IPOs Surge in 2011; Chinese Enterprises May Turn to Europe for Overseas Listings

Zero2IPO Research Center observed that listings in Europe by Chinese enterprises somewhat warmed up: In the first seven months of 2011, four Chinese enterprises went to Germany’s FWB senior market for listings, and the number of listings equaled the total number in the four years from 2007 to 2010; Meanwhile, UK Trade & Investment launched seminars themed "Going Out—Marching into International Markets" successively in cities like Shanghai and Shenzhen in 2010, in the hope of drawing more Chinese enterprises to the UK for investment and financing activities. As we are halfway through 2011, China concept stocks are embracing slowly opened windows into the European market although they suffered setbacks on the path to the US market.

US Listed Enterprises Had Tough Days for Half a Year

During the several days in the first half of May 2011, the US market saw five IPOs successively launched by Renren.com, NetQin, Jiayuan.com, Ifeng.com and Zenix, which came after the surge of Qihu on the first day of trading and was followed by Tudou.com, Xunlei and Cloudary that were eager to have a try. The market seemingly has well prepared a "gee feast" for China concept stocks in advance.

In June 2011, China concept stocks experienced a sudden turn for the worse, with financial status doubted by multiple sides, corporate qualifications frequently suffering credit crises and stock prices and market capitalization both shrinking substantially as the institutions represented by MuddWasters vigorously did short sales.

In July 2011, investor and enterprise concerns about US listings grew as the once-aggressive Xunlei and Cloudary suspended their listings due to poor environment in US secondary market. The month thus saw no Chinese enterprises going public in the US market, the lowest level since February 2010.

In August 2011, the US capital market showed no clear trends for H2’11 as the possibilities for USD depreciation and global inflation increased at the same time, though US Congress parties reached consensus on the debt ceiling in August 2011. During the same period, Zhu Mingyue, CEO of Zhubajie.com, announced they would kick off US IPOs at a proper time while Tudou.com spread the news of an upcoming listing. Anyway, an ice-breaking move is expected among the US IPOs by the Chinese enterprises.

FWB Embraces an IPO Surge

As a major international financial center besides New York and London, Frankfort is among the world’s biggest capital markets. Deutsche Borse (FWB in this article) boasts complete regulation mechanisms, transparent transaction procedures as well as market maker system and sound liquidity, which facilitates enterprises’ expansion in international markets, the European market in particular. However, Chinese enterprises have always shown moderate paces in Germany listings, taking interest far less than those in HKMB, US market and even South Korean and Singaporean markets. As of July 31, 2011, eight Chinese enterprises have been traded on the senior market of Deutsche Borse, and half of the IPOs took place in 2011, showing the gradually faster pace of Chinese enterprises in Germany listings.

The regulation department under Deutsche Borse requires prospectuses to be prepared mainly in English and preparation in both German and English only for key contents, which alleviates the burden of Chinese enterprises in listing preparation. In addition, the listing fees and post-listing maintenance fees on Deutsche Borse are both lower than those in the US market. For example, the minimum annual fees on NYSE stood at US$38,000, compared with Euro10,000 on the senior market of Deutsche Borse.

Chinese Enterprises Return to London for Listings after 14 Years

LSE is the oldest stock exchange in the world, listed among the world’s four major stock exchanges together with NYSE, NASDAQ and TSE. LSE set up the Alternative Investment Market (AIM), a growth enterprise market, in 1995. Beijing Datang Power Generation Company Limited went traded on LSE in 1997, becoming the first listed Chinese enterprise in the market. As of July 31, 2011, the listed companies disclosed in the official website of LSE included five enterprises in Chinese mainland, which were all big-sized state-owned enterprises. Besides, there were dozens of Chinese enterprises that went listed by setting up overseas branches in red chip structures.

