On the first day of August, we spoke with 23 investors about "confidence."

By Yi Zhang

Edited by Zhiyan Chen, Jing Liu

"Kr-Notes" is a recurring feature of ours. Typically at year's end, we survey dozens of investors, asking them to forecast the year ahead.

But 2022, barely halfway through, already feels like ages. At this moment, China's venture capital world has accumulated perhaps more "ten thousand whys" than ever before.

The foremost question: Will the second half of 2022 replay the second half of 2020? Not long ago, one investor did tell founders with absolute certainty: "Starting in Q3, things will look a lot like 2020. The funding market will gradually heat up."

Meanwhile, we stand at a fresh inflection point — a feeling clearer than at any moment in the past two years. New winds — new energy, hard tech, new globalization, and more — are emerging. But how to interpret them remains deeply contested, including on foundational questions like "Is this even suitable for VC?"

It felt necessary to move this survey up. Our thanks to the 23 investors bold enough to venture predictions: Kan Chen, Partner at Qiming Venture Partners; Yao Feng, Managing Director at Yunqi Partners; Zhilong Fu, Partner at YX Capital; Xin Guo, Partner at CASSTAR; Rui Han, Partner at Gaorong Capital; Boyu Hu, Partner at XVC; Mingming Huang, Founding Partner at Mingshi Capital; Ke Jiang, Partner at Taihe Capital; Feng Li, Founding Partner at FreeS Fund; Liang Li, Founding Partner at Hillhouse Capital; Kai Liu, Partner at 5Y Capital; Yuan Liu, Managing Director at ZhenFund; Gaoguang Song, Partner at Northern Light Venture Capital; Jie Tong, Founding Partner at SCVC; Lixing Wang, Co-Head of Investment Banking at China Renaissance; Xingshi Wang, Partner at Source Code Capital; Fei Xiong, Partner at Matrix Partners China; Weiming Xiong, Partner at China Growth Capital; Anmin Yao, Partner at ZWC Partners; Peiyuan Zhang, Founding Partner at Black Ant Capital; Yang Zhao, Partner at K2VC; Qingsheng Zheng, Partner at Hongshan; Jia Zhu, Partner at Lightspeed China Partners (listed alphabetically by surname).

If we publish another Kr-Notes in early 2023 as planned, we can compare these two: who guessed more of the future correctly.

Most Believe H2 2022 Won't Recapture the 2020 Frenzy

In some ways, H2 2020 may have been the best period in recent years. China's primary market never sank into the expected gloom; instead, it kicked off a full year of "capital market madness."

Two now-struggling companies perhaps best illustrate that era's excess. In H2 2020, Perfect Diary raised $140 million in its Series E before listing on the NYSE; fresh grocery platform Missfresh rapidly completed two large rounds totaling over 5.3 billion RMB within five months. By year-end, average single-deal funding reached 227 million RMB. Enterprise services, consumer, online education, semiconductors, and innovative drugs became hot sectors in rapid succession.

That year, domestic VC/PE exit volume hit 1.29 trillion RMB, a ten-year high. Dollar funds also sparked a fundraising surge — Sequoia, CDH, Hillhouse, Qiming and others each raised over 10 billion RMB.

Today, two years later, we face another post-pandemic era with Q3 upon us. Does 2020's "madness" have any chance of returning?

Starting in July, those who believed the primary market would quickly warm up could spot scattered recovery signs. On the deal side, transaction volume began ticking back up. According to Qimingpian data, from July 1-25, year-on-year deal volume decline narrowed from 42% in June to 37%. Some firms claimed "July deal count alone exceeded all of Q2." On the fundraising side, several top-tier firms announced welcome news: Joy Capital raised 4 billion RMB in dual-currency funds; Sequoia Capital's largest-ever raise — a $9 billion new fund — was nearing close; Qiming Venture Partners completed $3.2 billion for its latest dollar fund.

Looking at the macro picture, this warmth might seem even stronger. Multiple provinces — Fujian, Jiangxi, Anhui — announced local guidance funds and industrial development funds in the tens or hundreds of billions. After comparing H1 2020 and H1 2022 macro data, FreeS Fund's Feng Li found that the worst months of 2022 (April-May) outperformed the trough of 2020 (February-March) across economic indicators.

"This year's stimulus is clearly no weaker than 2020's, and more cash-flow oriented." This led Li to an optimistic call: the primary market will noticeably warm in Q4 2022.

But in our interviews, such optimists were few. Among the 23 investors, uncertainty was a recurring theme; most took a conservative stance on market recovery. Li was among the rare few who unambiguously believed H2 could match 2020's optimism.

For ZWC Partners' Anmin Yao, for instance, domestic growth still relies mainly on government investment and policy pull, but "there won't be outsized stimulus for excessively high growth targets." Globally, projections show the US likely entering recession in Q3-Q4, creating major uncertainty for international financial markets. The Russia-Ukraine war, roiling geopolitics, has also driven energy and commodity prices sharply higher, fueling surging inflation in Europe and America and further disrupting global supply chain stability.

Like Yao, more harbored uncertainty. In a recent summary of investor conversations, Taihe Capital found only 14% of investors reported being more active, while 49% were more cautious or slowing down. Unlike 2020's immediate adrenaline shot, H1 2022's economic stall continues to cast a shadow over the primary market.

