Source: CCTV.com

02-13-2008 16:06

Our first package had covered the overview of the industry. The fact that the industry did not begin until the early 90's, well over a decade after the United States. The fact that State Owned Enterprises were the initial darlings for investors. And the fact that 2007 recorded the biggest ever amount raised for China's VC industry: 5.4 billion US dollars.

In our second installment, we'll tell you where all that money is going, which sectors are considered "hot", and why the investment trend is changing.

It's fast. It's tasty. And it's affordable.

The Chinese restaurant chain Chamate or "tea-mate" believes those are the key ingredients that will help them win the stomachs and wallets, of China's coveted middle class.

And breaking with tradition, technology venture capital firm IDGVC known for their record returns on I.T. investments like Baidu.com, is also beginning to bet on more traditional industries. It has already invested in Chamate, for an undisclosed sum.

Hugo Shong, Founding Partner of IDGVC said "China's economy has been growing so well. And also people's life quality also be improving, So therefore, because China has such a huge domestic market demand, so you find a lot of firms also invest in traditional. So for example we invested in Home Inn-we listed on Nasdaq. We also invested in a restaurant, because they're all growing very well."

It's no wonder businesses related to consumers are thriving. The country has enjoyed double digit GDP growth for the past five consecutive years. And China's growing middle class is expected to double to 300 million people by 2010.

Just until recently, Venture Capitalists in China were not focused on traditional industries like restaurants, education or healthcare. Instead, Technology, Media and Telecommunication, also known as TMT sectors were their darlings. Many were following the investment trend in the United States. Lucrative exits via IPOs on the Nasdaq or local bourses further cemented their belief that they were on the right track.

But 2007 witnessed a significant shift in their investment strategy.

According to Zero2IPO research center which has monitored China's VC industry since 2001, IT investment fell by almost 20%, from 61.5% to 42.5% last year.

In contrast, traditional investment rose from 10.9% in 2006, to over 16% in 2007. Founding partner of Venture Capital firm Sequoia Capital China, one of the leading VC firms in China, explains why.

Zhang Fan, Founding Managing Partner of Sequoia Capital China said "In the US, many traditional industries, whether it’s retail, whether it’s financial services, whether it’s as mundane as energy or agriculture-the formation of large leading companies has already been established many decades ago. But in China, at this moment, we are experiencing a slightly different phenomenon. Many sectors, many industries, many sub-sectors within the industry-the fast growth and the formation of leading companies, are just beginning. So compared to the US or other market, the productivity gain and the model of innovation-not only comes from tech-but also comes from the changes, and the innovative practices, and the growing of large companies from traditional, non-tech sectors."

So it's clear venture capitalists are shifting their resources, and their money, more towards traditional industries in China. Statistics also show growing interests in healthcare and renewable energy, as protecting the environment has become a key priority, for the Chinese government.

So, what will be the eventual ratio of investments in TMT versus traditional?

Gavin Ni, the CEO of zero2IPO, an integrated service provider for China's VC and PE industry, says he believes it will be 35% TMT, 15% healthcare, 10% clean tech, and the rest diversified amongst other industries.

The Founder and CEO of China Renaissance, Bao Fan, thinks it will be more of a 50-50 percent ratio, at the end of the day. And although he too, is bullish about the traditional sector, he offers this word of caution.

Bao Fan, CEO of China Renaissance said "I do believe there are a lot of interesting opportunities in the traditional area. But on the other hand I’m also concerned that the investors-there’s a certain level of euphoria regarding those investments. Because we work a lot with traditional companies in terms of openness of management, in terms of the proficient levels of the management teams-I think there may be a lot of issues not priced in."

Venture Capitalists in China have no magic formula, no manual to help guide their investment strategies. And China’s ever growing and changing economy doesn’t make it any easier. But whether it be TMT or Traditional, internet or clean tech, everyone agrees that any industry to do with Chinese consumers, has a bright future.

 

Editor:Xiong Qu