PRINT THIS PAGE China Quarterly Venture Capital Report21/11/2007. Source: Dow Jones VentureOne and Ernst & Young.
Venture capital firms invested a record amount in services-oriented companies in Mainland China during the third quarter of 2007 as overall venture investment produced 59 deals and reached $677m. This is a five per cent increase over the $645m invested in 76 deals during the same period last year, according to the China Quarterly Venture Capital Report released today by Ernst & Young and Dow Jones VentureOne, publisher of the VentureSource database. The report showed that $432 million—nearly 64% of all capital invested in the third quarter—went to 28 deals in the Business/Consumer/Retail industry, shattering the category’s previous quarterly record of $242 million set in the second quarter of this year. This brings the year-to-date investment total for the Business/Consumer/Retail category to $710 million, besting the annual record of $676 million set in 2006.
The bulk of investments in this category went to “consumer/business services” companies, which garnered a record $335 million in 14 deals. This activity mirrors trends seen in the United States and Europe during the third quarter, as both continents also saw surges in investment in “consumer/business services” companies.
“What we’re seeing in Mainland China is a continuation of a global trend for venture capital investors to back service-focused deals, reflecting the fast growth in China’s middle class, which increasingly consumes more services,” said Bob Partridge, Ernst & Young’s China and Far East Venture Capital Advisory Group Leader. “Moreover, venture capitalists are attracted to this area by the relatively low capital requirements of services companies, their ability to acquire customers rapidly, and the strong exit valuations they are receiving in both IPOs and M&A transactions.”
One of the largest deals in the Business/Consumer/Retail category was the $25 million later-stage round for Beijing-based online specialty retailer RedBaby.
Industry Breakdowns
Overall, Mainland China’s health care industry accounted for four deals and $19 million worth of venture capital. Of this activity, $14 million went to three “health care services” deals, records for the sector in both deal volume and investments. The largest deal in this area was the $10 million first round for Beijing’s Jiamei Dental clinic chain.
“The trend for investors to back services-oriented companies could be seen across all industries in the third quarter, from traditional consumer plays to information technology to healthcare,” said Jessica Canning, Director of Global Research for Dow Jones VentureOne. “While overall deal volume may have slipped in the third quarter, it’s clear that investors are focusing more capital toward these opportunities. As a result, the median amount invested in a venture-backed company in Mainland China has reached $6.5 million for the first time.”
While total information technology (IT) investments in Mainland China fell 23% compared to the third quarter of 2006, to $217 million invested in 24 deals, the “information services” sector accounted for roughly half of all activity with 13 deals and $106 million. Even so, the “information services” sector, which includes many of today’s Web-based innovations, saw investment slide 37% compared to last year.
Bright spots for the IT industry included increased investments in “software” and “communications & networks” sectors. Despite completing one less deal (six v. seven) than in the third quarter of 2006, the “software” sector saw investments increase 80% to $54 million. The “communications & networks” sector saw only two deals completed in the third quarter compared to six last year, but investments rose 37% more to $41 million.
Round Class & Development Stage Breakdowns
Early-stage deals once again accounted for the greatest percentage of Mainland China’s overall deal count as 59% of deals (35) in the third quarter were first rounds. Most notable, however, was that the quarter saw eight later-stage rounds completed—the highest deal volume on record—accounting for $101 million.
Reflecting the quick development of many of the venture-backed services, 55 of Mainland China’s 59 total deals were for companies in advanced stages of development. Of these, 10 deals were for companies already turning a profit and 45 had fully developed product offerings.
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The investment figures included in this release are based on aggregate findings of VentureOne’s proprietary Chinese research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources. These venture capital statistics are for equity investments into early-stage, innovative companies and do not include companies receiving funding solely from corporate, individual, and/or government investors. No statement herein is to be construed as a recommendation to buy or sell securities or to provide investment advice.
Copyright © 2007, VentureOne.
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