturn in some of the hottest sectors, hoping to buy stocks cheaply after a market crash.
Three Types of Capital Pools
Another question: Why are founders willing to accept such harsh terms?
Shouldn't free market competition among VCs, like in the US with firms like Founders Fund and a16z pushing, gradually become more founder-friendly?
This change is indeed happening. But China's venture capital ecosystem is still younger than America's. More importantly, the different capital sources available to Chinese founders correspond to vastly different incentive mechanisms.
Chinese founders typically have access to three types of institutional venture capital.
Local RMB Funds
These funds are often backed by provincial or municipal government money and usually come with the most stringent conditions. They frequently require companies to set up offices or factories locally to create jobs and attract talent.
The goals of Chinese RMB funds are often not just capital returns; they also bear the task of driving economic development in the LP's locality. Their incentives differ from Western funds focused solely on investment returns.
These requirements often focus on job creation and talent attraction, which in turn helps stabilize the local real estate market.
So why would founders accept such funds?
The reason is, if you want to enter the hottest fields like AI, semiconductors, and robotics—industries also highly prioritized by the state—sometimes only RMB funds can invest, for example, in DeepSeek.
Domestic USD Funds
These include traditional top-tier Chinese VCs like Sequoia China, Hillhouse Capital, ZhenFund, Qiming Venture Partners, and IDG. Qiming Venture Partners actually has little relation to the US Matrix Partners anymore. Many of these firms manage both USD and RMB funds.
Compared to the first type, these funds are generally more founder-friendly. Over the past two decades, they've backed many household-name Chinese companies.
This is the capital source Chinese founders most desire, especially those planning to go global. Incidentally, from its founding until its split from Sequoia, Sequoia China was the best-performing part of the Sequoia system.
Foreign Funds
The last category is pure Western funds like ours.
Historically, many Western funds made fortunes in China, like Coatue and Tiger Global. But now, direct investment by foreign capital in Chinese companies has decreased significantly.
Benchmark's Series B investment in Manus is an outlier and likely the last deal of its kind. Obviously, the subsequent fallout from that deal further dampened foreign investor enthusiasm.
Of course, investors always want to think contrarian. Perhaps investing in China is the last truly contrarian investment thesis left in the market.
I once asked a member of Founders Fund what investment direction could still be considered contrarian. He admitted that both crypto and defense tech were already crowded, and China might be the only contrarian thesis left.
The FA Intermediary Layer
The existence of FAs is another unique feature of China's venture capital industry.
FA stands for Financial Advisor, but everyone just calls them FAs.
They are not wealth management firms as the name might suggest, but investment bankers serving early-stage fundraising, responsible for packaging, marketing projects, and facilitating deals between startups and VCs.
I was quite puzzled that such a large intermediary layer exists in the entire fundraising ecosystem.
VCs essentially outsource project sourcing and first-round due diligence to FAs. FAs are often the first point of contact for founders seeking capital. Many founders also prefer working with FAs to help them negotiate with savvy, powerful VCs.
But there's clearly a conflict of interest.
An FA can't keep pushing negatively selected, low-quality companies to a VC, or they'll lose that firm's trust and access. FAs typically charge 2% to 5% of the fundraising amount as commission. In that system, it's almost become a fixed tax.
I asked a top investor why VCs allow this. Doesn't relying on FAs mean losing the excess returns from exclusive deal flow and the ability to see good projects earlier than others? His answer: This is just how the industry operates.
They do invest in deals without FAs, but many of the best projects have FA-led coordination in the initial rounds. FAs even design the entire fundraising relay plan in advance: Sequoia China for seed, Hillhouse for Series A, both co-leading Series B. This way, the company can build fundraising momentum and really start moving fast.
The Invisible Relationship Network
China's social relationship network is neither public nor easily decipherable by outsiders. This is both a result of China's relationship-oriented culture and continuously reinforces it, profoundly influencing how daily business operates.
China is a society run on "guanxi" (relationships).
LinkedIn never truly entered China, and local imitators haven't succeeded. You typically can only meet people through introductions from acquaintances, or at best, join larger group chats. WeChat groups have a cap of 500 people, compared to iMessage's paltry 32-person limit.
Imagine: no cold emails, no LinkedIn DMs, and essentially no outbound prospecting. This might partly explain why China never truly developed a mature B2B SaaS industry. This culture naturally shapes how VCs and founders interact. Generally, investors won't directly DM a founder.
This is another reason FAs exist: they provide "relationship liquidity" for the closed network.
Most Chinese maintain a degree of anonymity online and on WeChat. If you add someone on WeChat, they likely use anime, cartoon, or landscape pictures as avatars and use screen names or aliases as usernames. I've even encountered some Chinese who refuse to reveal their real names, only willing to use nicknames or relatively impersonal English names.
The Hand of the State
The final factor is the direction and goals set by the state—industrial policy driven by national planning. Western attitudes towards this model depend on whether you ask Capitol Hill or Silicon Valley, and which faction within.
The government plays a far more important role in China's innovation ecosystem than in the West. The government is both a major LP for many funds and attracts startups to localities by setting attractive regulations, offering tax breaks, and land incentives. It also influences VC investment direction by signaling which industries it hopes to develop. The most typical example over the past decade is China's domestic semiconductor industry.
China's brain-computer interface industry provides a more vivid, personalized case of industrial policy.
Because a local government is a staunch supporter of BCI technology, I spoke with members of its affiliated investment arm who have invested in many startups in this field. They explained their primary goal is to build this strategic industry, not pursue venture capital returns. It's somewhat like In-Q-Tel in the US.