Beyond macro concerns large and small, the biggest problem is: this time, what's most devastated business is eroded confidence.

Yunqi Partners' Yao Feng told Anyong Waves that confidence among investors, consumers, enterprise clients, and upstream/downstream partners about future development and expectations is a crucial condition for primary market recovery — "and clearly, damaged confidence remains urgently in need of repair."

Domestically, Taihe Capital's Ke Jiang believes that two and a half years of pandemic have transformed from a short-term shock into a medium-term impact on structural economic fundamentals like consumption capacity and willingness, and the job market — "uncertainty has not been fully eliminated."

Looking abroad, beyond COVID, policies, international environment and other factors have left the outlook for Chinese companies' overseas listings unclear, with global observers broadly adopting a wait-and-see attitude toward China's economic development. China Growth Capital's Weiming Xiong believes "dollar fund sentiment is often the key variable that drives market mood, and this year many dollar LPs have paused investing in China." XVC's Boyu Hu observed that in the past half-year, international secondary market investors have broadly suffered damaged confidence. That negative sentiment takes 1-2 quarters to transmit to the primary market. "Right now, secondary pessimism hasn't fully played out; it's hard for the primary market to reverse."

A New VC Era: Industrial Shifts, Currency Battles, and What Matters Most in Investing

1. "RMB" Becomes More "RMB"

Everyone is starting to genuinely believe: RMB is becoming the dominant currency in China's primary market, and this will only intensify.

Despite outsized raises like Hongshan's $9 billion and Qiming's $3.2 billion, this year's dollar fundraising market is broadly depressed. ZhenFund's Yuan Liu noted that some dollar LPs have communicated in recent conversations that they'll reduce China allocation — from say 50% of their portfolio to 40% or one-third. Anyong Waves has also heard from some dollar LPs that mega-funds like Sequoia's $9 billion vehicle will to some extent absorb dollar institutions' China market quotas — "a Matthew Effect becoming more Matthew."

Meanwhile, the RMB market is active. According to Chuangtoutiao statistics, in H1 2022, 70 new母 funds (funds-of-funds) launched nationally, with at least 40 exceeding 10 billion RMB. Of current Chinese母 funds, state capital (including marketized母 funds) exceeds 90%; government guidance funds comprise 80%. Here's 2020 data for comparison: in H1 that year, state capital accounted for over 75% of completed fund raises.

These figures reflect two trends: RMB investor groups are growing (at least in visibility); RMB investors' state-owned character is strengthening. Per China Renaissance's Lixing Wang's forecast, in H2 2022, industrial/strategic investors and "national team" RMB players may become even more active.

For two decades, "RMB rising" has been a recurring refrain, but the past half-year marks true acceleration. This shift in capital attributes coincides with current industrial investment characteristics: in China's core technology sectors, RMB is already many founders' preferred, even only, currency choice.

Geographically, RMB investors were concentrated in the Pearl River Delta and Yangtze River Delta with industrial advantages. But this is shifting: Sichuan, Hubei, Jiangxi, Fujian and others have seen large-scale investors emerge. Potential LP distribution is gradually dispersing.

But for IR professionals, winning these investors requires understanding their core needs. Synthesizing views from multiple GP partners engaging RMB investors, RMB LPs have four main characteristics: (1) higher DPI expectations; (2) longer, more cautious decision-making; (3) for government LPs,返投 (local reinvestment requirements) is the top consideration; (4) preference for GPs with deep industrial roots, clear understanding of industrial cycles, and rich industrial resources.

2. Among N Investment Criteria, Policy Comes First

If you ask investors what most impressed them in the past year, most would point to: last summer's Didi incident and the online education crackdown. Both made investors — especially in VC, an industry that had imagined itself distant from policy — deeply realize: without understanding policy, there is no talking about investment.

In interviews, one investor even told us that policy matters more than changes in productivity. Allen Zhu of Lightspeed China, meanwhile, believes they must pay close attention to policy's guiding effect on markets while also considering whether there are fundamental demand-side and market-end factors at play — "to ensure the entire industry can sustain its development. Otherwise, once policy shifts direction or temporarily reduces support for an industry, or stops subsidies, the impact on that industry will be enormous."

Indeed, "understanding the political and policy landscape" has become a required course for more and more people. From our observation, more GPs have begun establishing departments similar to "public affairs." Beyond that, many large VC/PE firms have added "policy research" positions. Source Code Capital, for instance, built out a public affairs team quite early on, focused on studying macro policy, the 14th Five-Year Plan, and other frameworks to help portfolio companies "proactively and effectively communicate with relevant authorities."

3. Early-Stage and Late-Stage Markets: Two Different Worlds

Though investors generally felt the chill in the first half of the year, our interviews revealed that early-stage and late-stage investors were having distinctly different experiences. Super deals at the late stage were relatively scarce, but the early-stage market was actually quite active.

The data bears this out. According to Jingdata, venture capital in the first half of 2022 clearly concentrated toward the early stage. In the first half of this year, Series A rounds saw the most deal volume with 2,374 transactions, accounting for 43.6% of the total. Seed and angel rounds followed with 1,668 deals, or 30.6%. Looking further, pre-Series B and earlier deals made up over 85% of total investment activity in H1 2022. From a capital deployment perspective, pre-Series B and earlier investments reached 48.1% of total deal value, with cumulative investment of 118.027 billion RMB — essentially half of all VC/PE investment.

