The
Chinese venture capital community has been growing in the absence of proper
protection by law. Venture capital financing has given rise to a dynamic system
of modern financial products and services by introducing a series of
innovations. The development of a product can be divided into four periods:
seed, start-up, grow-up, and maturity. The Chinese government has gradually
embraced the concept of knowledge economy and is introducing a series of
policies to encourage the development of the venture capital industry.
China
being a developing and transitioning country, its venture capital market has
some special characteristics.
1. China’s venture capital practices lag
behind the international norm
The
high-tech enterprises in China, relying on various sources of capital, have
undergone a difficult process of development. Although China has quite a few
high-caliber entrepreneurs in the high-tech industry, a large number of these
companies (16,000 in Beijing while 72,000 nationwide) are run by inexperienced
individuals.
a)
Serious information asymmetry
First,
there exists an information asymmetry between the managers of high-tech
companies and the outside investors.
Second,
there exists an information asymmetry between high-tech companies and venture
capital firms. By international practice, both parties should be honest with
each other and exchange information openly. After all, the venture capital
investors add value by using their management and technological expertise to
improve the company’s performance.
b)
Serious exclusionism
High-tech
companies in China, particularly those run by the locals, have a tendency to
refuse to cooperate with outside investors.
c) High
cost of investment
Chinese
high-tech companies, particularly those run by the locals, are mostly under the
control of couples or families. These ownership structures make it difficult
and costly to follow the customary practice for venture capital investments,
under which venture capitalists receive a substantial portion of ownership and
control in the companies
2. Company managers, rather than venture
capital investors, retain majority control
It is a
common practice for the managers of some high-tech companies in China to demand
for majority holding in cooperation with venture capital firms. There may be
many explanations for such behavior, yet the primary reason lies in the
influence of traditional Chinese thinking. This thinking is based on the belief
that one will lose control over the company without majority holding or a
leadership role in the company.
3. China lacks an infrastructure of service
professionals to support venture capital firms
The
growth of venture capital involves not only high-tech companies and venture
capital firms, but also intermediary agencies such as law firms, accounting
firms and assessment centers. Unfortunately, China still lacks agencies that
offer proper services to the venture capital community.
At
present, venture capital firms in China have to shoulder the multiple tasks of
seeking for investment projects, assessing the projects, avoiding legal risks,
planning the finances of invested companies and helping the portfolio company
to list on the stock market.
4. The legal framework for venture capital
investments is inadequate
Although
China has set the national strategy of “revitalizing the country through
science and education,” it has yet to set up a legal framework in support
of venture capital investments. The Chinese venture capital community has been
growing in the absence of proper protection by law.
5. The Chinese capital markets provides
inadequate exit channels for venture capital investments
The
returns of a venture capital firm do not depend on yearly dividends but on the
acquisition or the initial public offering of its invested companies. Such
liquidity events require mature capital markets
, which China lacks at present.
venture
capital financing has given rise to a dynamic system of modern financial
products and services by introducing a series of innovations. Please visit
online http://www.dynastyresources.net
in NewYork city.