Investments of venture capital (VC) firms shrank sharply in the second quarter as a result of the outbreak of the severe acute respiratory syndrome (SARS) in the first half of this year, but the outlook for the year as a whole is still very bright, according to research firms and industrial executives.

Zero2ipo.com Ltd, a major professional venture capital market researcher in China, said in its second quarter report that 23 VC firms invested US$133 million into 28 businesses in China in the past quarter, while in the first quarter, 17 venture investment companies injected US$240 million into 31 companies.

"Our survey among 50 active VC firms in the Chinese mainland shows the SARS factor is the most important reason leading to the 45 per cent decline in investments in the second quarter," said Gavin Ni, chief executive officer with Zero2ipo.

Compared with international VC businesses, domestic players showed a more active performance in the second quarter and their total investments almost tripled in the period, from the first quarter's US$14.60 million to US$42.93 million in the April-June period, while the investment of international firms shrunk from US$133 million to US$90 million.

The focuses of the capitalists also diversified in the second quarter.

While almost 96 per cent of the capital flew into the information technology sector in the first three months, the service sector, new energy, telecommunications, manufacturing and medicine were the top five invested areas in the second quarter and telecommunications businesses only attracted 12 per cent of the total investment.

Despite the decline in the second quarter, the overall situation in the first half of this year was quite healthy, Ni said.

According to Zero2ipo's statistics, 66 Chinese companies attracted US$379 million in investments from VC firms in the first six months, growing 46 per cent year-on-year and reaching 89 per cent of last year's total.

"The increasing enthusiasm of foreign venture capitalists towards the Chinese market is the major stimulus for the fast growth in the first half of the year," said Ni.

Foreign VC companies invested US$277 million, or 74 per cent of the total investment in the first half, into businesses in China, according to Zero2ipo's survey among VC companies.

Ni said the shift of high-tech manufacturing from the Silicon Valley in the United States to China, the steady economic growth of the country, and the rebound of high-tech stocks on the US NASDAQ stock market, were three major factors behind the increasing flow of foreign venture capital into China.

Telecommunications, information technology, service, new energy and semiconductor sectors were the top five hot areas in attracting venture capital, gaining 44 per cent, 17 per cent, 11 per cent, 10 per cent and 6 per cent of the total investments, respectively, according to Ni.

With the end of the SARS epidemic in late June, Ni believes that venture capitalists will be even more active in searching for good target businesses and increasing their investment.

He predicted that the total investment this year would reach US$600 million, beating the figures of US$518 million in 2001 and US$418 million in 2002.

"It is a natural trend for VC firms to increase their investments after almost three months' of silence from April to July," Ni said.

The improvement of China's economy after the SARS epidemic and the recovery of stock markets will also stimulate more investment in the second half of the year.

The International Finance Corporation (IFC), the private sector arm of the World Bank, said last Thursday that it would invest US$3.5 million in the Beijing-based software business Great Infotech, the first VC project by IFC in China.

The money, together with US$3 million from Singapore-based OCBC Bank, Singaporean VC firm Wearnes & Walden, and German development finance company DEG, will be used to help Great Infotech expand its software and system integration businesses for financial institutions and build a development centre.

"We expect that this investment will have a positive impact in the information technology sector and also the financial sector," said Javed Hamid, IFC director for East Asia and Pacific.

The improvement of exit channels will also attract more venture capital.

The Chinese Internet real name service provider 3721.com was reported to be having talks with some buyers including Hong Kong-listed Tom.com and Chinese Internet portal Sohu.com, which is good news for its investors, such as US-based International Data Group (IDG).

At the same time, initial public offerings have also become a hot topic among Chinese enterprises.

Hangzhou-based e-commerce provider Alibaba.com said it was preparing for a listing on the NASDAQ.

If the initial public offering (IPO) becomes a reality, it will be good news for its investors, such as the Japanese VC firm Soft Bank and the venture capital arm of US investment bank Goldman Sachs.

"We have been preparing for an IPO, but I cannot tell you when, but one thing is for sure: It will not be long," said Jack Ma, chairman and CEO of Alibaba.com.

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