Too much cash chasing too few deals is resulting in spiralling asset valuations and a tendency to overlook smaller start-ups
Record fund-raising combined with a dearth of deal-making has caused a venture capital (VC) overhang in China, leading to higher valuations and some observers to warn of a boom and bust in the most competitive sectors.
According to China-based venture capital research company Zero2IPO, mainland and foreign venture firms raised a record US$4 billion last year while investments fell 16.7 per cent over the previous year to US$1.057 billion.
A venture capital overhang results from too much cash chasing too few deals, and while the situation seems like a boon for China's entrepreneurs it is widely regarded as a negative for the industry due to spiralling deal valuations and a tendency to concentrate on blockbuster expansion investments over traditional start-up venture funding.
The relative nascent history of VC funding in China is characterised by multimillion-dollar deals with companies already boasting proven records in revenue and earnings. Online gaming company Shanda Interactive received funding from Japan's Softbank on this basis in 2003. Softbank also invested in Focus Media's first round in the same year when the display advertising company was already making profits.
Last week, the mainland's Oak Pacific Interactive secured US$48 million in late stage financing - the largest ever VC deal in China.
