China tech sector holds promise but beware of bubble: VC firms

November 13, 2014 17:40
China presents lot of opportunities but there are also risks, say venture capital firms. Photo: Bloomberg

Technology companies remain a popular bet for China investment among private-equity and venture capital firms, but the opportunity is accompanied by the risk of a bubble in the sector, experts said.

"Companies are raising more money, more than enough, and this would lead to more negative behavior in terms of the ability to get the right products and marketing strategies," David Yuan, partner and managing director of Redpoint Ventures, told a forum in Hong Kong Thursday.

"And for some companies who are copycats, they should not get funding... In China, if one business succeeds, other companies pop up, which would be a burden to the good companies," he said.

Redpoint, which is based in California, focuses on investment in early-stage technology companies. 

While the venture capital firm is warning of a potential bubble in China's tech sector, some rivals feel the industry still has a long way to go before taking a pause. 

"There will not be bubbles if people are investing in different sectors, and China has a lot of opportunities in big data, cloud, mobile and so on, especially as the country is participating on a global stage now," said Thomas Tsao, managing partner at Gobi Partners, a Shanghai-based firm.

"In the past 10 years, China was just on the surface in data development...  while 90 percent of the data was created in the past two years," he said. "If you say the market was on a roller coaster in the past 10 years, it will be even more exciting in the next decade."

Zhou Wei, a managing partner at Kleiner Perkins Caufield and Byers, also sees a promising future in the Chinese market, even as he warned that valuations were getting stretched in some cases.

Zhou believes the upcoming investment opportunities are on the application level, while Tsao sees a boom at fundamental levels.

Tsao says the trend in future could be like the doctor-patient or teacher-student relationship, where the best practitioners in the industry could make their skills available to everyone instead of getting confined to boundaries. 

Apart from China, some venture capitalists also shared their view about the Indian market.

The market in India has improved as the nation's economic growth has started to turn around, they said, adding that improved prudency in capital supply also bodes well.

Better performance of the secondary market in India has helped the development of its primary market, which is vital for private-equity and venture capital firms to exit their investments, they said.

India is the "only major economy" that is projected to see a pick-up in growth momentum, Paris-based Organization for Economic Cooperation and Development said on Thursday.

The Reserve Bank of India, the nation's central bank, recently forecast that the economy will grow at 5.5 percent in the current financial year to March 2015 and at 6.3 percent in the following fiscal year, a significant improvement from the below-5 percent growth rates of the last two financial years.

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Ayishah Ma is a financial reporter on Greater China issues.