Web 2.0 drives Chinese venture

Information technology deals, in particular information services, have boosted venture investment in China to levels not seen since the dotcom boom crashed.

Information services companies topped the venture backing charts in mainland China in the second quarter of 2007, as overall venture investment produced 55 deals and reached $560 million (€412.6 million), according to Dow Jones VentureOne and Ernst & Young

Information services include blogs, social networks, wikis and other ‘Web 2.0’ companies, as investors put a record $209 million to work in 22 deals.

Overall, the second quarter saw significant investment in information technology companies with 36 deals raising $347 million in financing—the greatest IT investment seen since the third quarter of 2003. 

The largest reported IT deal for mainland China was the $31.5 million second round for Beijing-based ChinaCache, a provider of network services for web sites and other content providers

Bob Partridge, Ernst & Young’s transaction advisory services leader in China, said:  “As investors move to monetise China’s internet, we’ve seen a consistent increase in the amount of capital invested in IT deals. The median amount of capital put to work in IT deals in mainland China now stands at $6.2 million, the highest on record and up from the median of $5 million seen in 2006.”

The business, consumer and retail segment in mainland China also saw record amounts of investment in the second quarter with 15 deals attracting $198 million, according to the report.  That was 23 percent more than the previous record of $161 million invested in 15 deals during the second quarter last year.

The biggest reported deal in this category, and for mainland China overall, was the $85-million first round for Shanghai-based Hanting Hotels, an economy hotel line for business travelers.

The report showed that there was still no breakthrough investment in the health care sector, as venture capitalists invested $13 million investment in three health care deals. Even so, biopharmaceutical companies saw the greatest amount of investment since the first quarter of 2004 with $9 million put to work in two deals during the quarter. 

Early stage deals accounted for a greater percentage of the overall deal count as 53 percent of deals in the second quarter were seed and first rounds.  Most notably, there were 29 first rounds closed, up from 17 in the first quarter of the year.  Second and later rounds remained virtually unchanged. 

Reflecting the quick development times of ‘Web 2.0’ products and services, 50 of mainland China’s 55 total deals were for companies in advanced stages of development.  Of these, eight deals were for companies already turning a profit and 42 had fully developed product offerings.