Dear Partners & Friends,
We are back and excited to reconnect! We hope your summer break was refreshing, maybe even with a bit of time offline. Meanwhile, we did the opposite, traveling across China, meeting managers and startups, and getting first-hand insights into one of the most dynamic innovation ecosystems in the world. For more on what we learned and the trends shaping this market, keep reading!
– The Reference Capital Team
China’s Innovation Machine
In August 2025, we traveled to Shanghai and Beijing to meet with some of China’s leading venture funds and startups. Over 21 meetings, we explored how the local ecosystem is evolving and where the next wave of global champions may emerge.
What we found on the ground was very different from the picture painted by Western media. A market once known for imitators and low-cost manufacturing has, in just five years since Covid, transformed into one defined by scale, speed, and ambition. Across artificial intelligence, healthcare, electric vehicles, and robotics, we found a country that has learned to innovate under constraint, having built an edge that the rest of the world seems to ignore.
If the last cycle was defined by the United States setting the pace in “bits and bytes” (software), the coming cycle may be shaped by China’s dominance in “electrons and atoms” (hardware). This shift is already visible in the speed of adoption, the scale of production, and the global ambitions of Chinese founders.
FROM COPYCAT TO INNOVATOR
For most of the 2000s and early 2010s, China was seen as the world’s factory and a market of imitators. Its first wave of hardware borrowed heavily from foreign designs: “shanzhai” phones mimicked Nokia and Apple, local automakers produced look-alikes of Toyota and Mercedes, and even early Huawei and ZTE devices drew accusations of copying Cisco or Nortel. China’s advantage was cost and speed, not originality.
The same dynamic played out in software. Blocked from global platforms by the Great Firewall (China’s system of internet restrictions), local entrepreneurs reinvented the digital economy by adapting proven Western models. Alibaba mirrored eBay, Baidu took inspiration from Google, and WeChat began as a domestic version of WhatsApp. This phenomenon became known as “Copy to China”, and shaped for more than a decade how both local and foreign investors thought about Chinese innovation. Even today, many people still think that Chinese companies are trying to copy western businesses. Spoiler alert: people only copy from the best, and the best might no longer be in the west.
Many of these early “copies” grew into national champions and eventually global leaders. Alibaba scaled into one of the world’s largest e-commerce platforms. Pinduoduo’s gamified group buying was exported abroad through Temu, now studied by Western retailers. TikTok redefined entertainment worldwide, forcing Meta, YouTube, and Instagram to adopt the short-video format. WeChat went further, evolving into a true super-app that integrated payments, social media, and services at a scale no Western company has matched. By the mid-2010s, the flow of imitation had reversed. The world was beginning to “Copy from China.”
This acceleration was not accidental. In 2014, China launched what became known as the “Thousand Startups Bloom” initiative, under the banner of mass entrepreneurship and mass innovation. The program combined flexible regulations, easier financing, and hundreds of government-guided venture funds to create an environment where startups could thrive. The logic was simple: if you cannot predict which technologies will succeed, fund them all. As a result, hundreds of ventures were launched, many failed, and their people and assets were absorbed back into the ecosystem, strengthening those that survived. Over time, talent pools deepened, supply chains improved, and national champions emerged. The result is a resilient innovation engine: one that no longer imitates, but increasingly sets the global pace.
INDUSTRIAL SCALE: BIGGER, FASTER, CHEAPER
The Electric Stack
Packy McCormick coined the term Electric Stack to describe the four building blocks of electrification: batteries, rare earth magnets, power electronics, and compute. These components are what turn electricity into motion, light, and heat, and they form the foundation for everything from electric cars to drones, robots, and even household appliances.
Over the last 30 years, the cost of each layer of the Electric Stack has dropped by more than 98%, and China has been the driving force behind that drop. In 2024 alone, it invested $625 billion in clean energy, storage, and grid infrastructure, nearly a third of global spending. The country now produces about 75% of the world’s lithium-ion batteries and processes more than 90% of rare earths, essential for magnets in motors and turbines. It also leads in the production of inverters and microcontrollers, the less visible chips that keep electric systems running smoothly and efficiently.