Take Hillhouse Capital as an example. Since announcing Hillhouse Venture as an independent brand in 2020, it has increasingly tilted toward early-stage. Hillhouse's Liang Li noted that investment pace in H1 2022 was flat with the previous two years — roughly 80-plus projects per half-year — but by stage, Series A and earlier exceeded 50% this year, with "more than 10 seed and angel rounds."

In terms of allocation, "hard tech direction + stellar team" has essentially become Hillhouse's early-stage standard. Under the premise of "high tech content," Hillhouse participated in seed rounds across data analytics, semiconductors, core industrial software, synthetic biology, and other directions.

Perhaps this is indeed because a new round of industrial transition remains in its early phase. As Hongshan's Qing Sheng Zheng put it, "We have entered the early gestation phase of a new technological innovation cycle."

So when we interviewed them, both ZhenFund and K2VC said their first-half deal volume was flat with last year — "especially in biotech and synthetic biology, where more and more world-class scientists and academics are returning to China to start businesses," noted K2VC's Zhao Yang.

Weiming Xiong of China Growth Capital believes China's VC industry is currently in a position much like where US VC found itself 20 years ago. The venture industry sits in a gap between policy and market cycles, with no consensus (deal flow) and fragmented investment themes.

Kai Liu of 5Y Capital largely agrees. He said: "The early-stage market has returned to a very binary atmosphere — a market where every firm must rely on its own vision and conviction to perform." For early-stage investing, this is precisely the kind of market where VCs can win on non-consensus opportunities, and it's also the only market where you can bet small for outsized returns.

4. Rapid Industrial Rotation, Changing Investor Profiles

"2022 marks the beginning of a new technological innovation cycle. The content of foundational and original innovation is becoming increasingly visible." This statement from Hongshan's Qing Sheng Zheng represented the consensus view among most investors we spoke with.

Because industrial hotspots have completely shifted from internet to hard tech, and even to manufacturing and industrial chains, early-stage firms have found that discovering "underwater projects" now works very differently: they need to embed themselves in the Yangtze River Delta and Pearl River Delta industrial chains, visiting factories and industrial parks; they also need to frequent universities, mining projects through discussions with professors and academicians about their papers.

K2VC's Zhao Yang said they have been intensively adding talent from industry, "hoping these people can grow into core teams within 3-5 years of joining, driving 1-2 important directions." One investor observed that everyone is building out teams in technology, industry, and manufacturing, with "new energy research groups" appearing first — "almost every fund is making new energy groups standard."

Talent replenishment also extends to middle and back office. For example, IDG Capital's capital markets department recently posted a marketing role for intelligent driving, requiring "over 5 years of communications experience in the automotive field, with access to experts and KOLs in automotive intelligence."

We've summarized the three main post-investment demands that funds are hearing from portfolio companies in the hottest new energy and industrial internet tracks: 1) demand for managerial talent; 2) experts skilled at designing equity incentive plans; 3) those who can bring in more industrial resources, especially core supply chain resources.

In Hillhouse's Liang Li's view, on one hand, from the broader trend of manufacturing upgrading to advanced manufacturing, this industry still receives far too little social capital support; on the other hand, capital alone is far from sufficient. It requires investment firms to have multiple tools in their toolbox — lean management, digitalization, specialized manufacturing talent services, and so on.

5. The Next Two Years Will Enter a New Cycle of Industrial M&A

The dramatic adjustment in secondary market valuations has made corporate financing and shareholder exits more difficult than before. Being acquired by corporate venture arms or industrial investors is increasingly becoming another possible exit path for existing shareholders.

Since the anti-monopoly push began in late 2021, major tech platforms have significantly pulled back on M&A. Entering 2022, while policy toward internet giant M&A has begun to loosen somewhat, deal volume and value have continued to contract. China Renaissance's Lixing Wang noted that in the long term, the frequency of major tech platform deals still shows potential for fluctuating upward movement. In the near term, however, a meaningful increase in deal frequency seems unlikely.

But industrial M&A continues to brew. Wang believes that as buyer exit pressure mounts and the long-term inversion between primary and secondary markets persists, "after the dual cycle reaches its inflection point, the next two years will enter a new cycle of industrial M&A." Recently, CATL has already signaled a dual-wheel drive of international industrial chain acquisitions and industrial layout.

Wang believes M&A velocity and pace will accelerate most noticeably in strategically emerging industries encouraged by the state that also have high market-oriented components — robotics, 3D printing, new energy, flexible materials, chips, SaaS, and so on. Unlike internet company M&A, traditional enterprise M&A focuses more on industrial expansion and synergy, as well as the acquired project's R&D capabilities and cost advantages.

The Lost Paths and Endgames of 6 Key Sectors

There is no doubt that hard tech is the core track of the year. According to China Renaissance's definition, "broad hard tech" mainly includes: new energy vehicle industrial chain & autonomous driving, industrial manufacturing, semiconductor industrial chain, clean energy & energy conservation, and so on.

Among the 23 investors interviewed by Waves, 15 tended to answer questions related to hard tech.

