Venture capitalists face tougher competition from strategic investors in China as IPO market gains steam- report

By Nicel Jane Avellana

Jan 28, 2014 11:07 AM EST

After staying silent for a good part of last year, venture capitalists are now lured back to the mainland as the Chinese IPO market begins to heat up. However, in their efforts to look for deals, the biggest corporations in the country like Alibaba Group and are proving to be tough competition, The Wall Street Journal blog Venture Capital Dispatch reported.

Citing data from DJX VentureSource, the report said that from September to December, venture capital firms engaged in 106 deals, making it the most hectic quarter for last year. Compared to the fourth quarter the year before, the flow of deals in the same quarter in 2013 was 66% higher.

VentureSource data showed that the $100 million investment in the third round given to consumer services firm Beijing Xiaoju Technology Co and the $100 million second round provided to Hangzhou KuaiZhi Technology Co were among the top five venture deals in the mainland. Beijing Xiaoju is backed by Citic Private Equity and Tencent Holdings, the biggest Internet firm in China. Taxi-finding mobile application business Hangzhou KuaiZhi Technology, meanwhile, got the investment from investors that included e-commerce firm Alibaba Group. Another top transaction also included an investment from online travel website, one of the biggest corporations in the country, the report said.

Traditional venture capital fund managers are welcoming strategic investors into deals. Venture capitalists like Gobi Partners Founder Tom Tsao say that strategic investors like Tencent could pave the way for them to purchase the portfolio company later on. Because IPOs are not as predictable in China, companies are looking at trade sales as an important path to exit their investments, the report said.

Although industry observers say company valuations may rise with more acquirers looking to buy stakes in the few startups in China, Ernst & Young Managing Partner Keith Pogson said this is not likely to happen soon. It is in the strategic investors' interest to keep acquisition prices in the low end, the report said.

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