China's VC Outlook Improves Despite Global Recession

Venture capitalists increasingly turn their attention to investment opportunities outside of the U.S., according to several recent industry reports. Though the U.S. continues to dominate the global venture industry, the current economic crisis has negatively affected national fundraising, investment and exits. At the same time, venture investment outside the U.S. reached a record $13.8 billion in 2008, a five percent increase over the previous year. China, India and Israel in particular have made strides in building thriving VC markets. Though the crisis has dampened some short-term figures in those countries as well, long-term expectations are high and many international venture firms expect their activities in those countries to grow in the coming years.

A recent survey from the China Venture Capital Association (CVCA) indicates that foreign investors remain confident in the country's long-term prospects despite recent economic adjustments. Only 44 percent indicated that the economic downturn adversely affected their short-term confidence in China's venture capital/public equity market, while all of the respondents said that their long-term confidence was either the same or unchanged. Most firms believe that the current readjustment will conclude in the next 1-3 years.

Many respondents indicated that the narrowing exit channels for venture-backed companies in other countries, particularly the U.S., have increased their interest in establishing funds with Chinese partners to invest in Chinese companies. While the U.S. venture market had no IPO exits in the first quarter of 2009, China has substantially improved its exit environment in recent years. Other factors driving investment in China include low investment costs and the large number of high-quality deal opportunities.

The CVCA survey finds that investors expect environmental protection and new energy, consumer products and services and healthcare to be the top three sectors for Chinese venture investment in the next two years. Investors also expect to invest more in education/training, traditional manufacturing and the Internet services sector.

For more information, CVCA's Industry Survey Report is available at: http://www.cvca.com.cn/mail09/pe-vc090402/index_en.htm