Allen Zhu of Lightspeed China frankly admitted that with no new demand-side changes this year, there won't be much new capital flowing into consumer-oriented sectors. Boyu Hu of XVC proposed that "resource-intensive, capital-intensive" industries represented by semiconductors and new energy will continue to see heavy clustering of VC/PE investment.

Unlike the internet investment era's preference for imagination and high-ceiling business narratives, future hot tracks and quality companies will generally share these characteristics:

First, under the premise of market demand, there is clear policy support and drive. As Weiming Xiong of China Growth Capital put it, "Policy importance exceeds changes in productivity";

Second, industrial digital-intelligent transformation and technology upgrading will become keywords. Kai Liu of 5Y Capital's summary is that future tech companies will become "heavier, more vertical, more hardcore." Xingshi Wang of Source Code Capital's observation is that Chinese venture capital will enter an era "more focused on tech investment";

Third, the development logic of tracks and companies must adapt to the core value logic of investment institutions. Jiang Ke of Taihe Capital summarized this logic as "more toward reasonable valuations, rational growth expectations, higher degree of commercialization."

Specifically, across various promising tracks, energy storage (energy management), robotics, industrial software, new materials, and cross-border expansion are the hottest investment areas in the near to medium term. Below, synthesized views from investors on each track:

1. New Energy: A "Perfect Track" Showing Early Bubble Signs, Still in Early Industrial Phase

The performance of leading companies like Tesla and BYD, combined with national energy policy push, has made new energy the hottest风口 of 2022. Last year, this track had only a small number of CAS system funds and investment firms with years of vertical focus on new energy. Now, virtually no investment institution in the market is not布局 new energy.

Weiming Xiong of China Growth Capital noted that this wave of new energy and clean energy is a global opportunity. "The business models of new EV companies are shifting from to-G to to-C compared to a few years ago," said Xingshi Wang of Source Code Capital, who believes the EV upstream and downstream can drive upgrades across the entire dual-carbon industrial chain — a "trillion-level mega-ecosystem." Mingming Huang of Mingshi Capital put it bluntly: missing the new energy investment opportunity means missing an era.

Because new energy features long industrial chains and many directions, it shows greater容纳性 for different types of capital. Though this is a track that emphasizes industrial attributes, it does not exclude VC participation.

K2VC's Zhao Yang began paying attention to energy storage in 2020. He believes new energy differs from the internet's winner-take-all logic — VCs can make broader matrix investments with attractive returns. "China's photovoltaic industrial chain has one to two hundred listed A-share companies. Beyond the leading company LONGi, there are still many upstream and downstream companies at the ten-billion RMB market cap scale. Many new energy storage companies will likely see similar competitive landscapes and scale, with high probability of capital market access."

Currently, lithium battery industrial chain, hydrogen fuel cell technology and applications, and other sub-sectors are where new energy investors are most focused. But because energy storage technology is still iterating, its commercialization path remains unclear. Investors still hold differing views on which energy form will be the final形态 and which will capture significant market share.

Precisely because of this lack of clear judgment, new energy investment currently shows a "hot at both ends, cold in the middle" phenomenon. Early companies with technical demos and models, as well as mature companies at Series D and Pre-IPO stages, attract more capital pursuit, while companies at substantive validation and small-batch pilot production stages see few institutions investing.

Yet even this "perfect track" has already shown signs of overheating. Jiang Ke of Taihe Capital told Waves that bubble scenes seen in other industries are beginning to appear in new energy: increasing conceptual/story-driven coverage, more speculative capital entering, more resource-assembly projects with less genuine industrial experience.

But Jiang Ke also noted that the massive growth expectations for new energy, particularly electric vehicles, and secondary market performance have largely offset investor concerns about cycle fluctuations. Regarding this situation, one investor told Waves that there is an essential difference between new energy and semiconductors — China possesses multiple independent intellectual property rights in new energy, with multiple technologies at world-class levels, not merely强行推动 by national conditions and policy demand.

According to China Renaissance's first-half research, the new energy sector showed the smallest valuation inversion between primary and secondary markets among all sectors. While institutional investors generally consider top-tier primary market projects in this space to be richly valued, the sustained strength of the new energy segment in Q2 has left most feeling relatively optimistic about post-IPO performance.

One investor believes that "China has the opportunity to define the new energy industry chain on a global scale."

2. Hard Tech: Semiconductors Face First Round of Consolidation, Robotics Sector Sees Temporary Correction

After an exceptionally hot investment year in 2020 and a global shortage-driven price surge in 2021, the semiconductor segment within hard tech fell into a cyclical trough in 2022, ushering in its first wave of industry consolidation.

Starting last November, the domestic A-share semiconductor sector experienced a sustained decline, with many companies hitting limit-down or breaking IPO prices on their debut or upon lock-up expiration. According to incomplete media statistics, among 14 semiconductor IPOs between January and April this year, seven broke issue price on day one, and 100% of unprofitable semiconductor companies did so.

Multiple investors told Waves that "semiconductor company valuations have peaked."

