VC continued to roar along in H106 as US VCs kept pouring money into tech and services aimed at China’s middle class. From VentureWire:
Venture capital firms invested $757.9 million across 85 deals during the first half of the year, a 51% uptick from the first half of 2005, which saw $499.2 million invested in 62 companies.
Across the wider region, including mainland China, Hong Kong and Taiwan, venture capitalists deployed a total of $795 million in 95 deals during the first half of the year, according to data from Ernst & Young LLP and industry tracker VentureOne, a unit of Dow Jones & Co.
U.S. investors have pushed aggressively into China in recent years, encouraged by a growing middle class, increased infrastructure spending by the Chinese government and several high-profile public offerings.
“If you look at venture-backed IPOs coming out of China, you can see why there’s an interest on the part of venture capitalists,” said Mark Perry, a general partner at Menlo Park, Calif.-based New Enterprise Associates, pointing to Beijing-based search company Baidu.com and NEA portfolio company Actions Semiconductor Co.
Venture capitalists are also looking to China — and other Asian markets — for alternatives to the mature and highly competitive Silicon Valley market. “It’s hard finding the next big thing in your own backyard…but it sure seems like the Wild West in China right now,” said Eric O’Brien, a general partner with Lightspeed Venture Partners.
Information technology investments continued to dominate venture spending in China during the first half of the year, with $485.5 million invested in 59 deals, more than double the $232.2 million deployed across 41 start-ups during the first half of 2005. Investments in consumer and business services also grew 27% to $213.3 million across 19 deals, compared with $167.8 million in 13 deals a year ago.
During the second quarter alone, venture capital firms poured $480.1 million into mainland China, doubling the $239.1 million invested in comparable 2005 quarter. The median deal size for first rounds grew 19.4% to $4.3 million in the second quarter, from $3.6 million in the second quarter of 2005. The median size of second round deals grew 20% during the second quarter to $9 million, up from $7.5 million during the same period last year.
A slew of U.S. firms have committed capital to China this year, many partnering with existing China-based investors. Lightspeed Venture Partners, Madrone Capital Partners, AlpInvest Partners LP and Pantheon Ventures are limited partners in Shanghai-based DT Ventures, a targeted $130 million early stage fund formerly known as DragonTech Ventures Management.
Greylock Partners and New Enterprise Associates both invested this summer in the debut fund for Chinese venture capital firm Northern Light Partners LP. Sequoia Capital, as well, recruited new partners to launch a China fund and recently joined with WestBridge Capital Partners to form Sequoia India.
“The venture franchise in the states has concluded that China is not going away,” said IDG Ventures General Partner Michael Greeley. One of the early U.S. investors in the region, IDG Ventures closed its first China-focused venture fund in 1992 with $100 million. The firm has followed with two additional funds and earlier this year closed a $290 million joint fund with Accel Partners.
China does pose challenges for venture investors, said Greeley, including a shifting regulatory landscape, a lack of experienced executives and an unproven path to exits for venture firms. “[Government regulations] are literally shifting under our feet in a real time basis,” said Lightspeed Ventures’ O’Brien.
Many investors agree that one solution is to invest in local resources in China – either by adding China-based general partners or by teaming up with an existing Chinese venture fund that can help navigate government regulations and evaluate deals. “Imagine you are a Chinese general partner and you come to Silicon Valley twice a month…you don’t speak the language,” said Greeley. “How effective are you going to be?”