This control gives China a compounding advantage. Improvements in one layer of the stack spill over into others, lowering costs across entire product categories. The same supply chains that produce batteries for cars also power buses, smartphones, home energy systems, and drones. By mastering the full stack, China has built the backbone of the next industrial cycle, a foundation that enables scale, speed, and continuous innovation. A striking example is Xiaomi: better known for its smartphones, it drew on the same ecosystem to launch affordable luxury EVs, only three years after announcing its entry into the sector.
The EV Juggernaut
Electric vehicles are the clearest proof of China’s industrial strength. In 2024, more than 70% of EVs sold globally came from China. That outcome was the direct result of the “Thousand Startups Bloom” policy, which in the mid-2010s encouraged the creation of over 500 car companies. Fierce competition drove rapid product cycles and pushed costs lower. Most of those firms did not survive, but their engineers, factories, and suppliers were absorbed by stronger players. Out of that storm emerged today’s leaders: BYD, Li Auto, NIO, and more recently Xiaomi.
Each company reflects a different strategy. BYD has become a global brand, with nearly 30% of its sales coming from overseas markets across Europe, Latin America, and Southeast Asia. NIO has targeted the premium segment in Europe, pricing cars between €60,000 and €115,000. Li Auto has focused on securing domestic leadership before turning abroad, with high-end family cars. Xiaomi, for its part, disrupted the market with the SU7, priced around $30,000 yet matching Tesla’s Model 3 on acceleration and range, and in higher trims approaching Porsche Taycan specifications. Delivering luxury performance at mid-market prices is exactly the kind of disruption that could reshape the global auto industry. But China’s scale is also a double-edged sword. With capacity to produce nearly twice as many cars as it sells, analysts expect only a fraction of today’s 100+ EV brands to survive. Profitability and consolidation remain real pressures, even as global market share climbs.
That success has triggered pushback. The U.S. has already imposed tariffs on Chinese EVs and batteries, and the EU is debating similar measures. These may slow the pace of exports, but they cannot erase the structural cost advantage China has built into its supply chain and the Electric Stack.
For Western automakers, this creates an uncomfortable reality. Competing with China means matching a system where batteries, motors, and electronics are produced at scale and in-house, and where price-to-performance is pushed to levels few global rivals can sustain. Europe’s manufacturers, already under pressure from emissions targets, face the risk of being priced out of their own markets. Some are responding by partnering with Chinese firms, as Volkswagen and Audi have done, licensing Chinese EV platforms to cut costs and accelerate production.
Rise of the Robots
The same industrial foundation that powers China’s EVs is now spilling into robotics and automation. In factories, AI-powered robotic arms are being deployed at scale, often running on domestic chips that are less advanced than Nvidia’s but far cheaper and easier to source. In consumer markets, Chinese firms are finding strong product-market fit abroad by combining solid performance with aggressive pricing.
Narwal has carved out share in home cleaning robots, Botinkit is automating kitchens with robotic cooking systems, and DJI remains the undisputed global leader in drones. Each of these companies relies on the Electric Stack (affordable batteries, powerful motors, efficient power electronics, and embedded compute) to deliver reliable products that undercut Western competitors while still meeting global standards. Hardware improvements now drive as much disruption as software once did.
AI UNDER CONSTRAINT
While EVs and robotics highlight China’s industrial strength, AI tells a different story: one shaped by constraint. Foreign models like ChatGPT are blocked by the Great Firewall, and advanced Nvidia chips have been restricted by U.S. export controls. Faced with these limits, Chinese entrepreneurs turned to open-source models and domestic hardware, building an ecosystem that is cheaper, faster to adapt, and increasingly competitive.
The results are starting to be visible. Alibaba’s Qwen family of large language models counts more than 100,000 derivatives, forming the largest open-source AI ecosystem in the world. DeepSeek’s R1, released earlier this year, quickly climbed international benchmarks and has already been integrated into thousands of downstream applications. Even private companies are moving toward open source to keep pace: Moonshot AI released part of its Kimi model as open source, under pressure from intense local competition and government support.
