Venture capital investments in Chinese companies are growing strongly, as reported today by VentureBeat.
Having returned from the TechVentures Conference in Singapore earlier this month, I can confirm that China is a hot topic for investors. In the late 1990’s, I worked in Hong Kong as a venture capital reporter. During the height of the U.S. technology bubble, venture capital in China could mean putting $20 million into a cement factory.
While that’s changing, a closer look inside the numbers reveals that not everything has changed. A quarter of the deals are classified as “Business/Consumer/Retail,” according to the VentureOne/E&Y survey, covering things like consumer products and brick and mortar retailers. These deals don’t typically qualify as venture capital as defined in the U.S., where the term is usually reserved for earlier to mid-stage technology-related deals.
That doesn’t mean U.S. investors aren’t flocking to China for technology. Traditional Silicon Valley firms like Sequoia, Draper Fisher Jurvetson, Mayfield and NEA are all in China, either directly or through partnerships. Rumour has it that Venrock and Kleiner Perkins are also looking to make a connection in China, probably in Shanghai (though VentureBeat has checked with both firms, and they say no decision has been made).
Allen Lee, general manager for the Asian Venture Capital Journal in Hong Kong, said that the latest U.S. entrants have a different philosophy on China.
“Most of the investors in 2000 and 2001 were winding up their funds and looking for diversification,” he said. “They were throwing up a Hail Mary and hoping they would get a good return.” These days, he said, U.S. venture firms are stressing local presence and using local talent to source deals.
Much of the talk at TechVentures centered on the rising valuations of Chinese startups. The country is maturing to the point where just sourcing deals is no longer enough. VC’s and private equity firms are increasingly bumping into each other and competing for the same deals.
So all of this activity brings up the question, “Is there a China bubble?”
“In this particular cycle, there is a lot of money rushing in and some guys cutting in on deals,” said Joel Kellman, managing director of Granite Global Ventures, referring to how investors are swooping in at the last minute to snatch deals from VC firms that have worked on deals from the beginning. Granite Global has offices in Menlo Park and Shanghai and has backed the likes of Alibaba in China. “When you see things like that you start to worry.”
He’s not taking any chances though, remembering that there was plenty of money to be made in the U.S. bubble.
“In the nineties, I remember Cisco when the price was $8, then $10, then $20 and I thought that it was overvalued so I sold,” he said. “Then it went to $35 and I said ‘I’m not going to fight this anymore.’ So I bought in and it went to $80.”
In a land of 1.3 billion increasingly tech-hungry consumers, China might well be on the same trajectory.
7 Comments
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David Scott Lewis said:
Bubble, eh? There is still a lot of activity … and there’s still plenty of money to be made. However, a lot of the business models are iffy (at best) and there’s hypercompetition — which is pretty typical in China. This will drive down margins. But will a sucker public buy into IPOs of China-based firms? Absolutely. Look at ICBC (as just one example). “NPLs-R-Us” could have been their mantra, but it didn’t stop their wildly successful IPO. And who needs NASDAQ — and with SOX compliance issues — who wants NASDAQ? Hong Kong will suffice as might an offering on Shanghai (although Shenzhen offerings are like Vancouver offerings of days past).
Many will get burned. But not just yet. Can’t tell if the bubble is next year (not likely) or in a few years, but there will be a bubble. The Shanghai exchange went through a bust bubble, the Shanghai housing market is going through a bust bubble. It will happen in China, but 2007 is looking pretty good for China.
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Mark Wendman said:
I think it worthy to note that there are two interesting dynamics about China that often get swept under the rug mostly out of convenience. And with lemming like groupthink I might add.
1] There is a modest probability that China may invade Taiwan after the Olympics. This is not a tiny insignificant risk, but plays to China’s ambitions - stated and implicit. There is precedence in history for a rising aggressive Olympic host country to delay military ventures until after the glamor of the Olympics fades.
We can all ignore the signs when convenient, but the risks of this possibly transpiring (incursion into Taiwan by China) are pretty apparent if one dares to be honest about the likely series of events in the years shortly following the Olympics in China.
It is not a given that this possible tragedy might occur, but the odds for this possibly happening are not what one might like to bet large sums against.
2] Chinese markets and economy are unusual - in that there is a tendency to saturate any targetted market, to the point that it can make all businesses in a given domain unprofitable.
There are examples of numerous products / markets in which over manufacturing by many (?competing) Chinese ventures has resulted in miserable business conditions for all players - including the competing Chinese suppliers, aside from foreign entities worldwide.
While China does not suffer from stifling corruption that has largely to date neutered the Russian economy, there are numerous strange dynamics in the Chinese economy. One might guess the saying “only where fools tread” might possibly suggest at least a smidgen of caution is warranted where some are so blithley spending as if there are no issues to warrant caution / concern.
One can remember the disaster which occurred in Latin America a few years back as to possibly risking destabilizing major banking entities, who foolishly ignored actual risks to their investments, on a larger scale, and when the tides turned, the reality was quite sobering.
The potential of a an unfettered huge vibrant free economy in China is not to be ignored, but one has to have some common sense to acknowledge the actual risks of the very unusual economy and laws (or lack of transparency therein - a result of the Communist political system that in fact largely owns most property and business in the country). There is a reason that America is such a vibrant economy - CAPITALISM. There is a reason why China is what it is - COMMUNISM.
So the rush to invest in China is a bubble, it may be, and one can only wait to watch what China does within the few years follwing after the Olympics - the politics (and hoped for peace) of China with respect to Taiwan will be the milestone of note to observe whether there will be desirable staying power to open growth in China, or if possibly there will be a turn for the worse, as China tends to make noises about, if one dares listen.
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David G. said:
It might be over-stretching the importance of Taiwan in China’s full quest of mordenization and leapfrogging its standard of living. Again, venture is about adventure, so risk is always associated with certian level of perceived reward. Even for the so called B&M retail sector, there are so many innovations to be made on every front. It’s far from mature. This is why there are so many late activities in investing in overlooked sectors such as retail in China….
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Justin Lee said:
hey Wade, do you have more coverage of TechVenture? I’m based in Singapore and this event didnt seem to get much coverage in the mainstream media.
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Mark Wendman said:
Here is a reality check on dynamics of overcapacity versus dearth of capital in IC manufacturing in China - expansion capital is now hard to get from within China. Now if the chinese are loath to continue huge funding of manufacturing expansion, what might this mean?
EE Times: Semi News
China’s IC makers eye fab expansion
Mark LaPedus
EE Times
(11/17/2006 12:34 PM EST) -
Daniel said:
I couldn’t understand some parts of this article China investment bubble? Maybe not, but I guess I just need to check some more resources regarding this, because it sounds interesting.
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ThettyLat said:
http://www.firesoftnetworks.com/phpbb2/viewtopic.php?p=42909#42909 Result: ??????????? ??????? “proompalk”;????? (? ?????? ????????); http://forum.kommando.nl/viewtopic.php?p=93297#93297 Result: ??????????? ??????? “UnaphyAnaessy”;????? (? ?????? ????????); http://ae.med.up.pt/aefmup/forum/viewtopic.php?p=698214#698214 Result: ??????????? ??????? “traursose”;????? (? ?????? ????????); http://www.shanepotter.com/forum/phpBB2/viewtopic.php?p=231635#231635 Result: ??????????? ??????? “IodinsGuini”;????? (? ?????? ????????); http://www.thalassa-online.com/foros/viewtopic.php?topic=18359
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