Venture capital investment was strong in Mainland China during the first quarter of 2008 as investors put $719 million into 39 deals with media and advertising companies accounted for the bulk of deal activity and investment, according to the China Quarterly Venture Capital Report released by Dow Jones VentureSource. Even though this marks the lowest deal count the region has seen in three years, overall investment rose 46% compared to the $492 million invested in the first quarter of 2007.

"The first quarter marked the continuation of a broader trend we've been watching, not only in China but in India as well, as venture capitalists have focused on capitalizing on opportunities for local media, advertising and other business services companies," said Jessica Canning, Global Research Director for Dow Jones VentureSource. "While some of these investments are for Web-based technologies, many of the larger deals are going to finance traditional services like billboard and signage companies and travel-related services. With a ramp up in transit infrastructure and the increasing popularity of automobiles in China, there is a real opportunity for venture- backed companies to exploit the newfound mobility of the region's emerging middle and upper classes."

In total, the report found that China's consumer/business services sector accounted for 54% of all deal activity in the first quarter as 21 deals attracted a record $491 million in investment. This is an increase of 136% over the $208 million invested in the sector in the first quarter of 2007. In total, the business, consumer and retail industry accounted for 30 deals and $632 million worth of investment in the first quarter. Beijing's Skyflying Media, which provides outdoor transit-focused advertising services, closed one of the largest rounds of quarter in China with its $83 million later stage financing.

Elsewhere, Dow Jones VentureSource found that only five information technology (IT) companies in China raised venture funding in the first quarter, the lowest total for the industry since 2002. As a result, funding fell 72% to $44 million from $159 million in the first quarter last year. The majority of this investment total went into the $30 million second round funding for Shenzhen State Micro Technology, a maker of digital TV products.

The data showed that health care remains a small investment industry in China, as the first quarter saw only two biopharmaceutical deals close, accounting for $20 million in investment. This is 74% below the record $76 million invested in the industry in the first quarter of 2007.

"Larger deals drove the jump in investment in the first quarter with the median deal size in China reaching $10 million, the highest total since we've began tracking the region," said Ms. Canning. "And it's clear that this money is going to finance the expansion of well developed companies, even those raising first rounds. In fact, nearly 99% of all investment in the first quarter went to companies already generating revenues or are profitable."

Even though the vast majority of capital went to developed companies, early-stage rounds still dominated, according to the report. First rounds made up 54% of all venture rounds in the first quarter, up from 42% in the first quarter of 2007. Second rounds made up 28% of the deal count, down from 36%, and later stage rounds accounted for 13%, up from 8%.