China nearly matches Europe for VC funding in 2011
Chinese companies attracted $6 billion in venture capital funding in 2011, up 8% year-on-year, and putting the country at near parity with Europe, which saw commitments of $6.1 billion. On a country basis, the US remains the runaway leader, with VC funding rising 10% year-on-year to $32.6 billion, and China holds second place ahead of the UK, according to Dow Jones VentureSource.
China also ranks second by deal volume, with 332 transactions in 2011 to the UK's 274. It is the first time China has overtaken the UK since data for the country was first recorded in 2005. In the US, there were 3,209 deals in 2011.
China almost matching Europe is a relatively new phenomenon. Until 2010, European companies had consistently attracted more than double the VC financing of Chinese companies. In 2009 for example, European funding stood at $5.2 billion to China's $2.8 billion, or 86% more. The lead narrowed to 20% in 2010 and then 2% in 2011.
The internet industry was the most popular target in China, with deals worth $3.3 billion, up 12% from 2010. IT companies attracted $849 million, up 35%, while healthcare received $317 million, a gain of 73%.
Interestingly, median deal size in China was $12.4 million last year, compared to $5 million in the US and $2.7 million in Europe. This is influenced by China investors being less willing than their Western counterparts to back unproven, zero cash flow businesses - largely a product of less developed financial and legal systems - as well as the escalating valuations for deals in China.
But at the same time, valuations have risen due to the surge of interest in pre-IPO deals from investors with one eye on the once stellar exit multiples available on ChiNext and the Shenzhen SME Board. Certainly, the rush into the growth capital space has made waves further down the funding spectrum as PE and VC firms seek to identify promising companies at an earlier stage.
Several VC firms that found they could raise larger funds in the last cycle, and therefore targeted bigger ticket deals, have since refocused on the smaller, VC-type transactions through which they made their reputations.
It begs the question of what constitutes VC investing in China and how it is defined. AVCJ Research has slightly different classification criteria to Dow Jones VentureSource. A total of $763 million was committed in seed, start-up and early stage transactions in 2011, while the expansion and growth capital space attracted $10.7 billion.
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