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May 2010 Issue 40

China attracts superlatives for many things and its venture

capital industry is fast becoming one of them.

“I’m extremely excited by China – there are an extraordinary

array of things going on there that are much more dynamic than

I’m seeing anywhere else in the world,” says Andrew Rickman,

chairman of the UK-based angel investor Rockley Group, which

launched a $100 million joint venture fund with Shandong High-

Tech Investment Corporation last May.

The big opportunity in China lies in its internal growth,

says Rickman.

“China needs projects and technology that help it continue its

domestic growth in a stable way. That’s what it has to do in order not to

fry the planet with global warming and not continue to pollute its rivers,

while at the same time keeping its population happy with progressive

improvements in living standards,” says Rickman.

For the venture capitalists, that translates to opportunities in

sectors such as healthcare, energy efficiency, health and safety, consumer

companies, financial services and clean technology, including solar and

wind energy and water treatment.

China in the global context

“There are greenfield opportunities across all sectors,” says Xiaodong

 Jiang, who launched Silicon Valley-based New Enterprise Associates’

Beijing and Shanghai offices in 2005. “In terms of returns I would think 

that China is ahead of the US and if you find the right strategy, the

failure rate on average ought to be lower, although there are fewer

absolute breakthrough innovation companies so the absolute upsides

may be lower compared to, say, a Google.”

While their populations together account for 37 per cent of 

the world’s total, China is about five years ahead of India in terms

of development and ten years ahead in terms of the size of the

market, according to William Bao Bean, partner at Softbank China

& India Holdings, a fund with 14 investments, including six in China

and three in India.

Yet while there is a huge buzz about China, the actual amount

of venture capital investment there is still a fraction of the level

seen in the US, although it’s rising fast. In 2000, only about $5 billion

in VC money was invested in China, according to Jiang. By contrast,

the small European country of Austria, with a population of just

eight million, saw $10 billion in VC investment. A decade later and

China’s VC market is worth between 30 and 50 percent of the US

market by value, Jiang estimates.

While still growing in terms of its global share, the growth of the

venture capital industry took a hit last year under the impact of the

global financial crisis, even though China recorded 8.9 per cent overall

growth. In fact, according to statistics from the Zero2IPO Research

Centre, the number and amount of funds raised, and value and number

of investment and exit deals all dropped compared to the 2008 figures

(see charts).

Opportunity knocks

Within China itself, venture capital is a rapidly evolving market. The

more developed eastern seaboard attracts the bulk of VC money, says

NEA’s Jiang. More than half of NEA’s investments are in companies

located in the Yangtze River Delta region, which has a population of 

about 100 million but contributes about 25 per cent of China’s GDP.

 Jiang sees particular opportunity in healthcare services and $100

million of the $350 million he has invested is in this sector. He says the

Chinese government is now considering greater market participation in

what is one of the last remaining state-owned sectors.

“I don’t think there’s a bigger services sector of comparable

opportunity, given the number of people and the ageing society,” he says.

Rockley is using the relationships it has developed through

its partnership in Shandong, which lies to the southeast of Beijing,

to set up similar arrangements with six other local authorities in

industrial areas all over the country, Rickman said.

“These partners are typically investing about 30 to 40 per cent

of the money going into investment and they are also out there

searching out deals,” he says.

Rockley is concentrating on later-stage companies, typically

valued between $50 and $100 million, that need technology from

elsewhere to become more efficient, stay profitable even in lean

times and impact the environmental less.

“Our experience is it’s much better to go for businesses that

are post-revenue. They may not be using absolutely leading edge

technology. Instead they need technology that is well focused on

market demands as they are today. There are massive needs in

energy efficiency and health and safety which are unique to China.”

By contrast, pre-revenue investing in China is “truly terrifying”,

Rickman says.

“It’s just more difficult to create that stabil ity and longevity

within the tech field in China at the moment,” he says. “Part of it is

people tend to clear off with intellectual property which is a bit of a

problem. Loyalty isn’t as good as it needs to be in China to support

China venture capital report

High risk, high impactFrom humble beginnings, China’s venture capital market has seena meteoric jump in size and importance. It’s not a market for thefaint-hearted though, ndsTom Spender. 

