China’s Quantum Ambitions May Face Headwinds From Weak Startup Ecosystem

Insider Brief

• China’s impressive quantum research, particularly in quantum communication and sensing, may be undermined by its weakened startup ecosystem and shrinking venture capital sector.
• Venture capital investment in China has plummeted, with the number of startups dropping from over 51,000 in 2018 to just around 1,200 in 2023, which experts warn will stifle innovation in high-risk, high-reward areas like quantum computing.
• China’s insular approach, limited global collaboration and increasing state control over quantum R&D risk stalling long-term advances, even as global quantum technology promises trillions in economic impact by 2035.

China’s once thriving startup ecosystem has cratered, according to new reporting by the Financial Times — and that could limit the impact of China’s impressive growing quantum research acumen.

A recent report by the Information Technology and Innovation Foundation (ITIF) shows China’s dominance in quantum communication and its competitive stance in quantum sensing. The only area it lags behind the United States in quantum computing, especially in hardware development and — importantly — practical system implementation.

“China leads at transforming proven quantum ideas into advanced products and services, but it doesn’t lead in generating the most groundbreaking new concepts,” said Hodan Omaar, Senior Policy Manager at ITIF and one of the report’s authors.

Despite significant public funding — the figure $15 billion is often floated as the funds allocated to quantum research and development, but official numbers are not available — China’s insular approach relies heavily on domestic resources with limited international collaboration. This strategy yields rapid short-term gains but poses risks for sustaining complex technological advancements in the long run. The report also notes that while China excels in areas where technology is ready for application, like quantum communication, it struggles in fields like quantum computing, where theoretical concepts are abundant but practical implementation is challenging.

That factor may not be alleviated soon, likely it will be compounded by the current state of China’s venture capital industry, according to reporting by the Financial Times. Once a vibrant hub for startups and innovation, the sector has seen a dramatic downturn. According to data from IT Juzi, a Chinese data provider, the number of startups founded in China plummeted from over 51,000 in 2018 to just around 1,200 in 2023, with expectations of even lower numbers this year.

“China used to be the best VC destination in the world after the U.S.,” a Beijing-based venture capital executive told FT, adding, “The whole industry has just died before our eyes. The entrepreneurial spirit is dead. It is very sad to see.”

This decline is hitting deep-tech companies, according to FT, and is evident in places like BioBay, a science park in Suzhou near Shanghai. Once celebrated as an examplar of China’s strides in science and technology, BioBay now has vacant offices and deserted labs, the paper reports. Many startups have either moved out or shut down due to a funding crunch, leaving behind empty spaces that the park hopes to sublease.

COVID, Slowing Economy, Crackdowns

Analysts attribute the crisis in the venture capital sector partly to China’s slowing economy, impacted by prolonged COVID-19 lockdowns, a bursting property bubble and stagnant equity markets. However, political decisions under President Xi Jinping have also dramatically altered the environment for private businesses. Crackdowns on technology companies deemed monopolistic or misaligned with Communist Party values, along with an anti-corruption campaign affecting the business community, have eroded investor confidence.

Desmond Shum, author of “Red Roulette” and a former real estate mogul in China, told FT: “The party has throttled the private sector. Successful entrepreneurs can expect to be closely monitored, unable to transfer money offshore, and their transactions and public statements scrutinized. Their money is the country’s money.”

Venture capital firms now face pressure from state-backed investors to guarantee returns, leading to more conservative investment strategies focused on lower-risk ventures. This shift would likely discourage the kind of high-risk, high-reward investments that fuel innovation in advanced fields, such as quantum computing.

An industry expert told FT, “In a portfolio of ten companies, you would expect one or two to be a mega success and the rest to die. But now VC firms have to explain to the state why their companies failed and why they have lost the country’s money.”

Foreign investment has also waned due to rising geopolitical tensions and concerns over regulatory unpredictability.

“In the past, U.S. limited partners looking at Asia only wanted to meet China funds,” said one investor. “Today, we are like lepers. They don’t want to touch us with a ten-foot pole.”

The shrinking pool of venture capital, combined with increased state control, is likely to hamper China’s innovation drive in quantum technologies. Keyu Jin, associate professor at the London School of Economics, said venture capital is critical in spurring entrepreneurial dynamism.

“The outflow of global investment and the massive drop in the valuation of Chinese companies will impinge on the nation’s innovation drive,” she warned, as reported by FT.

Global Quantum Collaboration Limits

Quantum is a complex, interdisciplinary enterprise and few nations can supply the technology or talent to maintain on their own. The ITIF report explains that China’s strategy of limited global collaboration could limit its ability to sustain consistent advances in complex quantum technologies.

“China’s state control over quantum R&D is growing, with firms like Alibaba and Baidu exiting quantum research,” the report states. “This aligns innovation with national goals but reduces private sector involvement.”

Even sectors that Beijing considers critical to national security are struggling to attract investment. Financing for biotech and pharmaceutical startups fell by 60% in 2023 from its 2021 peak of approximately $18 billion, according to IT Juzi. No numbers are available for the quantum industry, although one might expect similar struggles there based on the impact to the nation’s other critical deep tech efforts.

Entrepreneurs are increasingly hesitant to take risks. A serial founder in Shanghai expressed the frustration of this risk aversion to the financial paper: “There is no good reason to start a company. Why should we take the risk? We have had five years of lost startups.”

Sebastian Mallaby, a senior fellow at the Council on Foreign Relations, observed that the current “debt mindset” in China’s venture capital industry means “fewer experiments in cutting-edge science and technology that could push China to the technological frontier.”

With venture capital firms under pressure to guarantee returns, many are shifting focus to less risky investments in advanced manufacturing, new energy, and integrated circuits. However, this shift may not compensate for the loss of innovation in high-risk, high-reward sectors.

The consequences of this shift in the private market would likely affect quantum computing — a core element of the burgeoning quantum technology industry — but, without the necessary entrepreneurial ecosystem, the effects could extend beyond quantum computing to areas where China has an established research leadership position.

While China has made remarkable achievements in quantum communication—such as the 1,200-mile Beijing-Shanghai quantum key distribution network and the groundbreaking Micius satellite extending secure quantum communication over greater distances—its lag in quantum computing is notable. The United States leads significantly in quantum computing patents and research quality.

The nation’s quantum entrepreneurs face another hurdle. China’s limited access to the global quantum ecosystem hampers its ability to collaborate on potentially groundbreaking research. The ITIF report notes that China selectively engages with open innovation environments abroad while protecting its own quantum advances, creating an asymmetric knowledge-sharing environment.

While the near-term size of the international market for quantum technology is largely unknowable, projections indicate that without a strong quantum startup community, China risks losing out on the trillions that will circulate in the quantum tech ecosystem worldwide. In a recent report, The Quantum Insider forecasts that quantum computing will contribute $1 trillion in value creation by 2035, while quantum computing vendors could generate $50 billion in revenue in ten years. The report also estimated 840,000 new jobs will be created by 2035.

The ITIF report recommends that the U.S. fully participates in the global quantum ecosystem by significantly increasing funding for research and development, building strong partnerships with allied nations and expediting the commercialization of quantum innovations.

“China has set a national goal of leading in quantum by 2035,” said Omaar of ITIF. “It’s a key part of Xi Jinping’s plan to gain competitive advantage in advanced industries and technologies. So, to remain at the forefront, the United States must respond in kind.”