China Leads the World in Venture Capital Growth

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China is working to become a leading innovator as VCs invest in emerging technologies

BVenture capital investments in China have come roaring back from the economic crisis, reaching $5.4 billion in 2010, a 79% increase over 2009. China venture capital (VC) investments are growing at a pace that’s outstripped every other nation on the planet, according to the inaugural report from Lux Research’s new China Innovation Intelligence service. Lux Research reports that 40% of China’s overall venture capital has backed emerging technologies since the start of 2010, affirming the country’s intent to be a rising global leader in technological innovation.

“Foreign investors look for breakout technological innovations. Domestic investors do as well, but they also factor in market channels and financials when selecting companies,” said Zhuo Zhang, a Lux Analyst and the report’s lead author. “And locals are getting in earlier: Series A rounds represent over 80% of all domestic VC-backed deals, while foreign VCs have backed less than half that many. This implies that many untapped opportunities await foreign investors willing to step beyond familiar territory.”

Titled “Investing in Indigenous Innovation: China's Emerging Technology VC Landscape,” the report charts investment opportunities beyond well-travelled enclaves like Beijing and Shanghai to help foreign corporations and investors successfully navigate China’s expanding frontier of innovation. It surveys how VC deals are distributed across multiple emerging technology domains and throughout China’s 31 regions. It also compares the investment patterns of domestic and foreign VC firms, providing insights into how local investors approach China’s unique opportunities differently.

Among the report’s key insights:

• VC activity is unequally, but broadly distributed by regions. Twenty-six out of China’s thirty-one regions received VC investment for emerging technologies since the beginning of 2010, but just four – Beijing, Shanghai, Jiangsu, and Guangdong – account for 60% of the activity. Foreign VCs have out-invested their domestic counterparts by two-to-one in both Beijing and Shanghai.

• Domestic and foreign VC firms have distinct industry portfolio weightings. Foreign investors have driven significant activity in LEDs, medical equipment, solar, and pharmaceutical industries. In contrast, domestic VC firms dominate investment in materials technologies, be they advanced materials platforms or green building construction materials. Even within technology domains there are distinct behaviors: For energy storage, domestic investors heavily favor lithium-ion battery opportunities, while foreign interests have scattered deals in flow batteries, supercapacitors, and fuel cells.

• Solar, LEDs, and wind show signs of maturity. With average deal sizes of $24 million for LEDs and $26 million for solar, these industries are moving out of the VC realm and are already experiencing the cost and margin-crunching pain of over-population. The next generation of concentrated solar thermal technology, building-integrated photovoltaics and thin film start-ups will be needed to reinvigorate the solar VC climate in China. Notably, no wind energy deals were uncovered as large incumbents now dominate the landscape.

“Investing in Indigenous Innovation: China's Emerging Technology VC Landscape,” is part of the Lux China Innovation Intelligence service. Clients subscribing to this service receive ongoing research on market and technology trends, continuous technology scouting reports and proprietary data points in the weekly Lux Research China Innovation Journal, and on-demand inquiry with Lux Research analysts.

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