Zero2IPO: Total Amount Invested in China’s VC Industry Grows 125% Year-on-Year

2008-04-23 16:21 572

BEIJING, April 23 /Xinhua-PRNewswire/ -- Zero2IPO Group, a leading integrated service provider in China’s venture capital and private equity industries, announced recently that China’s VC industry remained at a relatively high level of development with funds raised and amount invested increasing substantially during the first quarter of 2008. In terms of exit strategy, both entrepreneurs and venture capitalists also made significant achievements.

According to the Zero2IPO Research Center statistics, a total of 18 domestic and foreign VC firms established 23 funds during Q1’08 representing US$2.26B of capital available for investing in mainland China. Meanwhile, 116 Chinese entrepreneurial firms receiving venture capital disclosed investment totaling US$940.73M. In comparison with the same period last year, the number of deals and disclosed amount of investment increased 73.1% and 124.5% respectively. In addition, Q1 saw a series of new industrial trends and features. For example, diversified investment process continued to develop and shares of IT-related investment in total investment fell below 40%. Additionally, expansion-stage enterprises gained much more favor from VC and accounted for 70% of total deals. On the same note, investment deals receiving multi-million dollars gradually became mainstream. Lastly, traditional industry claimed the number one spot in terms of exit, and domestic VC performed strong in comparison to their foreign counterparts.

The Q1 Survey by Zero2IPO Research Center and the “China Venture Capital Report Q1 2008” provide the data and conclusions above. The Zero2IPO Research Center began conducting Chinese VC surveys and creating reports in 2001 that are based on real time data collected from 300 active Chinese and foreign VCs in mainland China.

Total Funds Raised Exceeds US$2B

This quarter VC fundraising maintained strong sustainable growth. A total of 23 funds collectively raised US$2.26B. On a quarter-on-quarter basis the number of launched funds decreased, but the total funds raised increased by 56.4%. In comparison to the same quarter last year the fund number and the total new capital increased by 283.3% and 536.8% respectively. Both the number of launched funds and the total funds raised during Q1’08 reached a second record high.

Seven funds established by foreign VC firms raised a collective US$1.90B and averaged US$271M. The average size of foreign VC funds in Q2’07 was boosted due mainly to a couple of funds (to be exact SAIF and Sequioa) raising mega funds. The other big news for this quarter is all seven funds’ size collectively exceeded US$100M.

Domestic VC firms were relatively active in raising and structuring new funds. They raised 13 funds, despite the fact that the aggregate capital was only US$265.82M. In terms of organizational structure, they adopted diversified organizational forms, including three funds established in the form of limited partnership and one trust fund. Moreover, the sources for domestic VC funds tend to be diversified. Private and public companies, governments, as well as affluent individuals invested heavily in the VC field.

Figure 1: Total Funds Raised by Quarter, Q1’07-Q1’08

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Total Amount Invested Approaches US$1B

Q1 witnessed 116 entrepreneurial firms receive venture capital, up 73.1% over Q1’07. The total investment amount (US$940.73M) that 99 firms disclosed in Q1 was close to US$1B -- registering a 124.5% increase when compared to the same period last year. Nevertheless, compared with Q4’07, when 164 firms received US$1.24B, both the total number of deals and the total amount invested considerably decreased.

China’s VC investment tends to be strongly affected by seasonal fluctuations. In general, first quarter investment is typically significantly less than that of the ensuing quarters. Compared to the same quarter of the previous year, China’s VC investment was still at a considerably high level of development. Our findings suggest this will provide a firm foundation for new records to be broken during this year.

Figure 2: Number of Deals and Total Amount Invested, Q1’07-Q1’08

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IT Investments & Deals Below 40%

According to our previous reports, the third quarter of 2007 saw IT investment decline to 42.6% and IT deals to 45.9% (both falling below 50% for the first time). During Q1’08, investment deals and total amount invested in the IT industry only accounted for 38.8% and 39.5% of the total (both below 40% for the first time). By contrast, the combined investment densities of Services and Traditional came closer to that of IT investment density. Although the total amount of shares of Bio/healthcare and Other Hi-tech investment was modest, the average fund size for both sectors is above US$10M; this figure greatly exceeds that of other industries. This fact helps to illustrate that VC firms are also interested in the prospects of the Bio/healthcare and Other Hi-tech industries.

In regard to industrial distribution, China’s VC investment is striding towards diversification. Broad IT is not the only industry gaining favor from investors, Services and Traditional are also attracting investors attention. All the investment deals analyzed were evenly distributed among each niche with the exception internet portion of IT investment (accounting for one-half the total). This indicates VC firms are actively exploring and tapping into investment opportunities in each niche market.

Figure 3: Industrial Distribution by Deal Number & Amount Invested (US$M)

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Expansion-stage Enterprises Receive over 70% Amount Invested

A total of 66 enterprises in expansion stage received venture capital. The disclosed amount of investment reached US$679.96M, which accounted for 56.9% and 72.3% of their respective total. Moreover, the average deal size of expansion stage reached US$12.14M, still higher than that of any other stage.

Obviously, expansion-stage enterprises stole the limelight that used to belong to early-stage and late-stage enterprises. The tradition view that early stage attracts the largest number of investors and late stage attracts the largest average deal size has changed in Q1’08.

Figure 4: Investment Stage Distribution by Deal No. and Amount Invested

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Average Deal Size Soars

The amount invested for a single deal is growing and has become one of the stand-out development trends in China’s VC market during recent years. More specifically, the size of deals has undergone tremendous change, with frequent emergences of mega deals worth multi-million dollars or above. An outstanding feature for this quarter is that the number of medium-sized deals (US$10M to US$20M) far outstripped that of mega deals and small-sized deals. It shows that the boosting of average deal size is not contingent upon a small number of mega deals but upon a substantial number of medium- or large-sized deals. Among 99 deals with available investment amount, 43 deals with size below US$5M secured only 10% of the total amount invested while 33 deals with size ranging from US$10M to US$20M garnered 42.7%: the aggregate amount invested came to US$401.46M. The latter seemed to become the mainstream investment scale option.

Figure 5: Deal Number and Amt. Invested for Deals with Different Sizes

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Traditional Industry Leads in Exit

A total of eighteen exit transactions took place during Q1’08. IPOs were still the most favored option for venture capitalists to choose from: 11 IPO events comprised 61.1% of the total. In terms of industrial distribution, there were eight exits in traditional industry and four in Broad IT, taking the top two positions. Additionally, there were two exits for Services and Other Hi-tech each, while there were no exits for the Bio/healthcare industry.

As for exiting market, the 11 IPO events were all allocated on Shenzhen SME Board, HKMB, and NASDAQ. Shenzhen SME Board stood out with seven exits, far exceeding that of the other two markets (three on HKMB and one on NASDAQ). As for fund type, seven domestic VCs and four foreign VCs exited.

Figure 6: Exit Distribution by Option & Industry

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About Zero2IPO Research Center

Founded in November 2001, the Zero2IPO Research Center provides a full range of business research reports and customized research solutions for investment professionals in the Greater China Region. Our research ranges from Venture Capital, Private Equity, IPO, M&A to TMT industries. The Zero2IPO Research Center sets itself apart from competitors as the most prestigious research institute in Chinese VC and PE spheres.

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