China outpaces US in backing chip startups

China has taken the lead in investing in semiconductor startups, surpassing the US by a wide margin.

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According to PitchBook data, Chinese startups attracted 75% of all VC investment into chip companies in 2023, a minor decrease from its high last year, when it accounted for nearly 80% of all VC investments in the space. US companies garnered about 11% of VC semiconductor investment in 2023. Semiconductor startups are comprised of companies working on chip designs, chipmakers, production and equipment.

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PitchBook analyst Ali Javaheri attributes the trend to China’s strategy to create its own semiconductor industry while hedging against US trade restrictions.

“It’s not very different from the US using VC to create titans like Intel and Fairchild Semiconductor in the ‘50s and ‘60s,” Javaheri said.

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China has prioritized investment in the chips space, launching a $40 billion national integrated circuit industry investment fund in September to spur on startups—its third major state-sponsored fund to support the industry since 2014. SJSemi, a chipmaking startup based in Jiangyin, raised a $340 million Series C+ in April from Shang Qi Capital, TCL Capital, Jade Stone Venture, and others. AI chip startup Biren Technology received a $280 million investment from Guangzhou government investors in December.

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Overall VC dealmaking in China has been on a downward trajectory, according to PitchBook’s most recent Greater China Venture Report. Throughout the first half of 2023, $26.7 billion was invested across 3,072 deals, on pace for a 31.4% drop in deal value for 2023.

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The US, despite an AI-driven frenzy prompting more interest in specialized chips and government stimulus into the space, remains behind China in terms of startup investment. The CHIPS Act, which was signed into law by President Joe Biden in August 2022, aims to revitalize the US chipmaking industry by providing grants and incentives to manufacturers and companies. According to some, it appears to have not done enough to aid startups.

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“There are lots of strings attached to the CHIPS act,” said Erik Terjesen a partner at Silicon Foundry, an advisory firm for larger corporations. “There are a lot of challenges and it’s more complicated than the Inflation Reduction Act, which had a huge stimulative effect related to cleantech and investment subsidies. The CHIPS act has not been nearly as successful.”

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OpenAI CEO Sam Altman is seeking billions to build out networks of factories creating AI-specific chips, Bloomberg reported earlier this month.

Notable recent deals in the US chip space include Femtosense, the maker of neural network models, raising a $10.88 million Series A in December. Efabless, a chip designer based in Palo Alto, raised a $6.3 million Series A1 in October.

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Reference: https://pitchbook.com/news/articles/china-semiconductors-startups-vc