In China, the gradual shift away from a manufacturing-centric economy towards a service and consumer-led economy, coupled with the support of the government through financial incentives, will help foster innovation and entrepreneurship in the region, which bodes well for the future of VCs in China.
Global investment into venture capital-backed companies hit a record high of USD128.5 billion in 2015, with China deals accounting for more than one-fifth of the world total.
Data from Venture Pulse, a quarterly global report on venture capital (VC) trends published jointly by KPMG International and CB Insights, shows that while global VC funding activity in the full year of 2015 decreased by 3 percent from 2014 to 7,872 deals, total deal value jumped by 44 percent to a record high of USD128.5 billion. China was a major driving force behind this growth, with Chinese VC-backed startups raising USD27.5 billion, representing more than two-thirds of Asia’s total deal value in 2015.
The internet sector drew the most interest from global VC investors in terms of both deal value and volume, closely followed by the mobile and telecommunication sector. The rapid development and growing popularity of mobile internet services and devices are spurring entrepreneurship and innovation in these sectors.
However, an uncertain global economic outlook for 2016 may be a cause for concern for VC investors. While global deal values hit a record high in 2015, VC funding activity declined both globally and in China in the fourth quarter due to concerns over valuations, over-funding and the strategy of ‘money burning’, which was commonly used in 2015 to gain market share and shape customer behavior. This strategy appears to be short-lived, however, as many businesses that could not afford the burn rate went under, while several others consolidated to stay afloat.
At the same time, ongoing concerns over a slowdown in China and recent stock market volatility are driving some investors to re-evaluate their investment portfolios. Some investors are increasingly focusing on companies with proven management track records, while others are looking to ‘pilot test’ a company’s products rather than pursue a direct investment.
Despite these concerns, VC funding will play an increasingly important role in 2016 as the industries favored by VC investors are expected to transform China from a manufacturing-driven country into one focused on innovation, digital technologies and creativity. We are seeing greater government support, ranging from tax incentives to reduced regulations surrounding outward direct investment (ODI) and the import of international best practices and talent to meet the demands of the new manufacturing and technology sectors. A greater focus on innovation and technology, coupled with favorable government policies, is likely to act as a catalyst in shaping investment appetite and transforming traditional business models.
In China, innovation startups in the technology, media and telecommunications sector are therefore expected to be a key target for VC investors in 2016. Healthcare is another sector that might attract more attention from investors, given anticipated favorable returns and growing demand due to an ageing population.
With the power of the internet increasingly breaking down geographic barriers, we can see China’s central and western regions presenting opportunities for VC investment. We may also see greater interest in companies that have businesses that are integrated with these regions, as they can tap into the abundant resources, as well as the enhanced logistics network that has been built over the past few years.
Furthermore, in an era of decreasing interest rates, investors are considering alternative investment options, making VC funds an attractive choice. We expect to see an increasing amount of investable capital by VCs, which will stimulate market transactions.
Meanwhile, customer-centered innovation is showing great potential in the form of internet-based retail/service and food delivery/shopping sectors. As the VC industry continues to mature – especially the boutique VCs that have formed over the past two years – we expect them to become a great resource in aiding the development and management of startups. While funding is critical, VC support through business strategies, marketing approaches and connections with various resources is also crucial for the success of startups.
In terms of exit strategies, IPOs will continue to be the most favorable channel for investors. We expect to see greater industry consolidation as startups streamline their marketing expenditures and R&D efforts to better respond to a rapidly changing market environment and to ultimately generate better returns for investors.
Despite a dip in VC activity in the fourth quarter last year, 2015 as a whole marked a record milestone for the industry. While concerns over China’s slowing economy and global market volatility linger, the fundamentals going forward remain steadfast. In China, the gradual shift away from a manufacturing-centric economy towards a service and consumer-led economy, coupled with the support of the government through financial incentives, will help foster innovation and entrepreneurship in the region, which bodes well for the future of VCs in China.
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Irene Chu: As the Head of TMT and Head of High Growth Technology and Innovation Group for KPMG in Hong Kong, Irene Chu actively works with leading technology companies and emerging companies to support various stages of their development and growth strategies. She and her team also collaborate with government agencies, startups incubators, early stage investors, universities and corporates to help promote and support the entrepreneurial ecosystem in Hong Kong.
Lyndon Fung: Mr. Fung’s primary focus at KPMG in China is in serving clients in the technology, media and telecommunications space. He is actively involved in guiding clients through regulatory hot topics and accounting matters during the pre-IPO stage, to allow clients to succeed in IPO projects. Lyndon is also involved with the KPMG Innovative Startup Centre, based in Beijing, whose objective is to provide a one-stop service for startup companies to accelerate their growth in the ecosystem.