Venture capital investment in China grows

In 2006, venture capital investments in mainland China reached its highest point in three years and the scope of non-technology investments have also broadened, according to a study by Dow Jones VentureOne and Ernst & Young.

Venture capital investments in mainland China reached its highest point in three years with 214 deals and $1.89 billion deployed, according to China Quarterly Venture Capital report by Dow Jones VentureOne and Ernst & Young. The latest statistics show a 37 percent rise in deal flow and a 55 percent jump in capital from 2005 levels.

Bob Partridge, China leader for Ernst & Young’s Venture Capital advisory group said: “While information technology remains the dominant industry for investments, there was significant investment growth in areas such as healthcare, business, consumer and retail companies and clean technologies.”

In 2006, 131 information technology companies received $920.7 million, 34 percent more capital compared to 2005. Internet-dominated information services segment proved to be the most popular sub-segment, attracting $464.6 million for 73 deals.

In the business, consumer and retail industries there were 57 deals and $613.3 million invested in 2006, which is 20 deals more deals and 40 percent more capital  from 2005, the study showed.

In healthcare, there were ten deals and $47.5 million invested, up from six deals and $5.8 million in 2005. In the energy segment, there was a tenfold increase in number of deals from a low base of only one deal in 2005. The amount invested climbed to $212.6 million from $80 million in 2005.

Stephen Harmston, director of global research for VentureOne said: “Investors are helping their companies ramp up quickly in the global marketplace by funding them with increasingly larger sums – a trend that was also apparent in other major venture capital regions over the past year. The median deal size in China is now $5.9 million, up from $3.7 million in 2005, and the highest median in at least seven years”

“In addition, the level of second round investment activity illustrates the growing maturity of the venture capital market in China. Investors are helping companies to move past the start-up stage into the next phase of development.”

The report found the median for China’s second round deals to be higher than that of the US in 2006. In China, the second round deal financing median climbed to $10 million, up from $7.5 million in 2005, and higher than $8.5 million in the US. The median size of first round deals rose to $4 million from $3.1 million in 2005.

In the relatively new venture capital market of China, seed and first round deals continue to form the main bulk of deal flow, making up for 62 percent, which represents a modest decline compared to 68 percent in 2005. Second and later financing rounds made up 22 percent in 2006, up from 15 percent in 2005. As much as 156 percent more capital was also invested into second round deals in 2006 compared to the preceeding year.

The VentureOne and Ernst & Young report findings were somewhat consistent with data from Beijing-based Zero2IPO, a private equity and venture capital research firm. The latter also found the number of deals and investment amount peaking in 2006, having collected data since 2001.