The seemingly rapid decline of semiconductor companies in capital markets is intimately tied to their origins. Due to international geopolitics and U.S.-China relations, domestic demand for independent R&D in technology — particularly breaking the semiconductor "chokehold" situation — surged dramatically. In just two years, the active investor base in semiconductors transformed from specialized vertical firms quietly building positions to a broad array of financial institutions, state-backed funds, and strategic industrial players entering the market. Yet the capital frenzy surrounding semiconductors never truly answered one question: do these companies possess genuine value? Indeed, a view has emerged that "semiconductor companies are only valuable in China."

Fu Zhilong of Yunxi Capital argues that China is the world's largest semiconductor consumer market, with the state providing policy, funding, and talent development support. This means "China's semiconductor entrepreneurship still holds certain advantages and opportunities, and can produce leading enterprises across various sub-segments." Xiong Weiming of China Growth Capital also believes semiconductor opportunities are medium-to-long-term in nature, and this sector will remain prosperous.

Allen Zhu of Lightspeed China observes that leading semiconductor companies in consumer electronics have already captured certain domestic substitution market share, leaving less room for late entrants. Because new energy vehicles have redefined automotive electronic and electrical architectures, growing EV sales will drive investment in upstream semiconductor companies serving this sector. However, customer qualification cycles, validation periods, and design timelines are all lengthy in this domain, requiring greater patience from investors.

The hot tracks within semiconductors have evolved from: AI chips represented by Cambricon, consumer electronics chips, and high-end GPU and CPU chips, to the current focus on automotive-grade chips, semiconductor equipment, and materials. Fu Zhilong believes the next investment hotspots will center on four areas: (1) electrical and electronic systems for automotive and new energy industry chains; (2) the metaverse industry chain centered on AR/VR; (3) the cloud computing industry chain driven by IDC construction; and (4) semiconductor equipment and materials needed for capacity expansion.

On another front within hard tech, "robotics and automation" is also widely favored by investors. In fact, from the year before last to now, the broad robotics sector has completed a dense wave of financings. Beyond the "machines replacing humans" thesis, Allen Zhu of Lightspeed China offered Waves an additional angle: "Driven by the new energy sector, the automotive industry downstream and manufacturing processes for photovoltaics and lithium batteries require massive automation technology, which has catalyzed the robotics industry's development."

It is understood that not only Lightspeed China, but also XVC, K2VC, Future Capital, ZhenFund, and numerous other VC institutions have listed robotics sector innovation as a priority investment track. Among them, Future Capital began deploying in robotics companies as early as 2014-2015.

However, it is worth noting that following the earlier frenetic fundraising pace, numerous robotics companies have faced financing difficulties to varying degrees in recent months. Pudu Technology, for instance, recently announced large-scale layoffs. One investor indicated this stems largely from a mismatch between valuations and commercialization capabilities: "There will certainly be a de-foaming process, but this doesn't negate the industry's long-term value."

As a representative RMB early-stage fund with nearly a decade of deep engagement in hard tech, CAS Star partner Guo Xin believes that domains featuring critical core technologies — "new energy materials, aerospace materials, advanced manufacturing, and optoelectronic chips" — will see favorable investment opportunities in the second half of this year through 2023.

3. Going Global: Evolving from Cost-Driven to Entrepreneurial Capability Spillover, Early-Stage Investment Offers Greater Opportunity

Strictly speaking, going global cannot be considered an independent sector. Yet starting from 2021, it became one of the most important investment directions for nearly all dollar funds. From consumer products and retail e-commerce to enterprise software and high-tech companies, from Southeast Asia and Africa to developed regions like Europe and the U.S., Chinese companies going global have demonstrated new development characteristics in recent years. This is somewhat related to dollar funds' currency constraints, which we won't elaborate on here.

From a positive perspective, as multiple investors told Waves, the "comprehensive advantages" of Chinese companies going global are becoming apparent. First and foremost is the continuation of manufacturing and supply chain advantages. Second is the internet marketing advantage developed in recent years, which can even form a "dimensionality reduction strike" in overseas markets. Third is the engineer advantage. Chinese companies have particularly established mature systems and processes in software. In Yuan Liu's view at ZhenFund, Chinese companies going global have reached the stage of "entrepreneurial leadership and capability spillover."

Looking at specific sectors, within the enterprise services track where cooling was pronounced in Q2 this year, beyond opportunities in vertical SaaS for chemicals, construction management, laboratory management, and chain store management, overseas SaaS companies represent a key focus area for enterprise services investors.

In consumer products, Han Rui, partner at Gaorong Capital, analyzes that the brands best suited for going global beyond cost-driven ones are those that can demonstrate China's engineer dividend through approaches like "electrification first, then connectivity."

Among high-tech companies going global, integrated manufacturers in new energy vehicles such as NIO, XPeng, Li Auto, and BYD have begun large-scale exports and sales overseas, with potential to pull upstream technology companies in the industry chain along with them. In Huang Mingming's view at Future Capital, the new energy vehicle industry represents the convergence point where the energy revolution, information revolution, and AI revolution collectively produce disruptive societal transformation — and an increasingly important window for Chinese companies going global.

What merits attention is that this wave of going global represents opportunity not just for Chinese entrepreneurs, but for Chinese investors as well. Particularly at early stages, discovering projects and locking in quality entrepreneurs will become a sustained opportunity for domestic VCs.