China concept stocks have undergone ups and downs over the past 14 years. On one hand, China concept stocks were once doubted for poor performances and given cold shoulders as the listing conditions on AIM where the Chinese enterprises were traded were loose and no compulsory requirements were imposed on the qualifications of the listed enterprises; on the other hand, few enterprises with sound profitability chose LSE because of their limited knowledge about the UK market and almost no Chinese enterprises went public on the LSEMB after Air China. However, various objective conditions are paving the way for the Chinese enterprises’ return to the UK’s capital market as the market pays increasing attention to the investment and financing activities by Chinese enterprises thanks to China’s flourishing economy and the maintenance fees on LSE are lower.

Chinese Enterprises Need to Diverse Places of Overseas IPOs

As the world’s most important financial center, the US market has long been one of the top choices for Chinese enterprises in overseas listings. However, the prices for US IPOs are growing year-by-year as the US regulation grows tougher and the maintenance fees become higher. Despite the slightly lower degree of familiarity about the European market at home and the limited P/E ratios at present, it is necessary for Chinese enterprises to have second thoughts about the choices of places for overseas listings as both subjective and objective environment changes.

As one of the major sources for global IPOs, the listings of Chinese enterprises mean great benefits for overseas intermediaries and stock exchanges. As China’s economy maintains robust growth, the overseas listings by Chinese enterprises can also help overseas investors share the fruits of China’s economic development and asset appreciation by investing in Chinese enterprises. Therefore, drawing more Chinese enterprises to settle down becomes a major goal of various capital markets. The European market has shown positive performance in recent years, with the aim to build a bridge for exchanges of capital between China and Europe.

LSE and Deutsche Borse successively set up Beijing offices in 2008 to further intensify their cooperation with the Chinese market. UK Trade & Investment initiated seminars together with Price Waterhouse Coopers in several Chinese cities in 2010, drawing a large number of representatives from Chinese enterprises; Deutsche Borse has held three sessions of China-Europe Equity Forum and offered Chinese pages on its official website to provide Chinese enterprises with listing information.

In 2007, NYSE acquired Euronext that included six stock exchanges like Paris Stock Exchange to set up NYSE Euronext. LSE and Deutsche Borse that have maintained independence are the core stock exchanges with the hugest influence in Europe. Despite the EU economic sluggishness resulted form Greece debt crisis, Germany and UK, as the two pillar economies with the greatest economic anti-pressure and recovery abilities, were least affected by the crisis and had relatively stable macro-economic environment. Through listings on the said two stock exchanges, Chinese enterprises can enter the EU market and better conduct M&As and cooperation with EU companies.

Courtesy: PEdaily China

Venture Capital bitten by Global meltdown

We should really ask ourselves if there should be alternative markets to help venture capital funds exit their deals. Indeed, it takes 5 to 7 years to go from project to company, and another 2 to 3 years to make that company reach critical mass to go public. It's a long gestation period.

Simultaneously, venture IRRs from the last decade, since the bubble burst of 2000, have suffered greatly for the lack of IPOs. Sure you can make breakeven returns as a venture capitalist when you sell your portfolio companies to larger companies, but M&As never command consistent big multiples. Because when M&A is the only route, that means the IPO window is closed and it is a buyers' market for the larger companies fishing in startup territory.

When the IPO window opened significantly in the last 2 quarters, a slew of tech companies rushed to file; more than a 140 at last count. And this crop is a good crop. Good growth run rates, existing revenues, existing cash flow, visible runway to profitability, and overall excellent metrics. Nothing in common with the last tech IPO window of 1999-2000.

But with the current global meltdown in markets, it seems that this IPO window might be closing rapidly. Over $5 billion worth of IPOs have been cancelled, or at least put on hold, over the past two weeks.

"This is another blow to venture capital" says Rachid Sefrioui, Managing Director at Finaventures, a Los Angeles based venture firm, "we've been waiting for 10 years to taste public stocks again and give hope to all startups, and now this comes from left field."

The U.S. debt situation has been known to all fund managers for a while now, but the S&P downgrade radar-clocked the investment community. "You know you're speeding down the freeway, but it doesn't hit you until those cop sirens light up in your rear-view mirror." Continues Rachid Sefrioui "how do you solve the revenue part of the government budget if the first hit is the number one industry in job creation?" 

