Gloom envelops Chinese venture capital industry

The global financial crisis is casting a pall over China’s venture capital industry, with surveys showing that funds are getting harder to raise and investments are becoming harder to exit.

The China Venture Capitalist Index, designed to reflect how VC investors based in China and Hong Kong see the mainland market developing over the next six to 18 months, fell in October to the lowest reading in the three years of the survey.

“The credit crisis has finally smashed into venture capital in China,” says Mark Cannice, an associate professor of entrepreneurship at the University of San Francisco, who compiles the index.

“We’re seeing declining exit opportunities, especially on the IPO side. Capital commitments are also declining, so fewer investments are being made,” he says.

Illustrating the tougher environment, 99.cn, an online music site launched last year, closed last week due to a lack of venture capital support, China Business News reported.

A total of 20 new domestic and foreign VC funds raised $492.1 million in the third quarter, compared with $3.02 billion raised by 40 new funds in the second quarter, according to Zero2IPO Research Center, a Beijing-based consultantcy.

The total amount invested in the third quarter was $787.3 million, down 12.1% from a year earlier and marking the first such fall in five years.

Moreover, only 19 transactions took place last quarter, down from 36 in the April to June period, the center, which is the research arm of Zero2IPO Group, announced in an Oct. 22 report.

Cannice quoted Harry Man of Matrix Partners China as saying that Chinese entrepreneurs’ expectations had not fallen far enough to reflect the harsher financial environment.

Another venture capitalist, who declined to be named for the survey, says the market was caught “somewhere between uncertain and non-existent.”

He adds: “I don’t believe that many deals will be done, only those already committed and rock solid from all standpoints.” —Reuters