Applications are where this ecosystem shines. With a home market of 1.4 billion people, Chinese users expect world-class products for free, which has created a culture of rapid iteration and relentless refinement. Because copycat products can be launched at minimal cost, often at negative margins, the only way to stand out is by improving features faster than rivals. This dynamic, born in the consumer internet era, is now shaping the AI wave. A single successful app can reach millions of users within weeks, creating feedback loops that Western developers struggle to match. Manus AI, an AI agent platform, even drew the first Chinese investment from U.S. venture firm Benchmark, a sign that Chinese applications are beginning to gain global relevance.
Compute remains the critical bottleneck. Domestic chipmakers like Biren, Huawei’s Ascend, and Cambricon are building processors tailored for AI, but their products often require two to three times more chips (and energy) to match Nvidia’s performance. Still, progress is accelerating as billions in government-backed funding flow into the sector and returning talent concentrates on the problem. As one manager told us in Beijing, “The ban has only accelerated the need to build our own.”
Constraints have shaped an ecosystem that is more open, more adaptable, and increasingly capable of exporting applications to the rest of the world. But there’s a catch: these models come with built-in censorship, which makes them harder to use from abroad. Nonetheless, if EVs and robotics showcase China’s strength in “electrons and atoms,” then AI reveals how innovation can thrive even under tight control, supported by deliberate policy that channels billions into priority sectors like AI, quantum, biotech, and biomanufacturing.
BIOTECH ARBITRAGE
Alongside hardware and AI, biotech shows how China combines policy, talent, and scale to carve out a unique global advantage. The formula is straightforward: combine world-class scientific talent with clinical trials that are 40–60% cheaper and faster than in the United States or Europe, and then channel assets back into global markets through licensing and M&A.
The numbers speak for themselves. As of this year, China accounts for close to 40% of large pharma in-licensed molecule deals with upfront payments above $50 million, as well as 20% of all Phase I submissions. That places the country ahead of Europe and firmly in the number two position worldwide. Managers also highlighted a growing wave of partnerships with global pharma, who are increasingly interested in securing access to Chinese assets at an earlier stage. This aligns with a broader trend: in the past two years, nearly 30% of the world’s largest licensing deals originated in China. Looking ahead, revenue from drugs originating in China could reach $34 billion by 2030 and more than $220 billion by 2040, as the industry shifts from generics to novel drug discovery.
The advantage is not only cost but also speed. Patient recruitment in China is about 2.5 times faster than the global average, which allows trials that might take years in the U.S. to be completed in months. Combined with a more streamlined regulatory pathway, this efficiency has made China a hub for drug development that global pharma companies can no longer ignore.
For multinational firms, the trend is clear. The top 20 global pharma players now source more than 70% of their pipelines externally, which makes China an increasingly important partner. Licensing deals allow Chinese biotech firms to monetize their early-stage assets while giving global players access to a pipeline that is both faster and more cost-efficient.
Capital markets are following this shift. Many Chinese biotech companies have chosen to list in Hong Kong, giving them exposure to international investors, while the STAR Market in Shanghai has become the main venue for domestic champions. Together, these markets provide an outlet for exits even when global IPO windows are tight, reinforcing China’s role as both a developer and a supplier of biotech innovation to the world.
In just a few years, China has moved from being almost absent in global biotech to becoming indispensable. What started as an arbitrage on cost has become a structural role in the global drug discovery and development process.
CAPITAL FLOWS
The structure of venture capital in China has shifted dramatically. RMB-denominated funds now dominate fundraising, powered by provincial government vehicles and local institutions. These funds typically have shorter time horizons, often capped at eight years rather than the 10–12 years common in USD structures. By contrast, U.S. LPs, once the backbone of Chinese venture, are now almost entirely absent. European LPs remain a minority but are increasingly welcomed as politically less constrained, which makes them more attractive partners.
