16 September 2019
As some funds have stayed away from the stock market, they are sitting on large amounts of idle cash. Photo: Reuters
As some funds have stayed away from the stock market, they are sitting on large amounts of idle cash. Photo: Reuters

Venture capital firms hungry for quality projects

My friends who make venture capital (VC) investments always keep complaining about how difficult it is to find quality internet or high-technology projects to put their money in.

Following the crash in China’s A-shares in recent months, some funds have been avoiding the stock market. Meanwhile, they have also been staying away from property investments due to price concerns.

This has led to VC and private-equity (PE) funds sitting on large amounts of surplus cash.

As there are several thousand VC firms, ranging from big to small, competition has become fierce in the industry. The sector requires some breakthrough.

Early-stage investments in the light-asset and high-growth internet industry have created many industry miracles. But they are on the top of the pyramid.

If you study the overall picture, you will notice that thousands of VC players have shut shop quietly after failed investments.

A friend of mine from Beijing told me that a well-known VC in China had resorted to a Ponzi scheme after failing to exit successfully from hundreds of investments.

Money was taken from new investors to pay off the old ones, he said, adding that the firm is now being investigated by authorities.

Some VCs don’t have enough understanding of the sectors they invest in. And the firms also don’t have anything other than money to support the growth of the portfolio companies. All this has led to several investment failures.

Before 2010, my fund didn’t favor any specific sector, expect real estate. My only criterion was the growth potential.

However, after competition became more intense in 2010, I divided the team to focus on two major sectors — clean technology and medical technologies, and hired industry experts as consultants.

Looking the overall VC industry now, I can say that it has oversupply of money and shortage of good projects. If the funds can’t be service-style entities with a focus on specific areas, they will very likely fail.

Apart from proper focus, funds should bear in mind that reasonable valuation is another important criterion while making investments.

This article appeared in the Hong Kong Economic Journal on Nov. 6.

Translation by Myssie You

[Chinese version中文版]

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Columnist of the Hong Kong Economic Journal