China's hardtech VC boom and Involution

October 4, 2021

China is experiencing a hardtech VC boom due to a a congruence of factors. VC investing in “hard technology” has been elevated to be part of “national strategy”. Funding for what’s animatedly-termed “throat-strangling technologies (卡脖子技)” has become a national priority and patriotic act. The fervor is a rational result of real and perceived threats posed by the “China Containment” mentality prevailing in the West, but like any reaction to threats that inevitably goes into short-term overdrive, the fervor has real short-term consequences.

We see several short-term consequences on the ground for VCs in the space:

  • Increased dealflow for VCs as the number of startup companies has mushroomed: we see 10x multiplication of companies in any “throat-strangling technologies” area with often tens or even hundreds of companies started within the last three years.
  • A harder time for long term hard-tech investors: valuation is driven up dramatically as a lot more funds and VC firms, with no prior experience, have entered the space and driven up valuations. Some large all-asset class, all-sectors behemoth funds are even offering term sheets without much of a due diligence of the companies as they transport the internet-sector success recipe to the hard-tech space.
  • Cost of building companies have risen significantly: mushrooming number of companies drives up cost for talents as the supply of hard-tech talent doesn’t increase as quickly as the number of start-ups getting funded. The buzzword in China, “involution (内卷)”, applied to industries, reflects increased competition that drives down profits for all companies.


While now is the best time for “hard tech” entrepreneurs in China as funding is widely available, it is a challenging time for long term VCs who understand and appreciate the long commercialization and development cycles for hard-tech companies. As costs-of-building companies go up and valuations goes up, returns come down unless the exits become much bigger.

We are tweaking our strategies to address the short-term challenges while maintaining our disciplined and long-term focus on hardtech.


  • Bulking up team to cover the space: we added and continue to add more junior investment professionals to deal with the rapid increase in the sheer number of companies in the space.
  • Focusing on being twelve months ahead of the market: we used to aim for twenty-four months leading the market, now we are happy with twelve months.
  • More emphasis on company’s “fundraising” capabilities: only companies who can successfully and successively raise ever-larger financing rounds can stay competitive for talent attraction and have the resources to succeed. We put more weight than before on founder’s ability to attract capital.
  • Build bigger exits: support companies to be industry-leaders with M&A. While we have always had the “invest in few, take significant position approach”, we are now, more than ever, focused on finding and working with those few entrepreneurs who have capabilities to build large companies. 
  • Leveraging existing industrial network: CM is backed by leading MNC companies in the materials, manufacturing, energy, and environment space, and over the years, we have backed a dozen industry-leaders. Leveraging this valuable network to build proprietary deal flow before investment and creating industry partnership post-investment are unique capabilities that we will expand, strengthen and systematically put to use.


Now is the golden age for “hardtech” or industrial tech. There will be a fall-out from the current policy overdrive and financial markets over-heating, particularly for those large funds that dive into the sector with much fervor but little due diligence. But the upside is that the sector is finally becoming a “mainstream” VC market rather than a “niche” market. Firms that emerge stronger from the heated competition will be long-term winners. For us who have been always here in this market, we cherish playing the main court in the spotlight as the golden age for hardtech has finally come.