Indeed that is what U.S. leaders have to figure out. Cutting taxes is a nice stimulus, but you have to wait long enough for venture companies to finish gestation and go public, and as we know 92% of job growth in venture-backed companies comes post-IPO.

Capital bottleneck: Fewer Venture Funds for Growing base of Entrepreneurs

At a time when innovation is at an all time high, and when entrepreneurs thought they had it tough to convince a venture fund to finance their startup, things are going to get a whole lot tougher. The venture industry is contracting! and this is mostly the final blow to that $100-billion overhang from the 1999-2000 fundraising cycle.

Thirty-seven US venture capital funds raised $2.7 billion in the second quarter of 2011, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 28 percent increase by dollar commitments, but a 23 percent decline by number of funds compared to the second quarter of 2010, which saw 48 funds raise $2.1 billion during the period. US venture capital fundraising during the first half of 2011 totaled $10.2 billion from 76 funds, a 67% increase by dollars compared to the first half of 2010 but a 15% decrease by number of funds, marking the lowest number of funds garnering commitments since the first half of 1995.

"The fact that the number of firms raising money successfully remains at such low levels confirms an ongoing contraction of the venture capital industry, which will serve well those funds that can obtain commitments – but that group is becoming more and more narrow," said Mark Heesen, president of the NVCA. "While a smaller venture industry will intuitively produce higher returns, it is critical that the mix of funds remain geographically diverse and cover a broad base of industries if we expect to contribute to economic growth and innovation at the levels we have historically. For that reason, we would like to see more funds raise money in the second half of the year."

There were 24 follow-on funds and 13 new funds raised in the second quarter of 2011, a ratio of 1.8-to-1 of follow-on to new funds. The largest new fund reporting commitments during the second quarter of 2011 was New York-based Level Equity Growth Partners I, L.P., which raised $120 million in its inaugural fund. A "new" fund is defined as the first fund at a newly established firm, although the general partner of that firm may have previous experience investing in venture capital. Adds Rachid Sefrioui, Managing Director of Finaventures: "Clearly investors (LPs) in venture funds have been disenchanted by returns in the last decade, though many have expressed optimism in the second wave of success stories coming out of California".

Second quarter 2011 venture capital fundraising was bolstered by two fund commitments from Palo Alto-based Accel Partners, which accounted for 50 percent of this quarter's fundraising total. Accel Growth Fund II, L.P. raised $875 million during the quarter, while Accel XI, L.P. raised $475 million.

Courtesy: nvca.org

China blocks Apple knockoff...first steps to IP legitimacy

With the announcement this week of the shutdown of 5 knock-off Apple stores by Chinese authorities, the entire venture community's hopes were raised.

Indeed most California venture capitalists are frustrated with China's constant play on their startups. Every successful Silicon valley startup has been knocked off, Facebook, Twitter, LinkedIn, Zynga, etc not counting the established ones such as Google and Yahoo.

Not that any of these have significant IP (Google's notwithstanding), but they do have trade practices, certain proprietary tools and interfaces that make them unique, and significantly justify their success. 

The National Venture Capital Association, the voice of venture capital, has been making the rounds in Washington DC in order to raise the issue to the Commerce Department and other federal authorities. But as it always stands with China, it is quite difficult for our leaders to make China listen, and enter the world of legtimate IP practices.

Europe is not any less innocent, just maybe a little less conspicuous about it. A German venture firm, run by 2 brothers, made it its mantra to invest in European versions of Silicon Valley success stories. French, Italian and Spanish web copycat artists make a living out of making the local version of their US counterparts, sometimes not even changing the design or the brand colors.

"I hope that the US Patent office gets an overhaul with Congress delivering a real IP protection law that includes today's innovations so that China and Europe stop getting a free ride on US innovations" confirms Rachid Sefrioui, Managing Director at Finaventures, a venture fund based in Los Angeles.

Living Social to be valued at $15 Billion for $1B IPO

It’s not quite official yet, but CNBC is reporting that Living Social has selected its lead underwriters for an IPO.

