VC firms shrug off chill in the equity market

BEIJING - Though China's stock market is cold, more venture capital (VC) institutions are cultivating early-stage companies.

"VCs may feel it's winter as companies involved with their funds face problems in getting listed, but it's a bright time for early-stage investment," said Xu Xiaoping, founder of the Zhen Fund and former vice-chairman of New Oriental Education & Technology Group.

Only 154 Chinese companies with VC or private-equity backing are being listed in China or abroad by the end of November, compared with 221 last year, said Ni Zhengdong, Zero2IPO group chairman.

Xu, one of the best-known angel investors in China, said that Sequoia Capital China is cooperating with his Zhen Fund to set up a second-generation Zhen Fund containing $30 million, and each holds about 50 percent.

They plan is to invest in about 100 companies within two years, with each investment ranging from $100,000 to $300,000. About $3 million of the new fund has already been invested.

"Our fund provides young entrepreneurs with seed capital to start new ventures focused on the Chinese market," Xu said. "On the principle that great people are the key to successful companies, we invest in the brightest and most promising entrepreneurs, rather than certain industries or markets."

Xu is not alone. Xiong Fei, an analyst at Matrix Partners China, said that his company was also seeking early-stage companies.

"There is a lot of money and many VC institutions in China and competition has become very fierce. So we're starting to seek more opportunities in early-stage companies," Xiong said.

Xiong said that his company was focusing on areas such as technology, media, telecommunications and clean energy.

According to Xu, early-stage investment has high risks as well as high prospective returns.

As long as one of the 100 companies they invest in lists eventually, their total costs can be covered. If two go public, their gains can be "rather good". He predicted that about 10 of the 100 companies might possibly be listed.

Xiong said that early-stage investors usually encounter two issues. "Compared with a middle-stage company, an early-stage company requires less money but the same manpower," Xiong said.

Xiong also said that as many VC funds are dollar-denominated, investing every infusion of funds in a Chinese company meant setting up a variable interest entity structure, which some investors might consider as not worth the trouble if a program is small.

Xu, recently named as "Angel Investor of the Year" by China's main early-stage investment portal, CY-zone.cn, set up Zhen Fund at the beginning of 2011.

Within a year, the fund had invested in more than 80 companies, including the online dating site Jiayuan.com International Ltd, which listed on the Nasdaq Stock Exchange in May.

Sequoia Capital and IDG Capital Partners also invested in Kai-Fu Lee's Innovation Works, focusing on making early-stage high-tech investments.

"We will increase investment in early-stage companies and help them develop innovative technologies and business models," said Shen Nanpeng, founding managing partner of Sequoia Capital China.

China Daily