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The Global Trend and China Opportunities of Venture Capital Investment

Apr 18-2013   



 

By WANG Dai-wei

 

What is venture capital investment? How shall we make use of Venture Capital to establish an internationally competitive enterprise? And what opportunities will exist in future China? At the BiMBA Alumni Class on the evening of April 22, Dr. Martin Haemmig, a world-famous expert in Venture Capital, gave detailed answers to these questions of the Chinese entrepreneurs present.   

 

Venture Capital: Standard Mode and Global Trend

The earliest mode of venture capital investment was born in the Silicon Valley, where scientists and researchers would choose to run a business of their own if their inventions were not accepted by the companies. Meanwhile, over 100 VC companies in the area invested in certain selected ventures and helped them grow rapidly and ultimately get purchased by big companies. After that, both sides would start a new round of venture and investment separately with the profits gained. 

 

“High Technology is the most important growth point of entrepreneurial companies. This can be seen from the areas around the world with the most concentrated research and development, i.e., computer and electronic component, medical care, and automation,” said Professor Martin Haemmig.

 

“Investors always focus on growing countries and regions. And GDP growth is an important indicator when they consider a VC investment,” Professor Martin Haemmig added. According to the forecast of Goldman Sachs & Co., by 2050, Brazil, Russia, India and China will have the fastest economic growth worldwide. By that time, a lot of investments will pour in and numerous business opportunities will arise. And this will constitute an ideal environment for the development of entrepreneurial companies. The present total venture capital worldwide has become 3.5 times that of six years ago.

 

“Perhaps the venture capital outside China will impose a threat on local venture capital in the country. However, the former will bring to China international management modes and experience and greatly enhance the influence of venture capital in the industry. The government has even started formulating laws for venture capital. ”

 

Investors: Where to Invest?

“Now two persons are inviting you to make an investment. One says, ‘I have a very good idea and all I’m short of now is money.’ And the other says, ‘my company is running smoothly with high profits. You will be assured if you invest in my company.’ Then which one will you choose for investment?”

Professor Martin Haemmig said that these represent two typical stages: early stage and late stage investment. The former is of higher risk but bigger profit return while the latter lower risk but smaller profit return.

 

He introduced two examples. One is the venture capital invested in Google, whose profits are 469 times its investments. And the other is Youtube, whose profits are 131 times.

 

The main objects of VC investment in China are nominally at the early stage, but actually are enterprises that have already entered into the profit-making stage. As a matter of fact, the sound performance of Baidu and Focus Media in the US stock market shows that there are already companies in China that can generate profits of international standards. If investors can find out such potential companies, they could expect to achieve high investment returns.

“A real VC investment seeks to help a growing enterprise to grow into a profit-making enterprise in China or worldwide and ultimately achieve satisfactorily high returns that correspond to the high-risk investment. This requires vision, sound judgment, courage and wisdom,” said Professor Martin Haemmig, “Late-stage investment only requires you to make good financial analysis, which is hard to render you a lovely surprise.”

 

Entrepreneurial Enterprise:To Win Venture Capital Means Giving up Some Profits

“Which one would you choose, the 10% of three-to-four layer big cake or the 100% of a small moon cake?” This is a question that Professor Martin Haemmig raised for the audiences.

 

For an entrepreneurial enterprise, the injection of venture capital will become a huge driving force and help it get listed as early as possible. Under an ordinary international practice, if a listed enterprise is purchased by a bigger company, the profits gained from the purchase will then be divided between the enterprise and its VC investors, with 20% of the profits for the former and 80% for the latter.

 

 

“In the United States, 90% of the small enterprises that gained venture capital choose to resign in the form of being purchased by bigger enterprises. But there are few such cases in China. Chinese entrepreneurs have a very strong desire for control. In their opinion, it’s the only way out for an enterprise to be listed, but it’s also a shame if their enterprises are purchased by others,” said Professor Martin, “but you should be aware that if your products are purchased and promoted by a bigger company, your popularity will be increased to great extent. It would be much easier for you to do what you want to with 10% of the profits from the venture. Besides, such a purchase usually costs a lot of money. For example, Skype sells at 4 billion US dollars and Youtube, 1.6 billion US dollars, which are indeed considerable figures. ”

 

“If you don’t want to do anything else, you may as well join in a VC investment company with the 10% profits,” he joked. ”

 

Entrepreneur: International Vision andChina Opportunities

“Five or six years ago, Chinese entrepreneurs would say, ‘we’ll first think of making profits locally.’ But now more and more enterprises would consider how to build up international competitiveness at the beginning of establishment.”

 

Professor Martin then continued with his analysis by taking IPOD of Apple as an example. Most of the technologies of IPOD come from Europe, Japan and China, with the total cost no more than 43.5 US dollars. However, through design, organization and promotion of the company, the retail price of IPOD can reach as high as 299 US dollars.

 

From this we can see that one of the cruxes of building up international competitiveness is to seek worldwide for most economical places for research and development. This can also explain why more and more multinational companies set up their world-class R&D centers in China, India and East Europe.

Then what are the hot spots for international VC investment in future China?

 

Professor Martin’s answers are IT, medical care and clean energy industry. The clean energy, in particular, is a common concern of VC investors worldwide. For “ it has been proven that when a country has to do something, it will do better job than any other countries.” Moreover, a clean energy that is suitable for China will surely enjoy endless opportunities in other developing countries of the world.

 

However, “these fields in China are still focusing on services while a revolutionary development will inevitably rely on high technologies,” summed up Professor Martin, saying, “You’ll have a lot of opportunities.”