4. Healthcare: In the Valley of Death, Still Worth Betting Early and Interdisciplinary

The chill in healthcare did not arrive overnight.

At the end of 2021, the biotech secondary markets in both China and the U.S. turned cold, with IPOs becoming difficult. In 2022, secondary market negativity further transmitted to the primary market. Although A-share healthcare companies have seen some recent price recovery, research data shows valuation inversion between primary and secondary markets remains significant. China Renaissance found that overall transaction activity in healthcare in Q2 showed no obvious change from Q1, remaining in a depressed state.

Kan Chen of Qiming Venture Partners observes that increasingly, healthcare companies facing financing difficulties and cash constraints are beginning to cut costs and control expenses. "These companies will also increasingly seek non-traditional financing methods, such as debt financing or exchanging product rights for cash." He expects the primary market downturn in biotech to persist, with the secondary market unlikely to see a V-shaped recovery in the near term.

Since 2022, major dollar funds have significantly reduced their deal activity in healthcare, adopting a clearly conservative wait-and-see posture. From first-half fundraising results, successful cases mostly came from RMB funds and local government industry guidance funds. Due to the IPO bottleneck, early-stage financing transactions became mainstream in healthcare starting in 2021. According to Jingdata Research Institute, in the first half of 2022, there were 365 Series A financing events in healthcare, accounting for over half of all investment and financing activity in the sector during that period.

Which healthcare sub-segments offer greater early-stage opportunity? Chen believes that in terms of technology approaches, starting from 2021, investors have shifted preference toward novel biotech companies in cell and gene therapy, mRNA, and small nucleic acids, relative to small molecules and antibodies. Additionally, over the past year, increasingly more hard tech investors have entered biopharma, investing in hard tech-driven biotech companies — such as life science automation and AI-enabled drug discovery.

"Investment in me-too innovative drugs developed solely for the domestic market has decreased substantially. Investors hope to find new drug products competitive in global markets, products that can sell in Europe and the U.S. without being constrained by domestic healthcare insurance negotiations," Chen said.

A relatively positive development is that investment mentality toward healthcare is gradually returning to the original patterns of venture capital. Song Gaoguang of Northern Light Venture Capital also notes that although healthcare remains in the valley of death, industrial upgrading has already begun comprehensively. Beyond early clinical-stage pharmaceutical projects, investment institutions are increasingly valuing companies' self-sustaining cash generation capabilities — the ability to produce确定性 revenue and profits. For instance, starting from Q2 this year, Northern Light Venture Capital introduced a new requirement for potential portfolio companies: because drug industrialization cycles have shortened dramatically from the previous 10 years, new investee companies must have a 3-4 year commercialization runway.

5. Consumer: Returning to Rationality, Returning to Product, Retention, and Cash Flow

Who would have thought that the consumer sector, which stirred investment frenzy throughout the second half of 2020, would have frozen over by 2022? However beautiful the bubble, it must eventually burst.

The consumer sector remains in a down cycle. The reasons are twofold: on one hand, the overall economic fundamentals; on the other, digesting the overheated泡沫 of the past 2-3 years. Zhang Peiyuan of Black Ant Capital believes that in the previous heated environment, tempted by financing and attracted by high valuations, some companies grew beyond their capabilities or took on excessive risk, while the consumer sector also saw short-term profit-seeking entrepreneurship and financing behavior. "These factors further created an explosive繁荣 in the consumer goods market."

Yet at bottom, consumption — so closely tied to people's needs and domestic demand stimulation — cannot be a "bad sector." As Boyu Hu of XVC puts it, "In the long run, whether through internal or external circulation, the greatest driver of economic growth remains consumption." Thus the key question for primary market institutions regarding consumer is how to view it and how to invest.

Jiang Ke of Taihe Capital believes that in 2022, the consumer sector will enter a "excess clearance" phase — after speculative projects and capital exit the industry, the sector's overall development actually becomes healthier, with surviving companies gaining market share, profitability, and management governance levels starting to improve this year, some even exceeding expectations. "Because consumer industry assets are relatively light, inventory destocking and excess capacity clearance happen faster, combined with government stimulus policies being rolled out, we are optimistic about the consumer sector's gradual recovery."

Multiple investors deeply engaged in consumer expressed similar views: Tong Jie of Shangcheng Investment believes that unlike last year's greater focus on traffic and growth, this year the emphasis has shifted toward product, retention, and cash flow. Han Rui of Gaorong Capital states that what is opening now is a new normal, giving entrepreneurs more patience and space — a time window to return to product itself.

Having experienced the consumer sector's heat and silence, Han Rui's strategic reflection is that "now is a good opportunity to find quality assets at appropriate prices."

In the past, many people invoked the "time machine theory" — the idea that business models that emerged in Europe, the US, Japan, and South Korea would appear in China in sequence. "But today we see that many mature Western and East Asian models neither arrive in sequence nor necessarily arrive at all in China," says Han Rui. "Beyond inductive reasoning about the past, we may place greater emphasis on deductive reasoning about the present and future. We hope to 'focus on the big picture and follow the map,' which means thinking deductively about what the endgame of an industry should look like, and what characteristics the players sitting at the final table should possess."

6. Enterprise Services: From the Heights to the Depths, "Going Outward" and "Going Deeper"

In this round of interviews, almost no one wanted to talk to us about SaaS anymore.

