Wu Bo calls Zhou Quan the great leader.

Wu, the chief operating officer of the biggest professional Chinese financial information provider China Finance Online (JRJ), has every reason to say so, as Zhou, managing director of the venture capital (VC) firm IDG Technology Venture Investment, funded JRJ, saved it from bankruptcy in 2000 and helped it make an initial public offering (IPO) on the NASDAQ stock market in October.

The returns for Zhou are also very good, as IDG's investment into JRJ have already grown by over 60 times.

JRJ's cycle is just like that of the VC sector in China: from a cold winter period in 2000 to a booming spring in 2004.

All-around recovery

According to Beijing-based professional VC industry research company Zero2ipo.com Ltd, the total amount of VC investment in China reached 1.27 billion yuan (US$153 million) in 2004, breaking the 1 billion yuan (US$120 million) level for the first time in history.

The number of invested projects rose by 43 percent during 2003, while that of investment volume grew by 28 percent.

"After years of hard work, the VC industry finally saw some hope and the dawning of prosperous development in 2004," said Zhang Jing'an, secretary-general of the Ministry of Science and Technology, who has been a strong supporter of the development of the VC industry since the late 1990s.

VC was a hot topic in 1999 and 2000 during the Internet boom, but when the bubble burst in late 2000, it was believed to enter a cold winter, with less open arms from stock markets and difficulties in the technology industry.

The attraction to the Chinese economy's rapid growth is a key factor to the recovery of the VC sector.

Wayne Tsou, managing director of Carlyle Asia Investment Advisory Limited, with US$1.4 billion capital under management, said: "We know VC firms always follow opportunities of high growth and high profits, but where else can we find another market with such growth like China and with high profit yields?"

Garvin Ni, president of Zero2ipo, said at the Zero2ipo China Venture Capital Forum early this month in Beijing that it was expected there is over US$15 billion in venture capital available to be invested in China.

Another sign of increasing interests in the Chinese market is the amount of capital raised this year.

Zero2ipo's statistics indicated 21 VC firms raised US$699 million of capital this year, compared with US$400 million in 2003.

Besides the prospects of the macro-economic situation in China, an improvement in exits of venture capital is a direct push to rising enthusiasm of venture capitalists.

In 2004, 24 VC-invested Chinese companies made IPOs and raised US$4.3 billion from stock sales, according to the Zero2ipo statistics.

Ni said VC firms exited their projects with US$800 million in returns, compared with US$210 million last year.

Softbank Asia Infrastructure Fund (SAIF) invested US$40 million into the biggest Chinese online game operator Shanda Interactive Entertainment in March 2003 and the investment saw 10 times its returns in just 14 months, when Shanda's stocks were listed on the NASDAQ in May. Zhang cited the case as a landmark of the recovery of the VC sector, together with the IPO of the biggest Chinese semiconductor maker, Semiconductor Manufacturing International Corp.

Frequent acquisitions also offered an exit to many VC companies to withdraw from invested firms.

Shanda bought stakes in six companies this year, helping many VCs exit from the firms.

An even hotter future

Despite the hustle and bustle of the VC business this year, the recovery has just started and is expected to continue in the next few years.

Zero2ipo's Ni predicted China will become the second largest VC market after the United States in five years, although it is still very small, compared with Singapore and Israel.

The increasing strength of the country's economy and its technology industry, as well as about 10 times of average returns in two years will continue to attract VC investments.

He said some big-name VC firms have already contacted his company to learn about the market and make arrangements for entering the world's most populous market in January and February.

With the rising interests of VC firms and the trustees of their funds, the capital available on the market is expected to create another record.

The possible IPOs of some big firms like the business-to-business e-commerce provider Alibaba.com and search engine provider Baidu.com will also push the IPO volume to a new height.

Li Jianguang, vice-president of IDG Technology Venture Investment, the most active VC firm in China, said his company will add a new fund with US$50 million next year, pushing the total capital under management to US$150 million.

IDG's investment scope will also be expanded from traditional high-tech information technology to media businesses, especially those with mature business models and good profit-making abilities.

Joe Zhou, a director with SAIF, said his company will also add a new fund next year. More importantly, it aims to form a limited partnership company in China, following the suit of the first company IDG Technology Venture Investment.

Limited partnership is a popular organizational form for VC firms in many countries, in which partners only have limited liabilities with their investment, but Chinese laws do not have regulations on such a form and only a temporary regulation issued in 2003 by the Ministry of Commerce gave the form a green light. However, a lack of concrete procedures and rules is still a major problem.

Zhou said SAIF is in talks with several potential projects, which may involve US$100 - US$200 million.

The focus of SAIF will be placed on semiconductors, personal computers, broadband applications, online services, digital TVs, and Internet TVs.

He hopes his company will see four to five invested projects make IPOs, if the market environment is favorable.

Ruby Lu, a principal of California-based Doll Capital Management, which invested into the NASDAQ-listed Chinese job recruitment service provider 51Job, said her company will invest as much as US$80 million in three to four years.

Risk of overheating?

However, just like some foreign investors who were worried about an overheating Chinese economy in the first half of this year, too many VC firms investing at the same time may also bear a risk of an overheating in the VC sector.

IDG's Li pointed out that the boom of the VC sector is related with the increasing demands of US consumers for Chinese goods and China's rapid economic growth, but how long these two conditions will last is still a question.

"My feeling is there will be some bubbles rising in the VC sector and maybe in one year's time, all of us will have to go back home, with nothing to do, so I suggest our colleagues have a sober understanding of the market situation," he said.

Zero2ipo's Ni also said the research of his company showed the valuation of some projects was very high, because many VC firms competed for high-quality targets.

Some VC firms complained many VC firms simply fly to China and fight for several good projects with high prices, but the market order is disrupted and such activity is not good for a healthy industry.

York Chen, managing director of Acer Technology Ventures Asia Pacific Ltd, also warned the exit mechanism is not so well-established as the wave of IPOs suggested this year.

It was estimated that only 15 percent of VC-invested projects can make successful IPOs, which is actually a very low ratio.

He said although China launched the medium and small-business board on the Shenzhen Stock Exchange in June, which may be a good channel for VC companies to exit, fraudulent firms and some low quality firms have cast shadows on investors.

Lack of a comprehensive legal framework about exit channels, capital management, and legal responsibility will remain major concerns for venture capitalists, especially domestic VC firms, which are small and lack channels for raising capital and exits, compared with their foreign counterparts.

(China Daily December 29, 2004)