At the half-year point there have now been 85 deals and $757.9 million invested in China, indicating investment in 2006 is likely to handily surpass the levels of the past two years, thus proving the country's progress in maturing as a venture capital ecosystem.
"With China's emergence over the past several years as a source for new technology and services, investors from around the globe have taken notice and are demonstrating this by providing them with the economic support necessary to compete in the global marketplace," said Bob Partridge, China leader of Ernst & Young's Venture Capital Advisory Group. "The increased early-stage deal flow in China this quarter is also a sign that investors are ramping up investments in new enterprises. This substantial pipeline of companies lays the groundwork for continued investment in the region."
The increase in the second quarter was boosted by a significant level of activity and capital for first-round deals. The 29 first-round deals and $180.7 million directed toward those rounds represented a 61% increase in deal flow and a 69% increase in investment from a year ago. As a percentage of the total activity, 54% of the quarter's deals and 38% of the quarter's capital went to first rounds. The median size of a first-round deal was $4.3 million, up from $3.6 million in 2005.
Second-round deals also rose substantially, growing from three a year ago to 14 in the second quarter, with $170.5 million directed to this round class. Second-round median size was $9 million, up from $7.5 million last year.
Despite the level of early-stage investing -- generally identified as seed- to second-round deals -- most of the venture capital backed companies being financed in China are more mature, established businesses. For example, of the companies financed in the second quarter, half of them, or 27, were already shipping products and 15 were identified as profitable.
"We also are already seeing a broadening of the marketplace in China, with business services and other emerging segments now drawing investors' attention," said Steve Harmston, director of global research for VentureOne. "Information technology remains the beneficiary of the majority of investment activity in China, as it does in the U.S. and Europe, but it is also interesting to see pockets of activity in business and consumer services, health care, and even in alternative energy occurring in China."
For example, the business and consumer services segment had deal flow double to six in the second quarter and capital investment almost double to $61.5 million.
The major venture-backed industry in China, information technology, saw financing rounds double in the second quarter to 40, up from 19 in the same quarter of 2005. Capital investment rose as well, by 176%, to $313.6 million. The largest segment within IT remains the Internet-dominant information services segment which posted 23 deals and $180.7 million in capital. This is more than double the number of deals here than a year ago and a more than five-fold increase in investment. The segment was responsible for two of the largest deals of the quarter: the $30 million second-round investment in HiSoft Technology International (Dalian), a provider of IT outsourcing services, and the $30 million second-round investment in Worksoft Creative Software Technology (Beijing), a software outsourcing provider.
In other IT segments, the electronics and computers segment, after posting only a single deal in all of 2005, had three deals occur in the second quarter and saw quarterly investment reach $31.2 million. Communications, semiconductors and software companies also all posted increases in the number of financing rounds.
Unlike in the U.S., the health care category, which includes biopharmaceuticals, medical devices, health care services and medical information systems, is not a significant part of the venture capital market in China. But it is a growing area, as there were two health care deals in China in the quarter and $5.7 million was invested.
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.