 

The Global Trend and China Opportunities of Venture Capital Investment

Apr 18-2013   



 

By WANG Dai-wei

 

What is venture capital investment? How shall we make use of Venture Capital to establish an internationally competitive enterprise? And what opportunities will exist in future China? At the BiMBA Alumni Class on the evening of April 22, Dr. Martin Haemmig, a world-famous expert in Venture Capital, gave detailed answers to these questions of the Chinese entrepreneurs present.   

 

Venture Capital: Standard Mode and Global Trend

The earliest mode of venture capital investment was born in the Silicon Valley, where scientists and researchers would choose to run a business of their own if their inventions were not accepted by the companies. Meanwhile, over 100 VC companies in the area invested in certain selected ventures and helped them grow rapidly and ultimately get purchased by big companies. After that, both sides would start a new round of venture and investment separately with the profits gained. 

 

“High Technology is the most important growth point of entrepreneurial companies. This can be seen from the areas around the world with the most concentrated research and development, i.e., computer and electronic component, medical care, and automation,” said Professor Martin Haemmig.

 

“Investors always focus on growing countries and regions. And GDP growth is an important indicator when they consider a VC investment,” Professor Martin Haemmig added. According to the forecast of Goldman Sachs & Co., by 2050, Brazil, Russia, India and China will have the fastest economic growth worldwide. By that time, a lot of investments will pour in and numerous business opportunities will arise. And this will constitute an ideal environment for the development of entrepreneurial companies. The present total venture capital worldwide has become 3.5 times that of six years ago.

 

“Perhaps the venture capital outside China will impose a threat on local venture capital in the country. However, the former will bring to China international management modes and experience and greatly enhance the influence of venture capital in the industry. The government has even started formulating laws for venture capital. ”

 

Investors: Where to Invest?

“Now two persons are inviting you to make an investment. One says, ‘I have a very good idea and all I’m short of now is money.’ And the other says, ‘my company is running smoothly with high profits. You will be assured if you invest in my company.’ Then which one will you choose for investment?”

Professor Martin Haemmig said that these represent two typical stages: early stage and late stage investment. The former is of higher risk but bigger profit return while the latter lower risk but smaller profit return.

 

He introduced two examples. One is the venture capital invested in Google, whose profits are 469 times its investments. And the other is Youtube, whose profits are 131 times.

 

The main objects of VC investment in China are nominally at the early stage, but actually are enterprises that have already entered into the profit-making stage. As a matter of fact, the sound performance of Baidu and Focus Media in the US stock market shows that there are already companies in China that can generate profits of international standards. If investors can find out such potential companies, they could expect to achieve high investment returns.

“A real VC investment seeks to help a growing enterprise to grow into a profit-making enterprise in China or worldwide and ultimately achieve satisfactorily high returns that correspond to the high-risk investment. This requires vision, sound judgment, courage and wisdom,” said Professor Martin Haemmig, “Late-stage investment only requires you to make good financial analysis, which is hard to render you a lovely surprise.”

 

Entrepreneurial Enterprise:To Win Venture Capital Means Giving up Some Profits

“Which one would you choose, the 10% of three-to-four layer big cake or the 100% of a small moon cake?” This is a question that Professor Martin Haemmig raised for the audiences.

 

For an entrepreneurial enterprise, the injection of venture capital will become a huge driving force and help it get listed as early as possible. Under an ordinary international practice, if a listed enterprise is purchased by a bigger company, the profits gained from the purchase will then be divided between the enterprise and its VC investors, with 20% of the profits for the former and 80% for the latter.

 

 

“In the United States, 90% of the small enterprises that gained venture capital choose to resign in the form of being purchased by bigger enterprises. But there are few such cases in China. Chinese entrepreneurs have a very strong desire for control. In their opinion, it’s the only way out for an enterprise to be listed, but it’s also a shame if their enterprises are purchased by others,” said Professor Martin, “but you should be aware that if your products are purchased and promoted by a bigger company, your popularity will be increased to great extent. It would be much easier for you to do what you want to with 10% of the profits from the venture. Besides, such a purchase usually costs a lot of money. For example, Skype sells at 4 billion US dollars and Youtube, 1.6 billion US dollars, which are indeed considerable figures. ”

 

“If you don’t want to do anything else, you may as well join in a VC investment company with the 10% profits,” he joked. ”

 

Entrepreneur: International Vision andChina Opportunities

“Five or six years ago, Chinese entrepreneurs would say, ‘we’ll first think of making profits locally.’ But now more and more enterprises would consider how to build up international competitiveness at the beginning of establishment.”

 

Professor Martin then continued with his analysis by taking IPOD of Apple as an example. Most of the technologies of IPOD come from Europe, Japan and China, with the total cost no more than 43.5 US dollars. However, through design, organization and promotion of the company, the retail price of IPOD can reach as high as 299 US dollars.

 

From this we can see that one of the cruxes of building up international competitiveness is to seek worldwide for most economical places for research and development. This can also explain why more and more multinational companies set up their world-class R&D centers in China, India and East Europe.

Then what are the hot spots for international VC investment in future China?

 

Professor Martin’s answers are IT, medical care and clean energy industry. The clean energy, in particular, is a common concern of VC investors worldwide. For “ it has been proven that when a country has to do something, it will do better job than any other countries.” Moreover, a clean energy that is suitable for China will surely enjoy endless opportunities in other developing countries of the world.

 

However, “these fields in China are still focusing on services while a revolutionary development will inevitably rely on high technologies,” summed up Professor Martin, saying, “You’ll have a lot of opportunities.”