China Venture Capital Investment Declines in Third Quarter

Venture capital investment continued its decline in mainland China over the third quarter, a further sign of  slowing economic growth and investment as China undertakes a once-a-decade leadership transition.


In the three months ending September, capital raised through venture capital investments in Chinese companies declined to US$612 million, a 58% drop from the same quarter last year. 


The number of deals declined 61% to 41.  Each deal represents a single case of equity investment by a professional venture capital firm, corporation, private equity firm or individual tracked by Dow Jones VentureSource.


Commenting on the decline, Guido Schenk, APAC and EMEA sales director for Dow Jones VentureSource, said: “Venture capital firms are being more selective with their investments.  Deals are still getting done, but fewer firms are attracting the valuations we saw peak in 2011.  Given the limited liquidity in the market, it’s no surprise total investment values are returning to their 2008-2009 levels.”


Through the first nine months of the year, venture capital investment totaled US$2.7 billion for 150 deals, a 44% decrease in capital and 44% fall in deals from the same period last year.


2011 was the highest year on record, with US$6.2 billion deployed across 350 deals.


Investment Declines for Most Industry Groups
The largest investment declines were in consumer services and industrial goods. Investment in consumer services, which is largely driven by consumer internet companies, fell 43% in the third quarter to US$445 million invested in 23 deals—down from US$778 million invested in 46 deals in the same period last year.


Similarly, investment in industrial goods and materials declined for the quarter to US$15 million across four deals, sharply below the US$135 million across 14 deals in the third quarter of 2011.  Industrial goods and materials include machinery, industrial materials and chemical makers.


Other sectors experiencing declines in the quarter include business and financial services, dropping to US$30 million across three investments from US$115 million across 12 investments in the same period last year, and consumer goods, which saw five deals in the third quarter of 2011 decline to zero in the same period 2012.


Information technology, which includes communications and networking, electronics and computer hardware, semiconductors and software, attracted US$47 million across eight deals compared with last year’s US$160 million across 18 deals.


Healthcare declined to US$58 million across two deals, down from last year’s third-quarter total of US$115 million across four deals.



China Decline Sharper than Other Markets
The year-on-year investment decline in China was comparatively sharper than in other major investment destinations worldwide.


Venture-backed companies in Europe raised just over €1 billion through 216 venture capital deals during the third quarter of 2012, an 11% decrease in capital raised and a 22% decline in deals from the same period last year.


Through the first nine months of the year, venture capital investment totaled €3.34 billion for 805 deals, a 6% decrease in capital and 10% fall in deals from the year-ago period.


The U.K. retained its position as the favored destination for venture capital investment in Europe during the third quarter, despite experiencing drops in investment and deal flow compared with the same period a year ago. Companies in the U.K. raised €301 million through 59 deals, representing a 21% decrease in investment and a 34% decline in deals.


The comparatively larger decline in China moved the country’s ranking to the number-three spot amount the largest recipients of venture capital financing, behind the U.S. and U.K.  In 2011, China had surpassed the U.K. for the first time to become the second-largest recipient.


Germany consolidated its position in second place as companies raised a total €266 million, dwarfing the €105 million raised during the same period last year. Deal flow was also up, by 26%, to 43 completed. Germany managed to attract a 26% share of venture investment in Europe compared to just 9% during the third quarter of 2011.


France held on to third position, with companies raising €106 million for 32 deals, a 46% decline in investment and a 32% drop in deals from the same period last year.


The Netherlands secured fourth spot, raising €71 million through four deals, a 71% increase in investment despite a 33% drop in deal flow compared with the third quarter of 2011.



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