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Venture capital quietly coming of age in China

(Agencies)
Updated: 2008-05-05 14:18

China is flush with entrepreneurs boasting newly acquired riches, but young investor Chen Hao believes a key ingredient is still missing from the country's modernising economy: more venture capitalists.

"We have loads of home-grown entrepreneurs but no real capitalists," said Chen. The 25-year-old is one of the few independent investors working in China's fledgling venture capital market.

"China is 50 years behind the US in this area... and my generation is going to have to fill this gap," Chen said at his somewhat rundown office bordering Shanghai's financial district.

Figures show some of the most active venture capital firms in China come from the US, but Chen said he believes it is only a matter of time before Chinese venture capital booms.

The son of a wealthy chemical manufacturing entrepreneur, Chen is a child of privilege. He grew up in the lap of luxury thanks to his father's success as China embarked on its long march toward market reform.

Foregoing the shelter of his father's firm in Jiaxing, one of the founding towns of China's Communist Party, Chen plunged into the uncharted waters of China's underdeveloped but fast growing venture capital market three years ago.

Initially backed by his father, Chen made his first financial foray in a small information technology start-up, before eventually folding his equity into Blue Ocean Angel Capital.

Blue Ocean, a $30-million investment firm he manages with five partners, has quietly prospered, building a portfolio of eight start-ups by investing a total of 50 million yuan ($7.1 million).

Venture capitalists put $3.25 billion into Chinese start-ups last year, 82.7 percent higher than in 2006, according to figures from Beijing consultancy Zero2IPO Group. The numbers suggest the market is gaining traction.

Major venture capital firms like IDGVC Partners, founded by Boston-based International Data, have cultivated local start-ups such as Nasdaq-listed online travel service provider and outdoor advertising firm Focus Media.

Despite these successes, Chinese venture capital firms remain behind their Western counterparts due to a lack of credibility and transparency in China's legal system, said Chen.

"In terms of laws and credibility of the entire society, the environment is not matured yet," said Chen, chief managing partner of Blue Ocean.

"If I as investor plunk cash in an enterprise, the question remains whether the management will make good use of the money to bolster the development of the firm or will they serve only their own interests."

In fact, the massive investment that has spurred China's meteoric economic rise over the last decade has mainly come through government-led programmes.

By comparison, in the US venture capitalists invested $29.4 billion last year, according to data provider Thomson Financial.

US venture capital firms invested $1.39 billion in China, an all-time high, it said.

Three of the five most active firms in China came from the US, with IDGVC Partners ranking at the top, the figures showed.

But local venture capital funds saw their portion nearly double in 2007 to about a quarter of total investment.

Indeed, China's growing wealth means more people are looking for returns on their investment, especially as over-invested real estate and stock markets are losing their appeal.

"Each month many private company owners or second-generation rich kids come to solicit my opinions on starting a venture capital firm," said Parry Yang, the CEO of intermediary agency U2IPO.

"An increasing number of property developers are shifting to the venture capital industry."

Although venture capital is catching on, Foo Jixun, partner of Silicon Valley-based Granite Global Ventures -- which helped nurture Hong Kong-listed e-commerce firm Alibaba -- said local venture capital firms have a way to go before they can rival foreigners.

Foo predicted more domestic venture capitalists will join the lucrative industry, even though foreigners will continue to dominate over the coming three to five years due to the lack of expertise at local firms.