Venture Capital in ChinaAs their understanding of venture capital increases, local governments around China have begun to pay closer attention to the development of the local venture capital industry. Some companies, especially high tech firms have also started venture capital operations. Companies such as Stone Group Corp., Start, Legend, Tsinghua Tongfang, and Haier have set up their own independent venture capital firms or joint venture venture capital firms to invest strategically.Venture capital plays a major role in the development of the high tech industry. Of the companies that receive venture capital financing, 28% are in the seeding stage, 53.6% are in the growth stage and 18.4% are mature stage companies. Some of the successful companies will be able to go public. The distribution of venture capital firms are concentrated in two areas. 1) Most VC firms are concentrated in China's eastern region. There are forty VC firms in the East and only seven in the West. 2) In terms of industry, the VC firms are concentrated in the high tech sector. 89% of the VC firms chose to invest in high tech projects. Foreign funded venture capital organizations are also starting to enter China's venture capital industry. Currently, foreign funded venture capital organizations account for 8% of China's venture capital organizations, but their influence cannot be overlooked. Foreign funded venture capital firms invest according to international venture capital standards. Before investing in a company, they will have an exit strategy. If there is no exit strategy, they will not invest, regardless how good the project is. They all have powerful parent companies backing them. Plus, they are extremely cautious about the firms they chose. There are several problems with China's venture capital. Limited sources of capital. After receiving encouragement from the central government, local governments have set up numerous venture capital funds and VC firms, mainly funded by the government. This has helped the shortage of funding in China's high tech companies to a certain extent, but it has also limited the scale of China's venture capital funding. Plus, it has prevented venture capital from dispersing. In western countries, government funding accounts for very little startup funding, about 8.3%. China has 6 trillion yuan in consumer savings but very little of that is invested in high tech firms. Insurance, social security funds are not permitted to invest in the venture capital industry. Plus, very little private investments go into high tech firms. Venture capital mechanisms need to be improved. 1) Venture capital investments often involve stock equity investments. In China's venture capital firms often use loans to provide funding. 2) Improve valuation mechanisms. Currently, China's venture capital valuation system is very subjective and not very harsh nor objective. Lack of stimulation and inhibition mechanism. Many venture capital firms basically use management models of traditional state owned enterprises and have to set up stimulation and inhibition mechanisms for venture capital. This has resulted in a deficiency of management experience and personnel quality. Most of China's venture capital firms cannot compete with international venture capital firms. An exit mechanism for venture capital has not been established. Venture capital usually takes on a huge amount of risk by trading their investment for stock equity, whose value exceeds their initial investment if the company goes public. There are several ways a venture capital firm can exit their investment, such as bringing the company public, buying back their equity, merging or liquidating. But in China, there are legal and logistical problems with these methods. Intellectual property and immaterial assets are not sufficiently protected. Due to a lack of protection of intellectual property, venture capital firms are unwilling to invest in the riskier trial stage projects. The quality of service of middleman agencies and personnel are uneven. The quality of middleman agencies for venture capital firms such as accounting firms legal firms, technology valuation organizations, investment consulting firms are weak. They lack high quality talents. The law fails to protect venture capital fully. There have been many breakthroughs in local regulations over venture capital. Although the < |
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