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May 2010 Issue 40

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an early stage model.”

In any case, argues Bao Bean, low set-up costs for businesses

and the widespread use of capital from family and friends in the

absence of a developed VC industry means there’s less demand for

early-stage money.“You can get to a point where the company has a product and

even revenue on family money so the requirement to seed isn’t

there,” he says.

Spring Capital Asia invests for a “very long” period of 10 years

and sees “significant growth” in clean tech, healthcare and professional

business service companies located in second and third tier cities such

as Tianjin near Beijing, Nanjing in the south and Xi’an and Chengdu in

the centre and west of the country. There, says Felix Wong, CFO of 

Hong Kong-based VC firm Spring Capital Asia, the growth potential for

companies is “much bigger” than in first tier cities such as Shanghai.

The risk factor

Wong says agility and experience are key to managing the political

risk inherent in investing in a rapidly-evolving yet also centrally-

planned economy.

“There’s a lot of political risk. You don’t know what China will

be facing in the future – there could be a revaluation of the currency

for example. VC in China will go its own way. It’s a country with a

planned economy and following policy is very important. All you can

do is react very quickly because the market changes very fast – but

this also affords opportunity,” he says.

But politics are not the only risk, Wong adds.

“A lot of young graduates who want to earn a lot joined the

industry in 2005. How can these people know what will happen in

the future? When things go sour, how do you divest? The trickiest

part is how you turn around a deal in the middle. It’s about making

sure shareholders don’t use it to build their own personal empire.

They may be cowboys. How to change this? How to make sure the

new generation behaves differently? It takes time. We ourselves are

learning and have to upgrade ourselves constantly.”

Both Wong and Rickman are skeptical of current conditions on

China’s newest stock exchange, the ChiNext index, which launchedlast October in Shenzhen following 10 years of preparation. Aimed

at smaller companies, it has been seen as an equivalent to London’s

AIM market and New York’s Nasdaq. However, companies listed on

ChiNext are trading at P/E ratios of up to 80 times, perhaps tempting

companies that may not yet be ready to list, Wong says.

“It’s not something we are looking for with our investments. You

can get an exit but these companies will not sustain these valuations

unless they have a key product,” says Wong.

Yet companies face a wait of about two years to be able to list

on ChiNext and China’s other stock markets, a backlog that suggests

China’s regulatory authorities are having difficulty dealing with demand.

“It may be the regulatory authority and its ability to progress

the IPOs. In China it takes longer at the moment than anywhere

else in the world and at the same time stock market valuations

there are about twice anywhere else in the world with the

exception of Nasdaq,” says Rickman.

Investing in venture capital in China, therefore, is not for the faint-

hearted. However, it is a market that is becoming harder to ignore for

venture capitalists, especially those looking in particular at technology.

“Whereas 10 years ago any tech developer needed to know

what was going on in the US, now they need to know what’s

happening in both the US and China,” says Rickman.

However, he adds that China still has some way to go before

it becomes the single most important market.

“There is still plenty of scope in the rest of world to develop

very advanced tech companies. It will take a long time before those

are dominated by China,” he says. l

China venture capital report

Source: Zero2IPO Source: Zero2IPO

8000

7000

6000

5000

4000

3000

2000

1000

0

4500

4000

3500

3000

2500

2000

1500

1000

500

0

140

120

100

80

60

40

20

0

700

600

500

400

300

200

100

02002 2003 2004 2005 2006 2007 2008 2009 2002 2003 2004 2005 2006 2007 2008 2009

China: Year-on-year Comparison of Fundraising

by VC Institutions between 2002 – 2009

China: Year-on-year Comparison of VC Investment

Amount and Number of Deals between 2002 – 2009

Amt Raised (USDM)

Number of New Funds

Investment Amt. (USDM)

Number of Investment Deals

1298418

226

177

253 228

324

440

607

477

992 1269 1173

1777.42

3247.05

4210.47

2700.904067

3973.12

5484.98

7310.07

5855.86

34

28 21 2939

58

116

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