Pitchbook data suggests that China’s fundraising activity looks similar to the U.S. and Europe on the surface. But if we dig deeper, we see that around 95% of new funds are being raised in local currency, mostly through provincial and government vehicles. In 2024, Beijing alone counted 10 new provincial funds, while Anhui launched 21. On the USD side, the few managers still active have been forced to cut fund sizes by half, reflecting both poor performance from oversized vintages and limited capital availability. Where there were hundreds of USD fund managers a few years ago, only about 10% remain active today. The result has been consolidation into leading brands, lower valuations across the board, and greater collaboration among survivors.
Despite RMB’s dominance, USD fundraising continues to play a strategic role. Entrepreneurs in non-critical sectors often prefer USD capital, creating optionality for future listings in Hong Kong or the U.S. One GP explained it simply: “founders choose their currency based on where they want to list.” USD funds also tend to have longer exit timelines, which align better with early-stage technology companies unlikely to exit within eight years.
Exits remain a challenge. IPO quotas in China are tightly managed by regulators, slowing timelines for companies ready to go public. Hong Kong has absorbed much of the USD-denominated biotech pipeline, while the STAR Market in Shanghai continues to serve domestic champions. In the meantime, M&A and secondary transactions are becoming more common, offering partial liquidity when IPOs are delayed.
Capital flows have changed shape, but not direction. RMB funds dominate, USD funds are fewer and smaller, and exits are harder to achieve. Mainland IPO proceeds are down 81% since 2022, yet the Hong Kong Stock Exchange has posted its best half-year since 2021 and now serves as the only reliable path for USD-backed listings. At the same time, state capital accounts for 78% of fresh VC money, often with terms that resemble debt. Liquidity is still there, but it comes with heavy pressure on both investors and founders. Even so, China remains one of the two anchors of global venture, with the scale and ambition to keep producing breakthrough innovation.
THE WORLD COPIES BACK
China’s innovation journey has been one of the most striking transformations in global venture. A decade ago, it was still seen as a market of imitators behind the Great Firewall. Today, that dynamic has flipped. Global companies are increasingly copying models that first took shape in China. From EVs to biotech to AI, the country has built an industrial base and innovation engine that is already competing at global scale.
But every rise in the global order meets resistance. The U.S. and Europe are rolling out tariffs and export limits, while at home China’s AI progress is slowed by weaker chips and higher energy costs. Even so, alongside North America, it now stands as one of the two anchors of global innovation. What happens in Beijing, Shanghai or Shenzhen echoes in Silicon Valley, Berlin and beyond. The age of imitation is over, and China’s innovation is already reshaping markets. The real question is who will keep pace, and who will fall behind.
In case you missed it…
General Technologies 🚀
🤖 AI Buzz vs. Business Benefits — Despite widespread enthusiasm, many U.S. companies struggle to demonstrate tangible benefits from AI. An FT analysis of S&P 500 filings reveals that while firms like Microsoft and Meta highlight AI’s potential, only a few sectors, such as defense, veterinary diagnostics, and payroll services, report clear use cases. The broader corporate landscape often cites AI more out of fear of falling behind competitors than from strategic insight. Read more here.
🔗 The AI Hype Triumvirate: NVIDIA, OpenAI & Oracle — The piece argues we’re witnessing a circular (and arguably self-reinforcing) bet: NVIDIA backs OpenAI, which in turn routes compute purchases toward NVIDIA, while Oracle escalates its stake in both sides. For founders and investors, the risk is clear, we may be locking in a compute oligopoly before its true limits are known. Read more here.
📈 IPO Surge: Klarna & Netskope Lead Tech Revival — September marks the strongest U.S. IPO month since 2021. Klarna’s $1.37 billion NYSE debut valued the Swedish fintech at $15.1 billion, while Netskope’s Nasdaq listing raised $908 million at a valuation of $7.26 billion. Dive into the story here.