Among the most likely is JP Morgan, Bank of America and Deutsche Bank.

The Washington, D.C. based company, which is the second-largest daily deals company after Groupon, is seeking $1 billion at an implied valuation between $10 billion and $15 billion.

Groupon is seeking to raise $750 million in an IPO, which it filed with the SEC in early June.

"it makes sense that LivingSocial does not wait too long behind Groupon's IPO" confirms Rachid Sefrioui, Managing Director of Los Angeles-based Finaventures, "the market window for these two leaders is now, and may not be there a year from now; as we all know timing for an IPO is just as important as quality of the company."

The lead underwriters that LivingSocial is likely to work with do not overlap with the ones leading Groupon’s offering, although there might be some overlap if others join later.

LivingSocial has raised a significant amount of money from Amazon.com. Its last round of capital totaled $565 million at a valuation of $3 billion.

SEC comes down hard on crowdfunding; considers changing rules

About a month ago, I wrote a post about the crowdfunding phenomenon, and the fact that none of these sites were focused on two key ingredients: 1/ regulations of promoting investments to the general public, 2/ securing funds and legal issues for the investments they promote and make.

Naturally I received a slew of emails complaining that this was not fair nor does it help the future of crowdfunding as an alternative to traditional investment channels. Though I agree with most, I do believe that crowdfunding platforms will have to differentiate themselves beyond the notion of attracting crowds - an already established paradigm by social networks. 

They will probably have to ride two horses at the same time - classic fundraising that meets regulators' existing laws combined with the crowd's ability to drive deal picking. Once there are a few success stories based on the crowd's input - after all they are the customer too, then the model can grow into a funding platform as well.

Rachid Sefrioui, an experienced venture capitalist from California, confirms that with any new model, there needs to be social acceptance by established crowds in that space. "if there wasn't a MySpace, Facebook would probably not have the traction it has today; if there wasn't a Plaxo, LinkedIn would not have grown so fast". 

So there are precedents in establishing one part of the formula - crowds picking deals, then establishing the second part of it - crowds funding deals, confirms Rachid Sefrioui, Managing Director at Finaventures.

Eventhough the SEC is considering loosening its rules, it will be difficult to see them completely change the rules where it becomes a free-for-all with little or no registration requirements.

Feast or Famine in the Venture Capital business

U.S. venture capital companies are off to their most successful fund-raising start since 2001, in large part because of intense investor interest in social media companies.

The National Venture Capital Association and Thomson Reuters on Monday reported that 36 U.S. VC funds raised nearly $7.1 billion in the first quarter.

According to both organizations, the Q1 numbers mark "the strongest quarter for U.S. venture capital fundraising since the third quarter of 2008 and the best annual start for fundraising in the U.S. since 2001."

The first-quarter numbers also are 76 percent higher than last year's Q1 total of $4 billion raised by 44 funds.

A year ago, of course, the economy was still struggling to emerge from the worst recession since the 1930s. And while unemployment remains unacceptably high, capital has been increasingly available over the past year as investors look for emerging sectors to bet on.

They found one in social media, as companies such as Facebook, Groupon, Twitter, Zynga, LinkedIn and others have sparked the kind of investor excitement -- and warnings of a second bubble -- not seen since the original Internet gold rush of the late '90s. That bubble began leaking air in March 2000, after which hundreds of presumably promising Internet start-ups withered away, unable to turn investment into sustainable revenue and profit.

Confirms Rachid Sefrioui, Managing Director at Finaventures in Los Angeles, "The venture business is either feast or famine; it feels like LPs hate us one year, and love us the next".  

 “This year will be a defining one as many venture capital firms will be fundraising, some of whom have been waiting for the investor climate to improve before going out,” NVCA President Mark Heesen said in a statement.

Bessemer Venture Partners raised the most funds ($1.6 billion) in Q1, followed by Sequoia Capital ($1.3 billion) and J.P. Morgan Digital Growth Fund ($1.2 billion).