While Silicon Valley venture capitalists' confidence receded sharply in Q4 2007, VCs in China remained cautiously optimistic. Tracking venture capitalists' confidence in the future high-growth entrepreneurial environment is important because it may provide a leading indicator of activity in the entrepreneurial economy which is critical to overall economic growth. Recently in the Industry Standard, I showed that U.S. VCs grew very concerned in Q4 over the credit market fallout and possible recession. In a separate report on VC sentiment in China, I and co-author Ling Ding found that VCs there remained relatively upbeat.
However, China-based VCs did express concern over the changing Chinese regulatory environment, inflated valuations of new ventures, and a looming downturn in the U.S.
For example, Stephen Chiao of Sycamore Ventures noted that China is coming up with "more new regulations and new taxes for foreign investors." Similarly, a seasoned observer with ChinaVest Services had this to say about Chinese regulators:
"The environment in the PRC is clouded by the government's attempts to clamp down on the existing bubble while not upsetting the financial applecart, a very difficult balance, and by the government's belief that the VC/PE industry in PRC should be led by local firms -- not foreign firms."
Harry Man of WI Harper Group cited increasing competition as leading to his reduced survey rating:
"I dropped my rating from 4 to 3 this quarter as I feel the market is getting increasingly competitive with more funds in town (international and local). Fierce competition is driving valuations higher and it is getting increasingly difficult to get good deals."
While caution has increased, Chinese VCs still hold an overall optimistic view of the future high-growth venture environment in China. For example, Laurence Ip of CLSA Capital Partners states that China is still a "hotbed" for private equity.
This measured confidence comes on the heels of a robust year for fundraising and investments by venture funds in China. According to the Zero2Ipo 2007 report, VC fund-raising and investments in China soared in 2007. An impressive 58 new VC funds were established with a total amount of $5.5 billion in 2007, compared to 39 new funds with $4 billion in 2006. At the same time, $3.2 billion flew into 440 deals in 2007 while 324 deals closed with a total of $1.8 billion of investment in 2006.
So what is likely to happen next? Well, I have found that VC confidence in China has been tending to track in a similar direction to Silicon Valley VC confidence more often than not. In the heavy downdraft of U.S. VC confidence in Q4, Chinese VC confidence also tracked lower, though not as severely so. This may be due to increased collaboration and investment between the two markets. Still, local issues -- such as the uncertain regulatory environment -- predominate in China, while financial market volatility and a looming recession worry U.S. VCs the most.
Should there be a lag effect of Chinese VC confidence to Silicon Valley confidence? What do you predict will happen to VC confidence in China in Q1 2008?
Related news, commentary, and predictions:
- Prediction: The USF VC Confidence Index will rise to 3.70 or greater in Q1 2008
- Analysis: Venture Capitalists' Confidence Wanes
- Analysis: Alibaba shows China in bubble
- News: Leading VC firm Kleiner Perkins loses partner in China
- News: China Mobile reveals 400,000 cracked iPhones on its network
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