China VC Survey Reveals Foreign VC dominance in market

Filed in archive Studies on November 14, 2005

Foreign firms will be the major players in China's venture Capital market until at least 2010 with Internet-based companies currently offering the best returns, claims Zero2IPO founder and chief executive officer Gavin Ni.

"For about (the next) five years, foreign (VC firms) will dominate China's venture capital market,' he said at a recent China Venture Capital Association conference held last week in Beijing.

This announcement coincides with the China Venture Capital Association's release of a joint survey compiled with Zero2ipo on the developing China venture capital industry.

Zero2ipo was established in 1999 by Gavin Ni, a Tsinghua University graduate, and several other Chinese graduates, the company now has nearly 50 professionals with backgrounds in venture capital, investment banking and market research.

The entrepreneurial-driven Ni, underscores the fact that many foreign venture capital firms had internal return ratios of over 100 percent, while most local currency funds had estimated internal return ratios of below 10 percent.

Private equity investors agree that China's Internet-based companies have given investors the greatest returns, especially in the last two years.The recent survey revealed that overall nearly $12 billion had been raised for investment in China from 1993 to 2005.

The survey stated there are 80 active venture capital funds in China, split into local currency funds and US dollar funds. Additionally, in a separate survey conducted by the reputable and independent Deloitte & Touche's VC services group demonstrates that 20 percent of U.S. VCs are interested in investing in China over the next five years.

Among the 50 most active venture capital funds in China from 1998 to 2002, about five had estimated internal return ratios of above 40 percent and 15 recorded ones of 10-40 percent, with most local currency funds returning much lower ratios.

In the first three quarters of 2005, China saw 11 venture-capital backed initial public offerings (IPOs), compared to 24 in all of 2004, according to the survey.

Of those IPOs this year, 23 percent each listed on the NASDAQ (NASDAQ: news) and on the Hong Kong main board, 22 percent on the Hong Kong GEM market for start-ups and smaller cap firms, with the remainder on domestic or other offshore exchanges.

While 23 percent of these IPOs were in 'traditional' industries, the survey identified 13 percent in the telecommunications industry and 11 percent were Internet firms.

In the first three quarters of 2005, seven venture capital-backed mergers and acquisitions were recorded in China, compared to 12 in 2004. Ni believes that the rate of mergers and acquisitions will increase 'dramatically' in the future.

Zero2ipo's chief executive is also bullish about an increase in venture-capital backed IPOs as well as mergers and acquisitions in the near future. This boosterism, revealed in the advisory company's many glossy reports, remains unchallenged by the industry, despite the many potential and real bubbles already evident in China's venture capital landscape. Look for more indepth data research in the coming months on this subject.