China VC activity will continue to thrive - AVCJ Forum

"There are a few unicorns emerging in China and their M&A activity is very vibrant," J.P. Gan, managing partner at Qiming Venture Partners, told the AVCJ China forum. "Asian markets, including Hong Kong, and the US market have given rich valuations to many VC-backed companies and people have made a lot of money. Therefore, people are getting greedier and greedier, which is driving a lot of deal activity and pushing up valuations."

The level of venture capital investment in China is also linked to overseas markets. Last year, US-based VC funds raised more than $30 billion, double the amount raised in 2013. In China specifically, the government is pledged to reform the capital markets, providing more domestic exit options for VC investors.

"The GEM board is open for business again and there is a lot of excitement about the NEEQ [National Equities Exchange and Quotations], the New Third Board. In 4-5 years' time you will see that engine is growing as well," said Jeffery Chin, vice chairman and managing director of Vickers Venture Partners. "A lot of the investment is not necessarily from the US dollar funds, but also on the renminbi side. For the first time in a long while, renminbi funds have viable exit paths. This is an interesting time."

He added that, 5-10 years from now, renminbi convertibility will be more advanced, which means the variable interest entity (VIE) structures will no longer be an issue for US dollar funds investing in Chinese companies.

William Bao Bean, a partner at SOS Ventures, pointed out a significant change in the nature of capital committed to early-stage companies in that there is much more "smart money" available.

"In the past, there was a lot dumb money. People invested in the areas in which they didn't have a lot of experience," he said. "At least now in the early stage, people have been working in the internet industry for a long time. Entrepreneurs have some exits and then they put the money back in. The money is smarter. Secondly, many of these companies have revenue, which is nice."

There are several Chinese "unicorns" - companies that have achieved a valuation of $1 billion or more - such as smart phone maker Xiaomi and listings and group buying service Dianping. They continue to raise private capital and secure debt from commercial banks, even though they are ready to go for IPOs, which in turn drives up the ticket size for VC firms looking to participate in later-stage rounds.

Valuations have become inflated across the full spectrum of VC investment stages, including angel rounds. The average pre-Series A round has risen to $2 million from $300,000 three years ago, Bao Bean said.

There are inevitably concerns about another internet bubble is emerging. However, Gan argued that "calling a bubble too early is almost as bad as being in the bubble." All factors have to be viewed differently because the commercial environment is very different from 10-15 years ago.

Firstly, there are now 700 million Chinese internet users - about half of the population - up from fewer than 50 million 10 years ago. Most of them have smart phones. Secondly, on the e-commerce side, most consumers didn't even have credit cards or debit cards. Now they can use instant-messaging apps such as WeChat to make payments via their mobile phones.

Moreover, the Chinese logistics system is getting more efficient - it costs just $1 to deliver a package from Shanghai to Beijing.

"All these things are changing, and then there is cloud computing, big data and artificial intelligence. All these technologies come together at this point - we are living in a different world from 15 years ago," said Gan.

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• Topics
• Venture
• Greater China
• Early-stage
• Exits
• China
• Venture
• Exit
• IPO
• Qiming Venture Partners
• SOS Ventures
• AVCJ Events