China's placid venture capital (VC) sector will return to the limelight this year driven by improved sentiments with the launch of new board for start-ups and strong influxes of foreign fund, a leading mainland VC research company forecast.

A three-year depression followed the bursting of the Internet bubble in 2000, but China's VC industry showed signs of recovery in 2003 with soaring investment and this year is going to be a turning point, said Gavin Ni, CEO of Beijing-based Zero2IPO.

Last year's VC investment amount totaled nearly US$1 billion, doubling the previous two years' figures, Zero2IPO's researches indicated. The company collected data from 55 of the mainland's most active VC firms.

In the first quarter of this year, 35 foreign and domestic VC firms invested US$216 million in 33 mainland or mainland-related companies, a sharp increase from about US$60 million in the fourth quarter of last year, according to Zero2IPO's quarterly survey.

And the activity index of investment for the first quarter reached 108.33, the highest level since the company conducted the survey at the beginning of last year. The figure represented a more active participation of VC firms.

"The figures are expected to be further improved in the rest of the year since the launch of the board for the small and medium-sized enterprises (SMEs) is really good news for the VC industry," Ni said.

"Although it could hardly directly help the industry at the moment because of its strict requirements, it has lifted sentiment in the industry and encouraged the participation of VC firms," he added.

As a sub-board of the Shenzhen stock market, the SMEs board adopted the same listing standards as the main board, requiring that the original shareholders in listed companies do not sell their stakes for three years, something which still keeps many VC-backed SMEs out of the capital market and fails to serve as an immediate exit channel for venture capital.

Foreign VCs will continue to lead the way but domestic VCs, after a round of adjustment, will become more dynamic, Ni forecast.

Of the US$216 million VC investment in the first quarter, about US$185 million - 85.6 per cent - was invested by foreign VCs.

"China has become a new stage for the world's top VC firms. Leading VC firms such as New Enterprise Associates, DCM-Doll Capital Management from US, 3i from UK and Jerusalem Venture Partners from Israel have invested in China's growing companies since 2003," Ni said.

As a result of a fund shortage, domestic players are seeking new deals and will act as soon as they realize liquidity from their investment two or three years ago, he noted.

As a firm believer in China's VC industry, the Tsinghua University graduate founded the company in 1999 and focused its business on a variety of advisory services in private equity including investment and fund-raising advisory, IPO and M&A financial service, portfolio management and management consulting.

"About 80 per cent of listed companies on the Taiwan stock market are VC-backed companies, and about 60-70 per cent of NASDAQ-listed companies also received VC investment. This situation will apply in the Chinese stock market in 10 to 20 years," said Ni.

"We expect that at least 50 per cent of China's top 100 magnates as selected annually by Forbes magazine will come from VC-backed companies in 10 years," he said.

The company will host its biannual VC forum, the largest non-government event for the VC industry, from July 22 to 23 in Shenzhen's Pavilion Hotel. It will deal with hot topics such as the new China strategy of foreign VCs and new trends after the launch of the SME board.

(China Daily July 14, 2004)