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The lack of an exit mechanism has become the biggest headache for venture capitalists in China, according to a semi-annual report by a major VC market researcher released last week.
"The exit condition of VCs was very worrying in the first six months and some domestic firms often withdrew from invested companies with losses rather profits," said Garvin Ni, president of Zero2ipo.com Co Ltd.
According to the company report, which was based on a survey among 325 VCs in China, only six VCs withdrew from their invested businesses through stake transfer, merger and acquisition, and stock sales. Two organizations got their invested companies listed on the Growth Enterprise Market in Hong Kong while one helped their invested business become a public firm on the domestic A share market.
Domestic venture capitals suffered more seriously from the delay of the long-awaited high-tech second board market and the global technological downturn because of their small fund base, which gave them less leeway to survive the hard times. Many were forced to stop investing because once the squeeze was put on by financial sources.
And the situation has yet to improve greatly - even for big international names in the field like the US-based International Data Group Venture Capital (IDG VC).
"Although we have exited 19 projects since the middle of last year, we still have more than 70 projects in the pipeline and exiting is still the biggest problem for us," said Hugo Shong, vice-chairman of IDG VC.
He complained that, despite a temporary regulation on the establishment of foreign-funded venture capitals in December, further specific rules to promote the growth of foreign-funded VCs were not forthcoming.
And problems are being compounded by speculation that the second-board market may be temporarily shelved and VCs will have to wait at least one more year.
The second-board market has been touted as the most important exit channel for VCs.
According to Zero2ipo's report, 45 VC organizations invested 91 projects in the first half of this year.
The amount in 85 projects, which reveal the number of investments, reached US$170 million and is roughly on a par with one year ago.
Information and communication sectors were the two most favored areas by VCs with 35 and eight projects respectively and amounts reached US$54 million and US$67 million.
Media and biotechnology did not fare so well with only US$1 million each in the first half of this year, according to Garvin Ni.
Despite the difficulties still ahead, major VCs and analysts believe the way forward to be quite bright.
"Although the amounts and numbers of invested projects shrank a little in comparison with last year, the slide is not as steep as what is happening in the United States and we have every reason to believe the situation will be better in the second half," said Garvin Ni.
He predicted domestic firms would have finished adjustments in the first half of this year and begins to regroup in the rest of the year.
Foreign-invested companies will increasingly look towards the future and continue to search for appealing projects in the second half of the year, Ni said.
York Chen, managing director for Acer Technology Ventures China operation, said his company would invest in six projects in the second half of this year using about US$10 million in capital, equaling the company's total investment in the past two years.
Potential areas include design and manufacturing of analog and digital chips, billing systems and customer management for the 2.5 and 3-generation mobile communications, and the integration and distribution of telecommunications components.
Chen also warned that local start-ups should focus on the domestic market and develop relevant applications, rather than seeking innovations and global markets blindly.
(Business Weekly August 6, 2002)
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