⚛️ Quantum Leap: PsiQuantum’s $7B Valuation & Nvidia Partnership — PsiQuantum has secured $1 billion in Series E funding, elevating its valuation to $7 billion. The company is collaborating with Nvidia to integrate its photonic quantum computing approach with Nvidia’s chips, aiming to develop the world’s first million-qubit, fault-tolerant quantum computer. Read more here.
🎧 What We’ve Been Listening To:
🎙️20VC — General Catalyst CEO Hemant Taneja on The Future of Venture Capital
Hemant Taneja shares insights on scaling startups and venture strategies, drawing on early bets in Stripe, Snap, Canva, and orchestrating major exits like Livongo’s $18.5B merger with Teladoc. Listen here
Sustainability 🌍
🫱🏻🫲🏻Venture Capitalists Band Together in New Bid to Back Climate Tech — In response to a decline in climate tech investments, a coalition of U.S. venture capital firms, including Breakthrough Energy Ventures and Khosla Ventures, has formed the All Aboard Coalition to support carbon removal and green hydrogen startups. This initiative aims to bridge the funding gap and accelerate the commercialization of climate technologies. Learn more here.
☀️China’s Solar Surge Pushes CO₂ Down — Record solar growth in early 2025 drove China’s emissions ~1% lower year-on-year, showing how rapid renewables deployment can bend the emissions curve and create major opportunities in grid, storage, and infrastructure investment. Read more here
🌍EU’s Carbon Border Adjustment Mechanism: A Global Shift — Starting in January 2026, the EU will require importers of carbon-intensive goods to surrender CBAM certificates, imposing financial obligations for embedded emissions. This policy shift will impact industries like steel, aluminum, and cement, influencing global trade dynamics. Read more here
🎧 What We’ve Been Listening To:
🎙️Catalyst — Is now the time for DERs to scale?
Rising electricity demand, grid bottlenecks, and falling tech costs make distributed energy resources (DERs) a tangible investment opportunity today, though scaling still faces supply chain and regulatory hurdles. Listen here
Blockchain & Crypto 💸
⚖️ Regulation
- SEC approves generic listing standards for commodity-based trust shares, easing market entry for related ETFs.
- SEC and CFTC highlight continued collaboration on crypto oversight, emphasizing investor protection and market integrity.
- Polymarket cleared to operate in the U.S. following a favorable CFTC ruling, enabling broader retail access.
🏦 Financial Institutions
- Coinbase’s Base network explores launching a native token, signaling expansion beyond Layer 2 infrastructure.
- Tether unveils USAT, a U.S.-regulated dollar-backed stablecoin, appointing Bo Hines as CEO of Tether USAT.
- StablecoinX raises $530M to back its Ethena-linked treasury, boosting liquidity for its U.S. dollar stablecoin.
- Nasdaq seeks SEC approval to trade tokenized securities alongside traditional equities, bridging traditional and crypto markets.
- EightCo stock surges 3,000% following partnership with Worldcoin, highlighting crypto-driven market volatility.
- Gemini, backed by the Winklevoss twins, targets a $22B valuation ahead of a planned U.S. IPO.
🔥 Top Stories
- Tether eyes $500B valuation in a major funding round, reflecting investor appetite for regulated stablecoins.
🔎 Research
📄Syncracy — Shows how Digital Asset Treasuries (DATs) use programmable money to optimize crypto balance sheets.
📄a16z — Measuring growth in crypto, highlighting key adoption trends and network effects.
📄DBA — Proposal to reduce hype by cutting total token supply by 45%, aiming to stabilize market sentiment.
📄Galaxy — Summary of the President’s Working Group report on digital asset markets, focusing on systemic risks and regulatory recommendations.
Podcasts & Videos
🎙️ Empire Podcast — Episode discussing recent market trends and key regulatory developments. Listen here
🎙️ Empire Podcast — Deep dive into stablecoin adoption, crypto-native networks, and institutional participation. Listen here
📹 Bankless — Video covering crypto fundamentals, Layer 2 growth, and evolving DeFi strategies. Watch here