In Huaxing Capital's research report, enterprise software was the sector that cooled most noticeably in Q2 this year. Xiong Fei of Matrix Partners China, who has focused on this track for years, felt it even more acutely. He told Waves that if 10 points represents the maximum heat for a sector, SaaS was at its 9.5-point peak over the past two years. But in the first half of this year, influenced by US capital markets, the external environment, and other factors, SaaS cooled rapidly. "Now it's only 3-4 points. In the long term, it's a healthy and stable state of 7-8 points."

The external situation is the most visible among the many reasons for SaaS's chill. But at its root, enterprise service software is inherently "unsexy" — a sector that rejects explosive growth and quick riches, one where you "slowly get rich." For this very reason, opportunistic investors treat the enterprise services track more like a "spare tire" — piling in when there's nothing hotter to chase, scattering the moment the next windfall arrives.

From 2014 to now, Xiong Fei says he has already lived through three peaks and troughs in the enterprise services investment market. "Seventy to eighty percent of investors who were here have gone off to look at semiconductors and new energy. But the truly excellent enterprise services companies haven't changed — they keep growing steadily at rates from several tens of percent to doubling annually."

Perhaps because of this, the cooling of 2022 isn't necessarily a bad thing for investors dedicated to this track. Xiong Fei says he now has more time to make decisions. For him, the two keywords for the second half of 2022 are: selecting the best from the best, and standing out from the crowd.

Feng Yao of Yunqi Capital, meanwhile, believes that both excessive frenzy and excessive gloom deviate from the general laws of enterprise services business development. She hopes to see a more healthy and rational return to value.

If we take 2014 as year zero for the enterprise services track in the primary market, many of its companies have now reached maturity. Which sub-sectors remain worth entering for investment institutions? Does enterprise services still have room for higher ceilings and greater development space?

Two paths are clearly visible. One is going global. Many Chinese SaaS companies already have output in Southeast Asia, Europe, and the US, to the point of driving the entire enterprise services track to be re-examined. "Overseas markets will multiply the ceiling of the entire enterprise services market by 5-7 times," says Xiong Fei.

The other is deepening into industrial applications. Recently, enterprise services projects in industrial applications, security, domestic substitution, and chemicals — areas that align with RMB fund preferences — have noticeably drawn more market attention. This in turn can drive greater activity from state-backed fund investors in the enterprise services track going forward.

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Five Final Questions

More compelling responses from investors were difficult to present in the sections above. We've distilled them into the following five Q&As for your reference:

"Waves": How would you describe the state of your focus area in 2022?

Han Rui, Gaorong Capital: We should assume that the manic 18 months from 2020 through the first half of 2021 will never return. What is opening now is a new normal.

Tong Jie, Shangcheng Investment: The previous overheating in consumer was certainly irrational and unsustainable. Conversely, there won't be prolonged deep freeze either. In this market cooldown, we're actually more decisive in deploying capital. The evaluation and negotiation processes in transactions have also become more reasonable.

Fu Zhilong, Yunxi Capital: I've lost count of how many times I've heard institutions say "we don't invest in consumer semiconductors." Semiconductor companies are also seeing valuations compressed in successive funding rounds, or even being unable to raise money at all.

Zhao Yang, K2VC: For the past year, new energy has been mostly a wait-and-see sector. But now, when we hold a new energy event, a 500-person online group fills up in under two minutes.

Li Liang, Hillhouse Capital: We look at the comprehensive upgrade of manufacturing to advanced manufacturing under the carbon neutrality theme. This area received unprecedented attention over the past year. But capital's role here is actually limited — there's no "magic" in manufacturing that happens merely through financing. Real breakthroughs require extremely high standards for underlying innovation.

Song Gaoguang, Northern Light: Despite the continued valley of death in healthcare, industrial upgrading has already begun in full force.

Xiong Fei, Matrix Partners China: The heat is elsewhere.

"Waves": Staying optimistic is easier said than done. What's your "spiritual victory method"?

Zheng Qingsheng, Hongshan: "Sentiment" is a double-edged sword in primary market investing. It can give sectors a boost, but it also easily creates irrational consensus in the market. What's important for investors is to see through the cycle of technological innovation, to pursue long-term value with a 5- or 10-year horizon.

Li Feng, FreeS Fund: If we compare the economic cycles of the two countries (China and the US) to the four seasons, the US is currently at "late autumn heading into winter," while China is more like a "late spring cold snap." We expect this year's primary market to resemble 2020, with a wave of heat appearing in the fourth quarter.

Zhao Yang, K2VC: Those who can do early-stage investing are optimists by nature. As the saying goes, the more confidence you have in the future, the more optimistic you'll be about the present. That future means — the farther future.

P.S. A necessary condition for optimism lately: don't talk to Shanghai investors.

Liu Kai, 5Y Capital: In the long term, I believe China's primary market is getting better and more mature, increasingly suitable for funds that truly want to dig in here for the long haul. But in the short term, I am indeed somewhat pessimistic: we face not only an avalanche on the supply side, but also a paradigm shift on the demand side. Yet in the next major cycle, because the market structure will be completely different, more fresh blood will enter, and people will quickly forget all the pain of the post-pandemic investment market. Transformation is always painful; there's always a rainbow after the storm.

