Local VC firms hunker down, shift focus

Chinese venture capitalists are taking advantage of the finance industry's sag to strengthen their hand in negotiations, evaluate their investment options more carefully and to build up the investments they've made over the past few years.

Companies' nosediving price-earnings ratio in the stock market along with tightened financing channels for start-ups certainly gives venture capital firms more bargaining power when making deals, said Xu Xin, managing partner of Capital Today, at the 2009 Piper Jaffray and ChinaVenture Investment Conference in Shanghai.

"We have more time to make investment decisions since the competition for a promising project is not as fierce as before and the number of cases we're dealing with this year is half of last year's," said Kuang Ziping, founder and managing director of Shanghai-based Qiming Venture Partners, which has invested in over 30 Chinese companies so far.

"Economic conditions such as these are the perfect time to review the projects that we have already done and test the quality of these firms, which is often difficult to do when the venture capital market is red-hot," said Capital Today's Xu.

Capital Today was set up in 2005 and independently manages a $280 million fund.

"We are shifting our business focus to helping companies grow and deal with the challenges they meet. About half of our time is spent on this now," said Shen Nanpeng, founding managing partner of Sequoia Capital China (SCC).

SCC, a three-year-old firm, has reportedly put cash into over 50 domestic start-up businesses by the end of 2008.

SIG Asia Investment LLP is also spending more of its time (as much as 70 percent of it) managing firms it has pumped capital into, said SIG's managing director Gong Ting.

Seasoned venture capital firms say the drooping market and the current hold on IPO activities are no concern.

"Going public is just one part of the venture capital industry. If the equities market loses its financing functions, then companies' value can also be passed down through methods, such as dividend sharing," said SCC's Shen.

"Cash flow, rather than the scale of a company, is the key to weathering economic hardship," he said.

"We could seek liquidity through the secondary market but IPOs are not our final target when we invest in companies. Good companies have other financing channels even in tough times," said SIG's Gong.

There may even be some good investment opportunities in the near future. Businesses in cyclical industries, such as the auto industry, are worth attention and may pay back handsomely when the market picks back up, said Shen.

Chinese venture capital firms experienced heady growth in recent years, prior to the global economic downturn.

The total amount of venture capital invested in China tripled in 2007 (to 39.8 billion yuan) and the domestic venture capital market attracted 101.9 billion yuan in 2008 (most in the first half of the year), according to the China Venture Capital Research Institute.

But growth has ground to a halt. There were only five venture capitals deal in China in February (down 66.7 percent from the same period last year), none of them involving a domestic venture capital firm, according to ChinaVenture, a research firm.

The accumulated venture capital pumped into Chinese start-ups this February was $54 million, a 61.7 percent year-on-year decline.

(China Daily 03/30/2009 page4)