Startups receive $5.8 billion from VC and private equity firms in 2011

Venture capital and private equity companies showed great enthusiasm for investing in new Chinese Internet companies in 2011. The year saw $5.8 billion put into such businesses, a record high.

Venture capital firms from home and abroad spent $3.3 billion, or 3.6 times as much as in 2010, on 276 investments in China's Internet industry last year, according to a report issued by the Beijing-based investment consulting company Zero2IPO Group.

Private equity firms invested $2.5 billion in Chinese Internet companies, an increase of 124 percent year-on-year, the report said.

E-commerce, social networking and online gaming websites attracted the most investments last year. Venture capital and private equity companies, for example, made 93 investments in e-commerce, compared with 65 in 2010.

In one of the best-known cases, 360buy.com, a company that started mainly by selling computers and electronics over the Internet, said last April that it had raised $1.5 billion in the third round of financing in its history.

The investors that put money into it included Digital Sky Technologies, a Russia-based Internet investment group that owns stakes in Facebook Inc and Groupon Inc, and Robin Li, founder and chief executive officer of the search engine company Baidu Inc.

"Venture capital and private equity's total investment amount in China surpassed 250 billion yuan ($39.7 billion), and the Internet sector ranked in the top three industries that drew the most money," said Gavin Ni, chairman and chief executive officer of Zero2IPO.

Yet since the second half of last year, valuations of new Internet companies have decreased. "Some have been reduced by half", as a result of global economic uncertainties and credit concerns about Chinese companies listed in the United States, Ni said.

Meanwhile, initial public offerings remain the main way that venture capital and private equity investors exit companies they have invested in.

The fact that fewer companies filed those offerings in 2011 has placed investors under pressure and caused some to be reluctant to make new investments, said Liu Erhai, managing director of Legend Capital.

In 2011, there were 613 initial public offerings around the world, of which 58.1 percent were related to Chinese companies. The same year saw 356 Chinese companies file IPOs and raise $61.5 billion on stock exchanges.

Both figures dropped greatly compared with what they had been the previous year.

"Investors should be patient and far-sighted, because the Internet market, especially the e-commerce business, is full of potential in China," Liu added.

Deutsche Bank AG expects China's e-commerce market to handle transactions worth more than 1.5 trillion yuan by 2014 and have a compound annual growth rate of 42 percent.

shenjingting@chinadaily.com.cn