Silicon Valley is back as China motors on

Fast forward to a Thomson Reuters and the National Venture Capital Association (NVCA) release on January 3, 2011 which reported that Q4 2010 venture-backed IPOS more than doubled over Q3 of 2010 to 32. "The quarterly volume was driven by 17 Chinese companies funded by US venture capital funds that went public on US exchanges. For full-year 2010, there were 72 venture-backed IPOs, the biggest year for activity since 2007. Over 400 acquisitions were completed during 2010, making it the biggest year by number of deals for venture-backed M&A exits since records began in 1985."

Today, social networking and its fast-growing progeny are the Valley's hottest ticket. The iPad, 4G smartphones, and a galaxy of internet savvy devices are rolling off the assembly line.

One trend that is clear is that decisions made during the depths of the crash in 2008 are impacting the situation today. One fund manager reports that Kleiner Perkins, which dove deeply into the alternative energy field, is quietly realigning its portfolio. "They are moving back toward their traditional strengths in the Internet area," he says. Ted Schlein, Managing Partner at Kleiner Perkins, however, notes that the firm has "always been very focused on digital and continues to be focused on greentech as well." He points out that KP has recently made high profile investments in digital such as GroupOn and Twitter while continuing its commitment to greentech. Of course, the question is, at what valuation those investments were made? Firms like Accel and Greylock, who made early decisions to support Web 2.0, invested at low valuations two years ago.

Trading in unlisted securities

Another trend is the development of markets in unlisted securities. That is, trading in the shares of private companies that are not required to publicly announce their financial results. Facebook's imputed market value has rocketed from $4 billion in 2008 to over $50 billion in 2011. Assuming $2 billion in revenue and $1 billion in 2010 pre-tax profit, the multiple is a staggering 25x. In the past several months, discount coupon provider GroupOn turned down a $6 billion offer from Google; assuming $700 million in revenues, $300 million in NOI, the multiple was 8.5x. Game-developer Zynga has been valued at $5.5 billion; and, message-service Twitter reportedly carries a $3.7 billion valuation. Mark Murphy, Head of Public Affairs for SecondMarket, Inc, one of the leading trading platforms, points out, "We have done $500 million in private company transactions since our market launched in April 2009. Of that $400 million was in 2010."

And, the platform is moving into Asia. "There have been and are transactions underway," says David Berger, Vice President, Business Development - Asia. "These are mainland companies with ‘Red Chip' structures that we expect, over time, to work with us to develop controlled shareholder liquidity programs," he adds.

Like anything, the SecondMarket platform does have its risks. There are potential liability issues if valuations turn south. But, the platform gives employees a way to cash in their options during a company's gestation period.

China

As for Chinese VCs investing in the US, Gary Rieschel, Founder and Managing Director, Qiming Venture Partners in Shanghai, notes that many of the name companies (Tencent, Baidu, Alibaba) "have very active business development teams looking for M&A opportunities." But, "Chinese VCs are not looking at the US because why would you? All the growth is in China! And the success rate of US companies coming to China has been very low, at least on the Internet." He thinks that for other technology areas such as cleantech and healthcare, more US technology companies will partner with local Chinese firms and investors in China.

"In China you are seeing the real breakout of the Internet models - large scale video, large scale e-commerce, large scale mobile gaming all emerging simultaneously. But China will prove to be a much more difficult market to have a winner-take-all situation the way the US was with EBay, and Amazon," says Rieschel.

LPs and Fundraising

The shakeout in the fund raising market unfortunately continues. LPs are still nursing their wounds from the crash, which impacts the amount of capital they are willing to commit and improves the terms they get. And, with all eyes on China, VC groups are having to do more to prove the opportunity set and that they can make money in this market.

 

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• Topics
• Venture
• North America
• Greater China
• Gary Rieschel
• Kleiner Perkins Caulfield & Byers
• Qiming Venture Partners