Corporate venturing in China more than trebled last year to $760m and companies invested nearly $2bn between 2007 and 2010.
Martin Haemmig, senior adviser on venture capital at Stanford University and international adviser to the Shanghai Venture Capital Association’s (SHVCA) event, Corporate Venturing in China: New Ways of Innovation for Chinese Corporations, said corporate venturing units backed 94 deals, 8.1% of the total venture capital market, between 2007 and 2010, using information from data provider Dow Jones.
Intel Capital was the most active corporate venturer with 20 rounds in Chinese companies, followed by Disney’s Steamboat Ventures.
Haemmig, said his research using information from data provider Dow Jones showed there was relatively few venture investments in pre-revenue Chinese companies. He said 3% of money went to start-ups or for product development versus 68% for companies with turnover but making losses and 17% for profitable companies. By comparison, a third to a half of venture money in the US and Europe last year went to pre-revenue businesses.
The focus on later-stage investments has coincided with a boom in flotations, with 183 venture-backed initial public offerings (IPO) raising more than $25bn on Chinese stock exchanges in 2009 and 2010. Delegates at the event said their biggest concern was the rush by corporations and other investors to back pre-IPO companies was driving up prices and fuelling a bubble as the authorities had limited the capital that could flow into property speculation and the stock markets directly.
Haemmig said over the next two to five years there would be a "massive change" in the type of exits, with an increase in acquisitions by foreign companies and local companies also trying to move beyond manufacturing into innovation through alliances and takeovers.
Haemmig said there was a greater focus on innovation in business models and investment in new services in China and emerging markets versus developed economies where the focus was more towards new technologies. He said: "For that reason many western companies struggle to make an impact in China: because they do not understand business model innovation."
China’s venture capital industry has followed the same path as the country’s general industrial policy of building capacity and then replacing foreign products.
John Chiang, Professor at the Department of Technology Management and director of the Global Innovation Research Center at Peking University, in a talk at the SHVCA event said China’s economy had gone from total ruins to the world’s second-biggest within 30 years and local currency venture funds had exceed US dollar-denominated funds in 2009 and now made up 90% of current fundraisings.
He said the replacement of foreign venture funds was less controversial than for other products but part of the larger National Innovation Drive by China.
Chiang’s talk on the Status of Government Rules and Regulations for Corporate Venture Capital & Venture Capital in China said making and sourcing products in China was well-established but creating local innovation partnership was "the big opportunity, but more challenging".
He said large corporations did not buy from start-ups unless they had at least $50m in revenues and when they took equity through corporate venturing they wanted a large say in the portfolio company’s strategy.
He said, therefore, that in Chinese venture capital, "everything is possible, but nothing is easy".