hina’s VC growth
The year of the monkey was great for venture capital in China, but Shanghai is still a long way from Silicon Valley.
February 22, 2005
BEIJING – Venture capitalists stormed into China in 2004, investing $1.27 billion, almost 29 percent more than the previous year, according to Zero2IPO, a Beijing-based VC research firm.
Yet most of the capital is foreign, and most of the investments were driven by market opportunity, not new technology. Though China’s fabled 1.3 billion consumers may hold huge potential returns for both local and distant VCs, the IT venture market there still has some growing up to do.
Last year, venture capital firms funded 253 mainland or mainland-related enterprises, according to Zero2IPO, but most of that money—over $800 million of the $1.27 billion invested in the year—came from foreign-based VCs.
The most active VC in the country, Softbank Asia Infrastructure Fund, is based in Hong Kong, but San Jose, California-based Cisco Systems is the sole limited partner in the $404-million fund. Other major market players include Carlyle Asia Venture Partners, the local arm of the U.S. private equity behemoth, which opened an office last summer in Beijing and will open another this year in Shanghai, and IDG Technology Venture Investment, one of the first American firms to enter China, with more than $100 million invested since 1992.
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Many inexperienced Chinese VCs, most of which are still on their first or second funds, have invested in dogs and watched their American counterparts hit it big.
“Domestic VCs are still below the waterline,” said Gavin Ni, president and CEO of Zero2IPO. “It’s a hard time for them. They made a lot of investments over the last five years, and for some, only 10 percent of their portfolio companies have seen an exit.”
Contrast that with Doll Capital Management in Menlo Park, California. Its Shanghai-based Internet job site, 51job, bettered its Nasdaq IPO offering price by 271 percent in barely two months by the end of 2004.
Several local VCs, including New Margin Venture Capital in Shanghai and Lenovo sister company Legend Capital, have made use of access to capital and dealflow, but domestic firms are more likely to invest in later-stage rounds. When it comes time to exit, most Chinese VCs are hampered by a tough local regulatory framework for IPOs and lack the resources to shepherd companies into U.S. public markets.
On the other hand, the U.S. VCs pouring money into Beijing, Shanghai, and Shenzhen are often deficient in language skills and connections outside the big cities. Granite Global Ventures, headquartered in Menlo Park but with a Shanghai office, is one of a small number of foreign firms scouring the Chinese eastern seaboard for deals.
Because of the low cost of parts and labor in China, semiconductor companies were a hot IPO last year. But many of the most prominent startups and recent IPOs in China are consumer-focused companies—job sites like 51job or the Shanghai-based online gaming operator Shanda Interactive. VCs are funding media and wireless value-added services companies. They’re interested in “any sector that is consumer-driven with a high prospect of penetrating the mass market,” as Chester Hoang, associate director of private equity and VC at Deloitte Touche Tohmatsu, put it.
This consumer focus elicits echoes of the U.S. dot-com boom: all eyeballs, no technology.
“The biggest problem is that VC in China is not governed by technological innovation,” said Mr. Ni. “In China, the market is the driving force. In the future, China needs to find companies with their own intellectual property. Shanda is not about technology. It’s about the consumer market.”
This lack of market breadth is one reason China’s total VC market pales to the U.S. figure of almost $21 billion in 2004, according to PriceWaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. Still, China had the largest IPO on the Nasdaq last year—Semiconductor Manufacturing International—and Nasdaq-bound startups like Focus Media, funded by Draper Fisher Jurvetson and 3i, are experiencing huge jumps in valuation between rounds.
What’s more, serial entrepreneurs, a sure sign of a mature market, are already starting to appear. Zhou Yunfan and Nick Yang created community web site ChinaRen, which merged into Sohu in 2000, then founded mobile entertainment company KongZhong, which IPO’d on the Nasdaq last year. The sooner another duo like Mr. Yunfan and Mr. Yang pops up, the faster the Chinese market will reach its potential.
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