VC investment down in China, up in India in 2012

China saw overall number of venture capitalist investments drop 40 percent, though size of deals were stable; India's rise continued with 17 percent growth, characterized by late stage investments and smaller sized deals, according to Ernst & Young report.
Written by Ellyne Phneah, Contributor on

The value of China's venture capitalist (VC) deals experienced a 40 percent year-on-year decrease in 2012 compared to the year before, but India's investments continued to grow, up 17 percent.

According to Ernst & Young's Global Venture Capital Insights and Trends 2013 report released Monday, global VC investment fell 20 percent to US$41.5 billion last year, and the number of rounds declined by 8 percent to 4,970 in 2012. The average round size also decreased to US$8.4 million, and the total number of VC funds closed down 13 percent to 280 from 323 in 2011, and the value closed lower by 31 percent at US$29 billion.

"2012 was a tough year for global venture capital and we saw consolidation in the market as the number of active investors declined. However, we are hopeful that 2013 will see the industry turn the corner. Steadying economic conditions will bolster investor confidence and point towards a strengthening risk appetite," Ringo Choi, Asia-Pacific strategic growth markets leader of Ernst & Young, said in a statement.

China VC investment falls, but median deal value remains high

VC trends in China from 2006 to 2012 (Source: Ernst & Young's Global Venture Capital Insights and Trends 2013 report)

In China, US$3.7 billion was invested in 202 rounds in 2012, a year-on-year decrease of around 40 percent for both figures. China also saw a 50 percent decline in the number of IPOs from 2011 to 2012 due to domestic exchanges such as ChiNext stopping IPO registrations in the second half of 2012, to reduce pressure on the Chinese stock markets caused by drainage of funds to the IPOs.

However, the median deal value, at US$10 million, was significantly higher than in other parts of the world, due to substantial investments in profitable companies. For example, Beijing had attracted a significant amount of VC investment through relatively fewer deals. At US$19.9 million, the average round size in Beijing is the highest and above the global average of US$8.4 million.

It is expected that China's VC market will rebound in 2013 with a steady growth, though.

Even though the number of VC-backed IPOs have been falling in the country since 2010, China is the global leader in terms of amounts raised and exits, and investors were attracted to the rapid time of exit and high returns on offer.

"IPO exits are likely to pick up again from the second quarter of 2013 as government economic policy is confirmed. There are more than 800 companies in the pipeline ready to list when the market opens again," the report said.

India VC rises, with more late stage investments

VC trends in India from 2006 to 2012 (Source: Ernst & Young's Global Venture Capital Insights and Trends 2013 report)

Over at another Asian VC hotbed India, the number of investment rounds increased by 17 percent to 205, its third successive year of increasing activity. However, the total capital invested declined from US$1.7 billion in 2011 to US$1.4 billion in 2012.

This can be attributed to the rising economic prosperity in the country and entrepreneur's willingness to take risks on VC investment. The entrepreneurial system is also becoming more developed with the availability of higher education and corresponding increase in number of engineering and medical schools.

Late stage investments were also dominant in India. The proportion of deals in the revenue generating stage was 87 percent in 2012, up from 83 percent in 2011 and 81 percent in 2010. This is because unlike Silicon Valley companies, Indian firms were focused less on innovation and more on application development and efficient delivery models giving them time to develop into the revenue generating phase, according to the study.

India also has more deals which are smaller in size, with its median round decresing from US$5.5 billion in 2011 to US$3.6 billion last year. This is because the growing network of angel investors are rising in the market but prefer low investment sizes.

Moving forward, the report had a "relatively positive" outlook for India's VC market. "The growth of India’s investor community and resulting increase in the amount of capital being invested in purely domestic opportunities provides India’s VC industry with a  degree of insulation from global shocks," the report said.

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