Venture Capital Investing in China Grows 47% in Third Quarter Compared to Last Year

Market Wire, November, 2006

Venture capital activity in companies headquartered in mainland China is on course for a record-breaking year, with 54 deals and $361.1 million invested in the third quarter of 2006, according to the China Quarterly Venture Capital Report released by Ernst & Young and Dow Jones VentureOne, the publisher of the VentureSource database. Deal flow rose by 16 deals from the same quarter of last year and capital investment increased 47% from the same period.

Through the first three quarters of the year, there has now been $1.18 billion directed to 145 deals, putting 2006 on a clear path to surpass 2005's year-end total of 151 deals and $1.20 billion, and evidencing China's growing maturity in the global venture capital market.

"China is becoming a center for technological innovation. Against this backdrop, we are seeing the venture capital cycle progress and financing activity mature," said Steve Harmston, director of global research at VentureOne. "Investors are putting larger sums into individual companies to ensure global competitiveness -- with the median round size reaching $5 million, the highest on record -- and are directing investments to an increasing number of second- and later-round financings."

While seed- and first-round deals continued to make up the majority (70%) of deal flow in the third quarter, there were 14 second or later round deals this quarter, up from 10 in the same quarter a year ago. In addition, the amount of capital directed toward these later rounds, $139.7 million, was 57% more than was invested in similar rounds last year. On the other side, there were 38 seed- and first-round deals in the third quarter, an increase from the 25 that occurred in the third quarter of 2005. The capital investment to these rounds was $216.6 million, a 65% increase in capital from a year ago.

"While early-stage investing dominates the venture capital landscape in China, many of these companies have already achieved a level of business maturity that surpasses their U.S. venture-backed counterparts. For example, 69% of the companies funded in the third quarter in mainland China are already shipping product, compared to 56% in the U.S., and 22% of the Chinese companies are already profitable compared to 7% in the U.S.," said Bob Partridge, China leader of Ernst & Young's Venture Capital Advisory Group. "This illustrates the fact that there is a solid foundation of successful and competitive businesses underlying the investment activity in China."

By industry, information technology (IT) remains the stronghold for venture capital activity in China in the third quarter. There was $221.8 million invested in 34 IT companies in the third quarter, an increase of 85% in capital and nine more deals than a year ago. Within the IT industry, the Internet-focused information services segment continued to draw the most activity, with 22 deals and $136.2 million invested. This is 13 more deals and $71.3 million more capital than was invested in the third quarter of 2005. KooXoo, a category message search engine based in Beijing, received a $10 million second round, which was among the largest information services deals of the quarter. The largest deal overall was the $35 million later-stage financing for Advanced Micro-Fabrication Equipment, a semiconductor company based in Shanghai.

Investment in emerging areas such as energy is growing as well this year. There were three energy deals in the third quarter and $8.70 million invested in them, compared to zero in the third quarter of 2005. For the year as a whole, there have been six energy deals to date, compared to one in all of 2005.

Investment in the business and consumer services category also increased, with 17 deals, nearly twice as many as a year ago, and $130.6 million invested, a 7% increase. Within this category, the business and consumer services segment posted the most activity with 12 deals and $88.4 million invested, which is twice as many deals as the same quarter of last year and 9% more capital. The health care category in China faltered in the third quarter, with no deals completed.

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.

Copyright © 2006, VentureOne.

About VentureOne

Dow Jones VentureOne ( www.ventureone.com and www.venturecapital.dowjones.com ), a unit of Dow Jones Financial Information Services, has been the leading provider of finance and investment data to the venture capital industry for almost 20 years. With an office in Shanghai, it has been tracking the venture capital market in mainland China, Hong Kong, and Taiwan since mid-2005. VentureOne also has offices in London, New York and San Francisco and tracks venture capital activity in Europe, Israel and the U.S. Dow Jones VentureSource, a sophisticated electronic database on the venture capital industry, is published by VentureOne.