Venture capital activity in companies headquartered in mainland China is on course for a record-breaking year, with 54 deals and US$361.1 million invested in the third quarter of 2006, according a new report.
The China Quarterly Venture Capital Report released by Ernst & Young and Dow Jones VentureOne says deal flow rose by 16 deals from the same quarter of last year and capital investment increased 47% from the same period.
By industry, information technology remains the stronghold for venture capital activity in China in the third quarter. There was US$221.8 million invested in 34 IT companies in the third quarter, an increase of 85% in capital and nine more deals than a year ago. Within the IT industry, the Internet-focused information services segment continued to draw the most activity, with 22 deals and US$136.2 million invested.
This is 13 more deals and US$71.3 million more capital than was invested in the third quarter of 2005. KooXoo, a category message search engine based in Beijing, received a US$10 million second round, which was among the largest information services deals of the quarter. The largest deal overall was the US$35 million later-stage financing for Advanced Micro-Fabrication Equipment, a semiconductor company based in Shanghai.
"China is becoming a center for technological innovation. Against this backdrop, we are seeing the venture capital cycle progress and financing activity mature," said Steve Harmston, director of global research at VentureOne. "Investors are putting larger sums into individual companies to ensure global competitiveness — with the median round size reaching US$5 million, the highest on record — and are directing investments to an increasing number of second- and later-round financings."
Through the first three quarters of the year, there has now been US$1.18 billion directed to 145 deals, putting 2006 on a clear path to surpass 2005's year-end total of 151 deals and US$1.20 billion, and evidencing China's growing maturity in the global venture capital market.
While seed- and first-round deals continued to make up 70% of deal flow in the third quarter, there were 14 second or later round deals this quarter, up from 10 in the same quarter a year ago. In addition, the amount of capital directed toward these later rounds, US$139.7 million, was 57% more than was invested in similar rounds last year. On the other side, there were 38 seed- and first-round deals in the third quarter, an increase from the 25 that occurred in the third quarter of 2005. The capital investment to these rounds was US$216.6 million, a 65% increase in capital from a year ago.
The investment figures included in this release are based on aggregate findings of VentureOne's proprietary Chinese research and are contained in VentureSource. This data was collected by surveying professional venture capital firms, through in-depth interviews with company CEOs and CFOs, and from secondary sources.