WI Harper sees bubble in China VC market

By Tiffany Wu

SAN FRANCISCO (Reuters) - U.S. venture capital firm WI Harper said on Monday there is a bubble in China's VC market and many investors are not getting the returns they want due to too much capital chasing too few deals.

Claude Leglise, managing director of WI Harper, told the Reuters Venture Capital Summit in San Francisco that yields in China could arguably be 500 to 1,000 basis points higher than in the United States after factoring in political, currency and other risks.

But because of the huge investment interest in China, which has logged average annual economic growth of 9 percent over the last decade, returns on average are just a few hundred basis points higher than in the United States.

"When there is more money made in conferences to talk about investing than money made in deals, then that's probably a bubble," said Leglise, whose company invests two-thirds of its money in China and the rest in the West Coast of the United States.

"The world is absolutely awash in liquidity and it's super hard to find a place where the market is inefficient enough to give you 1,000 basis points," he said.

Leglise said venture capitalists are on average looking for 25 percent to 30 percent yields in China, compared to 18 percent to 20 percent in the United States, but so far he did not see many achieving that target.

In China, WI Harper invests in companies that are focused on the domestic market, as opposed to the export sector. That's because these companies sell to a middle class of about 130 million to 150 million people whose cost of housing and health care is meaningfully lower than in the United States, he said.

Leglise said hot sectors include clean technology, value-added mobile phone services, and Web 2.0 companies, which refers to the new generation of interactive Internet services that encourage users to share text, pictures and video with other users.

"Mobile value-added services is an area that essentially in the States we don't know. But they have 430 million cellphone users who are accustomed to messages, weather, traffic maps, and so it's just a totally different world from what we're seeing here," Leglise said.

He said WI Harper on Friday closed an investment in Mapbar, which he described as a merger of Google Maps and the Yellow Pages -- users click on a map to see company listings.

"It's of course available on the Internet PC and also on mobile, which essentially multiplies the potential market for this company by a factor of six," Leglise said.

WI Harper is also interested in consumer-oriented companies that use the Internet for sales, what he called "bricks and mortar with a Linux server."

Leglise said WI Harper's lowest investments in China is around a quarter of a million dollars, and the firm will pour up to $8 million for a good company over several rounds of financing.

(Additional reporting by Scott Hillis)