Chinese venture-stage firms raised a record amount of capital last year, but as the world's second-largest economy slows, investors are getting choosier about which startups they back.
Venture capital investments in 2015 grew 25% to 129.3 billion yuan ($20.2 billion), said Zero2IPO Research, a local data provider. China ranks second only to the U.S., where startups raise about $60 billion a year. Japan lags at roughly $1 billion.
Chinese people "have an amazing hunger for starting out on their own and becoming wealthy," a VC investor said.
In a society where connections are key to success, entrepreneurship and its notion that one good idea is all you need to compete hold a certain magnetism for young people.
Of course, only a tiny handful of startups ever reach an initial public offering. But "for both entrepreneurs and VC investors, the options for making an exit besides IPOs have grown diverse," said Nobuaki Kitagawa, CEO of CyberAgent Ventures Beijing, a unit of the Japanese venture capital company.
Selling to a big corporation offers one such way out. Baidu, Alibaba Group and Tencent Holdings -- the Chinese Internet giants known collectively as BAT -- reportedly spent over $13 billion on acquisitions in 2014. More recently, Tencent reportedly invested $30 million dollars in the Shanghai-based operator of video-sharing platform bilibili, while Baidu and others took a similar stake in Bolome, a Shanghai e-commerce startup.
Some have voiced concern that China may be witnessing a tech bubble, but the reality seems to be changing.
"Before, many investors would say, 'We'll fund you,' with no thought about things like technology or prospects," one startup founder said. But investors have become more discriminating since last summer, and more startups are going out of business, this person said.
Many Chinese names -- mostly state-owned financial services or natural resources groups -- now can be found among the world's most valuable companies. But even Alibaba Chairman Jack Ma concedes that few Chinese companies can compete globally. A thriving VC environment fostering innovation could help China dispel the stereotype that its economy is based on imitation.