Qihoo Continues China IPO Rush: Hurst Lin of DCM Explains Why Chinese Companies are Listing Stateside

Chinese VC-backed companies dominated the landscape in 2010, rivaling the number of U.S. startups going public. Although 2011 has gotten off to a slow start, many investors say that when all is said and done, by the end of the year, China IPOs will again be one of the top stories.

Perhaps on cue, on Wednesday, Qihoo 360 Technology Co. Ltd., a provider of Internet security products and China’s third most-popular Internet company, soared in its public debut (NYSE: QIHU), providing a successful exit for a slew of investors, including Sequoia Capital, Highland Capital, Redpoint Ventures, Matrix Partners and IDG.

Reuters is calling the IPO an echo of the Chinese IPO phenomenon of last year.

However, this is not news for subscribers of Venture Capital Journal, which in February reported how investors from Qiming Venture Partners, GGV Capital Ventures, DCM and others are gearing up for more VC-backed IPOs in 2011 from an expanding Chinese economy.

As Hany Nada, a managing director at GGV Capital, told us about China: “You can stand anywhere here and grow 10 percent. You can enter a specific city or market, and your growth instantly doubles. You don’t even have to be particularly good.”

VCJ subscribers can read the story here.

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Meanwhile, as a treat for peHUB readers, below is a perspective that Hurst Lin, general partner of DCM, wrote for VCJ.

In it, he explains why so many Chinese companies are listing stateside:

By most accounts, 2010 was hardly a blockbuster year for IPOs in the United States. While IPO activity picked up over 2009, it remained at depressed levels.

But one group had a banner year on the Nasdaq and the NYSE: Chinese companies.

Last year, 38 China-based companies went public on U.S. exchanges, raising more than $4 billion and accounting for a quarter of all IPOs last year, according to Dealogic. Of these, 22 were venture-backed companies, accounting for 36% of all venture-backed IPOs in the U.S. last year, according to Renaissance Capital.

Why are so many high-growth, venture-backed Chinese companies going public in the U.S.?

DCM has invested in Chinese startups since 1999 and seven have completed IPOs in the United States. Our portfolio company E-Commerce China Dangdang Inc., known as the “Amazon of China,” went public on NYSE in December and quickly achieved a $2.5 billion market cap.

A decade ago, as co-founder of SinaNet, China’s largest online portal, I helped guide the company through a $78 million IPO on Nasdaq, the first-ever IPO of a Chinese tech firm on the exchange. So I have a pretty good idea of why Chinese companies choose to list in the U.S.

There are three main advantages for a Chinese company to do a trans-Pacific IPO. First, the deep research bench of U.S. financial analysts covering Internet companies is unparalleled. On Nasdaq, there are hundreds of analysts following the ins-and-outs of tech companies. Any Chinese tech company that lists in the United States will be covered by financial analysts and benefit from this well-established research ecosystem.

Second, U.S. markets offer Chinese companies access to a large base of institutional investors. In China, the stock market is more retail driven, whereas most investors are institutional in the U.S. market, which leads to less volatility and more stability among shareholders.

Lastly, and most importantly, U.S. exchanges do not require listing companies to be profitable. High-growth tech companies that have huge potential but no profits are welcomed on the Nasdaq. In China, all companies must be profitable for two years before seeking an IPO. High-growth, yet still unprofitable Chinese companies that want to raise growth capital through an IPO have no choice but to list outside of China.

In a few years, Chinese authorities may loosen listing rules, but until then, the United States will remain the most hospitable market for high-growth tech companies.