Investment in Asia’s most attractive venture capital markets fell steeply in 2012, following the general global decline in venture deals, according to a report by Ernst & Young.
The value of venture capital investments in China dropped more than 40 percent year-on-year in 2012, to $3.7 billion from $6.3 billion, having previously recorded two record years since 2010. The number of funding rounds in the country also declined 44 percent to 202 versus 362 during 2011.
By comparison, venture capital investment declined 15 percent in both the US and Europe.
The pullback in investment was driven by the country’s economic and political environment, including slowing GDP growth, external economic woes including the US fiscal cliff that impacted China’s manufacturing activity and a change in the Chinese leadership, according to the report.
In India, venture investment decreased by 17 percent, to $1.4 billion from $1.7 billion, despite a growing consumer economy supporting the growth of the venture industry. This support was reflected by an increase in the number of funding rounds in India’s venture capital sector, which rose 17 percent to 205 from 175.
China's venture capital interest grew too rapidly – it was a bubble. It's healthy that it has cooled down
Vincent Lauria, managing partner, Golden Gate Ventures
“Rising economic prosperity has increased the pool of entrepreneurs willing to take a risk on VC investment. Some of these high-net-worth individuals have already made money as successful entrepreneurs prior to becoming VC or angel investors,” the report explained.
Vincent Lauria, managing partner at Golden Gate Ventures, explained that China and India could not necessarily absorb the capital that previously rushed in, and too much capital was in search of too few deals.
“China's venture capital interest grew too rapidly – it was a bubble. It's healthy that it has cooled down,” he told Private Equity International.
Regarding India, he said the emergence of smaller and more frequent rounds of funding, as opposed to previous larger and less frequent rounds, suggests that “the market is at a healthier balance”.
Moreover, India’s 2011 figures were offset by a few large investments with a combined value of between $400 million to $500 million. Excluding these deals, the year-on-year comparison looks far healthier, the report emphasised.
“The growth of India’s investor community and the resulting increase in the amount of capital being invested in purely domestic opportunities provides India’s venture capital industry with a degree of insulation from global shocks, and the outlook for the coming year is therefore relatively positive,” E&Y analysis said.
The firm also believes China will rebound in 2013, in particular because of the strength of China’s consumer sector despite the slowdown in GDP growth.
During the first three months of 2013, China received $254 million of investment from venture capital firms over 47 deals, according to data from Thomson Reuters. During the same period in India, $175 million has been invested over 45 deals.