As China’s economy keeps growing, it’s no surprise that venture-capitalists are investing there at a rapid lick. A 20 July report on venture-capital funding in China – from analysts Lux Research – notes activity at an all-time high of $5.4 billion in 2010, an 80% increase on 2009’s $3.1 billion (see chart, and press release [pdf]). And 40% of that sum went into emerging technologies – chemicals, materials, energy and healthcare.
That’s quite a shift from 2007, notes Chris Hartshorn, vice-president of research with Lux Research in Boston, Massachusetts, when just 20% of China’s VC investment fell in these areas (with the rest on more consumer-facing sectors such as retail, telecoms and IT).
Admittedly, $5.4 billion is just a quarter of the $21.8 billion VC funds poured into the United States in 2010. But, after the economic crisis, the United States has only just recovered to 2004 levels (last year’s 19% rise for US VC funds was the first time annual investment had increased since 2007). China is starting to catch up.
Where is the money going? Within the emerging technologies arena that the Lux report analyses, some of the highest interest falls squarely into China’s traditional strengths – composites and advanced materials (28 deals totalling $388 million). That same research theme is evident in another Lux-defined sector, ‘Green building’ ($516 million) where typical investments are made in LED and lighting companies, and in producers of thermal insulation. Energy storage and solar power (together, $255 million) and the pharmaceutical sector ($494 million) rounded off the top areas.
While total investments are shooting up, the size of each deal is getting smaller – because much more VC activity is being focused on the earliest-stage, most risky investments (small firms making what are known as ‘Series A’ funding rounds). “There’s an increasing proportion of activity at the front end of the VC pipeline – meaning a higher proportion of early-stage innovation is being invested in,” notes Hartshorn.
Compare that to the States, where, since the economic crisis, VC investors have preferred to stick to larger, established private companies in later rounds of fund-raising. They must keep their portfolios afloat, and are moving away from the greatest risk. There’s enough critical mass to keep investing in small biotech companies, says Hartshorn, but the physical sciences space – such a focus in China – is having less success in the States.
Back to China, Hartshorn adds that foreign VCs are taking a quite different approach than those based within the country. The domestic VC industry focuses heavily on those most-risky, series A rounds. Those coming in from outside tend to focus on larger private companies at later stages of fund-raising, and concentrate large portions of their cash in Beijing and Shanghai. They are also largely ignoring advanced materials and the (small) biotech opportunities in China, leaving those fields almost entirely to domestic investors.