Recruiting in China

Capital investment into deals totalled $480.1m in the second quarter of 2006, slightly more than double the amount invested in the same quarter of 2005 ($239.1m). Venture capital deal flow to companies headquartered in mainland China reached a high point with 54 deals occurring in Q2 2006, according to the inaugural China Quarterly Venture Capital Report released by Dow Jones VentureOne and Ernst & Young.

At the half-year point there were 85 deals and $757.9m invested in China, indicating investment in 2006 is likely to surpass the levels of both 2002 ($1.19bn invested in 145 deals) and 2004 ($630.4m invested in 103 deals).

Bob Partridge, China leader of Ernst & Young's Venture Capital Advisory Group, said, 'With China's emergence over the past several years as a source for new technology and services, investors from around the globe have taken notice and are demonstrating this by providing them with the economic support necessary to compete in the global marketplace.

'The increased early stage deal flow in China this quarter is also a sign that investors are ramping up investments in new enterprises. This substantial pipeline of companies lays the groundwork for continued investment in the region,' Partridge continued.

The increase in the second quarter was boosted by a significant level of activity and capital for first-round deals. As a percentage of the total activity, 54 per cent of the quarter's deals and 38 per cent of the quarter's capital went to first rounds. Second-round deals also rose substantially. However, despite the level of early stage investing, most of the venture capital-backed companies being financed in China are more mature, established businesses.

'We also are already seeing a broadening of the marketplace in China, with business services and other emerging segments now drawing investors' attention,' said Steve Harmston, director of global research for VentureOne. 'Information technology remains the beneficiary of the majority of investment activity in China, as it does in the US and Europe, but it is also interesting to see pockets of activity in business and consumer services, healthcare, and even in alternative energy occurring in China.'