Wang Lixing, Huaxing Capital: If I told everyone "the primary market is broadly optimistic for the second half," there would need to be a whole pile of qualifiers in between.

Xiong Fei, Matrix Partners China: Every investor is a product of their era, a trend-rider beneath the times. At any moment, what you're competing on is always relative advantage. We want to be in the top 5% of investors in this era, investing in the top 5% of companies in this era and this sector.

Yuan Liu, ZhenFund: Staying optimistic and hopeful is the only choice. Each generation has its destiny; each generation has its choices. Sometimes the choices we face are limited.

"Waves": In one sentence, predict the future landscape of your primary investment battlefield.

Guo Xin, CAS Star: Hard tech isn't about following trends or sectors. Hard tech investing isn't merely about backing companies that go public, but about helping enterprises with China's own core technologies to continuously emerge and grow strong, becoming great companies that lead world frontier technology development for a generation or even several generations!

Zheng Qingsheng, Hongshan: The technological innovation and entrepreneurship happening now is the foundation-laying period of a new technological revolution. It may influence the direction of technological progress for the next decade or even decades. We hope to see truly epoch-making technological innovation emerge.

Xiong Fei, Matrix Partners China: Quality enterprise services companies achieving economic viability, back to basics, returning to normal levels in 1-2 years, and in 3-5 years, a large batch of enterprise services companies with small-billion-scale revenue will appear.

Zhang Peiyuan, BA Capital: Consumer opportunities aren't gushing forth — they require professional institutions to capture, cultivate, and create with care.

Yao Anmin, ZWC Partners: Many scientists and researchers from various institutes are throwing themselves into the entrepreneurial wave. In this, they need to avoid "carrying a hammer looking for nails." For industrial technology innovation, finding industrial scenarios where it can land is most important.

Yuan Liu, ZhenFund: We want to back entrepreneurs with strong innovative spirit, who still have the courage to start businesses in the face of uncertain environmental risks, and who possess their own unique technical capabilities. We hope they can bring about qualitative change through quantitative accumulation, gradually turning once-science-fiction imaginings into reality.

Han Rui, Gaorong Capital: In the past, we were all searching for "greatest common denominator" markets. In the future, we'll enter an era of diversity and stratification, where more high value-added goods and services will see more opportunities.

Wang Xingshi, Source Code Capital: Reducing dependence on imported fossil fuels through technology and reshaping energy structure is a clear development and investment direction.

"Waves": Any new reflections on "Long China"?

Huang Mingming, Mingshi Capital: The world's largest and most complex application scenarios are in China today. The Chinese market will certainly give birth to a large batch of world-class technology enterprises.

Jiang Ke, Taihe Capital: Of course, China currently faces some new challenges — demographic shifts, market factors urgently needing deeper reform, external challenges from deglobalization, and so on. But I believe China remains one of the most valuable markets.

If we were to list the reasons, there are simply too many. Take the energy industry: it's transforming from a "resource-oriented" industry to a "manufacturing-oriented" one, and this is precisely China's advantage.

Feng Yao, Yunqi Capital: China has the most complete industrial chain and the world's second-largest consumer market. It has also experienced over 20 years of high-speed internet development, established information infrastructure, and cultivated an engineer dividend — all accumulating energy for the next phase of industrial internet digital-intelligent transformation and technological upgrading, enabling breakthroughs.

Fu Zhilong, Yunxi Capital: "Going long China tech" is the best opportunity in the next venture capital cycle.

Wang Xingshi, Source Code Capital: China is a top-two global economic entity. Numerous trillion-scale sectors are also undergoing rapid technological and commercial change. We've observed that since 2020, many technology entrepreneurs going from zero to one are emerging. China venture capital may be entering an era of "greater focus on technology investing."

Li Liang, Hillhouse Capital: From my sector's perspective, growth remains a very visible indicator. China's new energy vehicle penetration exceeded even the most optimistic projections. Vehicle electrification has broken through its tipping point, and China is fortunate to play the most important role in it.

"Waves": How will top-tier entrepreneurs of the future be different?

Hu Boyu, XVC: Entrepreneurs of Chinese background are very competitive in global market competition.

Zhao Yang, K2VC: One obvious feeling is that entrepreneurs are getting increasingly excellent. Many world-class scientists and researchers are becoming willing to return to China to start businesses. The companies they found are changing the world in more real and visible ways.

Yuan Liu, ZhenFund: Future top-tier entrepreneurs will start their first businesses increasingly young, accumulating rich entrepreneurial experience. There will be fewer entrepreneurs with long-term big-company employment histories; more will have been continuously entrepreneurial since their school days — serial entrepreneurs.

Xiong Weiming, China Growth Capital: This wave may be an opportunity for entrepreneurs around 60 years old in Chinese manufacturing. They may be old-guard Chinese entrepreneurs like Cao Dewang, or long-dormant figures like Wang Chuanfu. We're waiting for a Jobs-like entrepreneur who can push productivity forward.

Li Feng, FreeS Fund: As long as what you're thinking about, the broad direction, is correct, and you've grasped the most important factor, you'll ultimately get a pretty good payoff.

Image source | Visual China

Layout | Guo Yunxiao