Semiconductor Funding Drops Amid Investor Concerns

The semiconductor industry is entering an era where investment is shifting behind the scenes. State-owned capital is reducing its investment in semiconductors, while market-oriented capital is scarcely investing at all, raising serious concerns within the industry. Once, market-oriented capital was the most important investor in the semiconductor sector. Before the national semiconductor fund (Big Fund) began its investments, market capital was the main force. Even after the Big Fund’s involvement, it still played a key role. Now, however, as market capital recedes significantly, it signals a warning for China’s semiconductor industry. Market-oriented capital is the lifeblood of this sector—its retreat has left this once-hot investment field entering a drought.

Here are some recent observations from frontline industry visits:

1. Former top-tier semiconductor-focused investment funds now allocate only about 25% of their capital to semiconductors.
2. State-owned capital increasingly dominates semiconductor investment and financing, while market-oriented funds are investing less and less.
3. Even within state-owned capital, the focus has shifted from planning and developing industry projects to merely “brick-moving” investments—relocating mature projects to new regions for the purpose of attracting investment. This “dual relocation” approach prioritizes attracting business over actual innovation.
4. To avoid investment liability or reduce risk, many state-owned entities entrust their funds to centrally owned or state-owned investment funds and prefer to act as LPs (limited partners). While this might ensure safety, it sacrifices investment efficiency.

These trends reveal that market-oriented capital is shrinking in terms of funding scale, investment approach, and dynamism. Meanwhile, state-owned investment is becoming increasingly passive.

Why Market Capital is Withdrawing

Market capital has cooled on semiconductors for several key reasons:

1. Tougher IPO and Exit Conditions: It’s become increasingly difficult to list and exit semiconductor projects. A-share IPO scrutiny has intensified, and in 2024 alone, 49 companies withdrew their IPO applications in just the first half of 2025. Some have turned to Hong Kong’s market, but low liquidity means many of these companies fail to meet the requirements for trading access, limiting their ability to raise funds. Additionally, even after lock-up periods end, some investments are passively delayed from exiting due to new regulations.
2. High Investment Risk, No Risk Sharing: As most low-risk semiconductor localization projects are completed, what remains are high-risk, technically demanding challenges. Without IPOs to share the risk, market capital is reluctant to invest. Current regulatory frameworks only suit projects with clear profit potential, not high-risk, high-innovation initiatives.
3. M&A Stalemate Due to State Asset Issues: The most attractive current investment opportunities lie in mergers and acquisitions. But unresolved issues with state asset devaluation block these moves. Under current regulations, many market investors are waiting for asset prices to fall before acting.

In short, fundraising, investing, managing, and exiting—the four pillars of venture capital—have all entered turbulent waters. Market capital is scarce in fundraising; most projects that can be localized have already been done; M&A is hard to implement; exits are blocked. When all four stages are constrained, market capital has no choice but to leave.

Why Market Capital is Indispensable

While China’s semiconductor industry has laid its foundation, continued development still requires sustained investment, with market capital playing a critical role.

1. Semiconductors Are International and Competitive: Despite challenges to international cooperation, the fundamental global competitiveness of semiconductors remains unchanged. This sector demands sensitivity to technology and rapid decision-making—strengths of market-based firms. China’s past rapid progress came from adapting to global competitive intensity.
2. Market Capital Excels in High-Risk, Frontier Projects: State capital focuses on heavy assets, with longer decision cycles and lower risk tolerance. Market capital, though smaller in scale, performs better across the investment cycle. In fact, many state investments only follow once private capital reaches a threshold, with valuations often benchmarked to market capital. When private capital withdraws, state capital also loses momentum.
3. Innovation Projects Need Risk Tolerance: The industry is oversupplied with mature technology but still lacks cutting-edge capacity. Local state capital rarely invests in risky, innovative projects, favoring safe, predictable ones. Yet, breakthrough and high-risk projects depend on market capital to move forward.

China’s state capital may be strong, but market capital sets the tone and direction of investment. For China’s semiconductor industry to continue advancing, market capital must return.

How to Bring Market Capital Back

The semiconductor industry still has strong demand for capital. If obstacles are removed, market-oriented investors are willing to return. ICwise Research offers the following suggestions:

1. Improve the Capital Market: While strictly cracking down on violations, tolerance for risk must increase. Let the market decide how to approach high-innovation projects. China’s semiconductors have entered uncharted territory—there are no longer guaranteed returns. Insisting on high certainty will only drive risk capital away.
2. Facilitate M&A: Industry consolidation is key to reducing unhealthy competition, improving industrial quality, and managing capital. Many projects are already in operational trouble and need restructuring. Allowing state-owned capital to write down assets rationally will enable M&A. Tools like bankruptcy reorganization and debt-to-equity swaps should be used to ease state asset exits.
3. Market-Oriented State Capital Operations: State capital must cooperate more with market investors, increase investment in innovative and high-risk projects, and ensure policies also focus on them. As the industry tackles more difficult challenges, state investment must learn to tolerate more risk to provide the support needed.

Conclusion

The push for independence in semiconductors is testing China’s new national system. Regulatory frameworks must evolve. Without adapting to new market conditions, essential innovation funding will dry up. As the industry moves deeper into uncharted waters, significant policy changes are required to support the next stage of self-reliance and technological breakthrough.

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