The Current Status Of VC In China Opportunities And Challenges For VCs And LPs

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The Current Status Of VC In China -
Opportunities And Challenges For VCs And LPs

• York Chen
• iD TechVentures Ltd.
• SuperInvestor, 07, Paris
• November 13th, 2007

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Agenda

• China Market Opportunities
• China VC Market Update
• Evolving Investment Environment
• Exploring Onshore RMB Investment

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China Presents Huge Opportunities
11.5 First 3Q GDP Growth Momentum keeping on for
28 years
USD1,434 Billions Worlds largest forex reserves
A start-up acquired a MNCs China
operation Listed in HK, over 26.6B market Cap
Shanghai Mobile (1 city, 1 operator) more than
10M users The whole country over 500M
Market Value ICBC bigger than HSBC, Citibank,
PetroChina double of Exxon Mobil, .
Procured more than 20B goods annually from China
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But, a Risky Market for Foreigners

• China is a tough market for foreign players.
  Business initiative needs ?????? (a Chinese
  proverb holding the rock to cross the river).
  Familiarize with local regulations, market
  admittance system and industry practice to avoid
  operational and legal risks.

??????
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China VC Market Update
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VC Investment in China, Q3, 07

• Investment amount continue to shoot up. In Q3,
  88 start-ups received VCs capital with USD897M.
  A new quarterly record in China VC.
• First three quarter amount is over USD2 billion
  (vs. USD1.78 billion in 2006 full year)

Source Zero2IPO Q3 07 report, Oct., 07 The
USD897M is from 75 start-ups who disclosed the
amount
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VC Fund Raising in China, Q3, 07

• 13 VC funds raised USD1.32 billion. Fund raising
  dropped 44 from last quarter as several Mega
  Funds were closed in Q2.
• However, new funds raised by local VCs were
  increased. Eight RMB funds were raised with
  USD330M, doubled from that of Q2.

Source Zero2IPO Q3 07 report, Oct., 07
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Diversifying Investment Sectors

• For the first time, broader IT drops down to
  below 50 in terms of amount. Traditional growth
  sectors continue to grow.
• In Q3, service sectors, such as education, hotel
  chain, media and entertainment, attract much
  funding. Six projects got more than USD100M
  funding each.
• Venture-backed IPO local IPO, 19, the first
  time, surpassed overseas IPO, 10.

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Evolving Investment Environment
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Foreign VC Go Alone or Go Thru Local Teams?

• VC is a localized operation in terms of local
  talents, local supporting infrastructure, local
  decision making, and even local fund raising.
• Out of the driving distance and crossing the
  Pacific is just too tough for American
  counterparts.  Tourist VC wont work.  Sand
  Hill Road VCs will either enhance their own local
  operation or park their interests with a local
  team.
• Two examples of shifting to partnership
• KPCB gave up own effort, to work through an
  enhanced TDF team joined by SAIFs Joe.  Raised a
  China Fund, 360M, in April. 
• Mayfield stopped its own effort in China by
  parking all interests in China with GSR Fund II.

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Local VC To Partner or Not to Partner?

• Home grown VCs, many of them grown out of
  hi-tech/financial groups or government entities,
  are emerging as key players.
• China GP teams are pondering should they
  outsource fund raising challenges to Sand Hill
  Road peers by giving up some economic interests
  and operational independence? 
• A question to follow will there be independently
  owned and managed China-rooted VCs in the long
  run? 

• China Rooted VC Brands
• CDH ??
• CDH VC ????
• SAIF ??
• Legend ??
• New Margin ??
• Infotech ????
• DT ????
• SBCVC ????
• iDT VC ????

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Great Leap of Mega Fundings

• Ballooning of VC fund raising in China. US4B VC
  fund raised each year for both 06 and 05.
  Added up US4.04B for first 3Qs in 07.
• Quite a few mega VC/PE funds raised, in less than
  two or even only 1.5 years from previous vintage
  05 funds.
• Mega funds raised in 2007
• TDF II (120M) to KPCB China Fund 360M
• Sequoia China Capital I (200M) to total 750M
  (Sequoia China Capital II 250M and Sequoia China
  Growth I 500M)?
• SAIF II (643M) to SAIF III 1.1B
• CDH PE II (310M) To CDH PE III 1.6B
• IDG Accel I (290M) to IDG Accel II 550M

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A China Miracle Chasing for Better Return
Drives Funding to China

• Sand Hill Road peers took one or two decades to
  reach mega funding size. For example, KPCB,
  founded in 72, had its Fund IX reached 550M in
  99, then Fund XII of 600M in 06.
• Its a China Miracle for local VC/PE to reach
  mega size in just a few years. However, all
  these funding are endorsed and invested by
  reputable and leading Western LPs and FoFs. Take
  SAIF III. It gathered one of the most impressive
  LPs including endowment funds of Harvard,
  Princeton, Cornell and Dartmouth, CalPERS and NY
  State pension funds, Dupont, Common Fund, Horsley
  Bridge, ... ()
• The VC/PE funds in China have really seen good
  financial returns in past few years. And, these
  foreign investors are confident about the future
  opportunity going forward in China.

Source Andy Yan Interviewed by Zero2IPO
eWeekly, May, 2007
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Diversifying of VC/PE Operation
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Exploring Onshore RMB Investment
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Foreign Funds Joining RMB Investment

• Offshore restructuring becomes much tough, if not
  impossible, due to series of circulars and admin.
  measures.
• At the same time, the local IPO, VC legal
  framework and LP funding sources are improving.
  Shenzhen GEM board should be launched in H1 2008.
• Doing RMB investment is not by choice. Its a
  survival issue as offshore deals might dry out.
• Two alternatives for foreign VCs and LP/FoF to
  participate the RMB opportunities
• Make direct cross-border JV Investment.
• Initiate, sponsor and set up RMB funds.

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Foreign LPs Funds in China Projects (Current
Status)
LP
LP
USD Fund
RMB Fund
3a
1
2
3
Project
Project
Project
Project
Project
Onshore Offshore
(Offshore Holding)
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A Foreign Fund Sponsors a RMB Fund
GP
GP
LP
LP 1
Fund Mgmt
Fund Mgmt
LP 2
LP 3
USD Fund
RMB Fund
Onshore Offshore
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Overseas LPs Role

• Conventional LP practice (long term, not
  interfering GP operation, management fee/carried
  arrangement) prevailing in the West is not yet
  popular in China. Local LP funding supply is
  still at shortage.
• At the moment, government owned/affiliated funds
  could be a good source for RMB funding. Many
  government agencies (ministries, banks,
  provinces, municipalities, hi-tech parks...) set
  up matching funds (????) to support RMB fund
  formation.
• With the improving of legal, forex and tax
  issues, overseas LPs and FoFs could continue to
  play a key role in supplying funding into Chinas
  VC/PE industry.

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Foreign LPs Funds in China Projects (Future
Scenario)
LP
LP
3b
USD Fund
USD Fund
RMBJV Fund
RMBLocal Fund
RMBJV Fund
RMBLocal Fund
3a
1
2
3
4
Project
Project
Project
Project
Onshore Offshore
(Offshore holding)
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iD TechVentures Your GP Partner in China

• One of the most established and stable VC teams
  in China with 8 years of localized presence
  maintaining a consistent and proven investment
  strategy.
• Your GP partner and a local base for China
  initiative
• Supporting your local market intelligence

(Lujiazui, Shanghai))
Our HQ in Shanghai, and offices in Beijing and
Taipei, welcome you.
(Grand Theater, Beijing)
(Building 101, Taipei)
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Thank You ! ??yorkchen_at_idtvc.comwww.idtvc.com