Venture capital in China. Three examples

This article reviews the literature on venture capital in China and examines where China's venture capital industry has been and where it is likely to go in the future. Since the 1980s, venture capital in China has grown steadily alongside the robust national economy. The future is likely to offer even greater opportunities, as entrepreneurs are encouraged and property rights improve. However, there will also be a period of transition as the market continues to mature and as new legal structures and commercial arrangements emerge. Venture capital in China has many interesting differences from that in Western countries. The venture capital industry is shaped by the institutional context and China is no exception to this. This article also examines some specific differences between the system in China and that of the United States. Future prospects for venture capital are also appraised as China continues its transition to a market economy. Asia Pacific J Manage (2007) 24:247-268

2007

This article reviews the literature on venture capital in China and examines where China’s venture capital industry has been and where it is likely to go in the future. Since the 1980s, venture capital in China has grown steadily alongside the robust national economy. The future is likely to offer even greater opportunities, as entrepreneurs are encouraged and property rights improve. However, there will also be a period of transition as the market continues to mature and as new legal structures and commercial arrangements emerge. Venture capital in China has many interesting differences from that in Western countries. The venture capital industry is shaped by the institutional context and China is no exception to this. This article also examines some specific differences between the system in China and that of the United States. Future prospects for venture capital are also appraised as China continues its transition to a market economy.

Management Decision, 2007

PurposeThis study seeks to examine the peculiarities of the venture capital market in China and seeks to compare it with Western markets.Design/methodology/approachThe paper provides insights based on both the practitioner and academic literature in the field.FindingsIt is noted that different cultural norms, corporate governance structures, a lack of appropriate exit strategies, and governmental intervention are important factors that set the markets apart and should be taken into consideration when making venture capital investments in China.Practical implicationsThe paper should be of interest to practitioners considering investing in China and to academics doing research in this area.Originality/valueThe paper is to the best of the authors' knowledge the first to provide a detailed and comprehensive review of the Chinese venture capital market.

Columbia Journal of Asian Law, 2017

This article analyzes Professor Ronald Gilson's theory of " simultaneity " in engineering a venture capital market in the context of China. Based on both quantitative and qualitative data collected by the author, this article analyzes how China has created the fastest developing and the largest engineered venture capital market in the world within three decades. It concludes that the rise of venture capital in China is attributable to (1) increasing capital supply through various governmental programs, easing regulatory barriers towards institutional and foreign investors, providing tax incentives, and improving the exit environment; (2) enhancing the availability of financial intermediaries by introducing the limited partnership that creates an efficient relationship between venture capitalists and investors; and (3) encouraging entrepreneurship by improving the regulatory environment for small businesses. Through these measures, China has facilitated the simultaneous availability of capital with the appetite for high-risk, long-term investments and the emergence of a class of entrepreneurs with the skills and incentives to put that capital to work. One key factor of the rapid development of the Chinese market has been its increased reliance on market forces in allocating capital. On the other hand, a residual degree of bureaucratic involvement in capital allocation prevents the Chinese regime from being fully efficient. China serves as an (imperfect) model for other governments in the world where unfettered market forces have not brought about successful venture capital markets.

2002

Institutional theory argues that institutions in general, and culture in particular, shape the actions of firms and individuals in a number of subtle but substantive ways. The theory has been used to explain a number of significant and substantive managerial differences found in different parts of the world. To date, the examination of venture capital outside the US and Europe, however, has been rather limited. Institutional theory also suggests that there would be differences in how venture capital may operate in other parts of the world, such as Asia where the culture is substantially different from the West. Based on interviews with 36 venture capitalists in 24 venture capital firms investing in China, this exploratory research finds that China's institutional environment creates a number of significant differences from the West. The article discusses the impact of these findings on future research on Asian venture capital, theory development, and the activities of venture capital professionals in that region. D

Journal of Business Venturing, 2003

Institutional theory argues that institutions in general, and culture in particular, shape the actions of firms and individuals in a number of subtle but substantive ways. The theory has been used to explain a number of significant and substantive managerial differences found in different parts of the world. To date, the examination of venture capital outside the US and Europe, however, has been rather limited. Institutional theory also suggests that there would be differences in how venture capital may operate in other parts of the world, such as Asia where the culture is substantially different from the West. Based on interviews with 36 venture capitalists in 24 venture capital firms investing in China, this exploratory research finds that China's institutional environment creates a number of significant differences from the West. The article discusses the impact of these findings on future research on Asian venture capital, theory development, and the activities of venture capital professionals in that region.

2017

Existing literature suggests a strong relationship between a vibrant venture capital market and an active stock market: venture capital flourishes when venture capitalists can readily exit from successful portfolio companies through IPOs, and IPOs are in turn facilitated by active and efficient stock markets. This article uses China as a case study to explore the connection between the stock market and venture capital market. Through empirical studies, this article confirms the existing literature by demonstrating a close connection between the stock market and venture capital market in China. It also refines the existing literature by finding that, for venture capital availability, laws and policies also matter in China. Strong and sustained law reforms and government policies aimed at improving the institutional structure and regulatory environment of the stock market can facilitate venture capital-backed exits, which in turn lead to an increase in new venture capital availability in China. Nonetheless, numerous IPO closures have led to freeze-ups in China's venture capital market. Also, there remain a multiplicity of institutional impediments to the efficient operation of the stock market and the effective implementation of IPO reforms in China. These may in turn hinder the development of the Chinese venture capital industry.

2017

This paper evaluates a method, intended by formal investors (venture capitalists) while making sound investment decisions and selecting those successful entrepreneurs in the emerging economies by identifying their basic investment criteria. The purpose is extended to compare the criteria used by venture capitalists of both countries along with the related risk profile faced by them. The online questionnaires were sent to the venture capitalists of both countries (selected from the official entities) which are followed up by the interview (face to face and electronic). It is found that venture capitalists of both countries act almost same while evaluating the individual criteria (entrepreneur’s personality and experience) and corporate criteria (Product and Market characteristics). In terms of institutional or environmental criteria, Pakistani VCs are more demanding then Chinese VCs due to the lack of support from the financial and legal institutions. Further, Pakistani VCs attracted...

Journal of Small Business Management, 2008

In this study, we examine the control and incentive mechanisms of domestic and foreign venture capital (VC) firms in China. Primary findings show that most VC firms use staged capital infusion, value reassessment based on subsequent performance, and other tools reflecting the flexible and dynamic characters of the investment systems and rarely replace management team. On the other hand, domestic VC firms are less active in monitoring, less likely to retain veto rights, and less likely to introduce stock options into target firms and for all employees. They are also less motivated to provide value-added services than their foreign counterparts. Instead, they concentrate their monitoring and participation on the financial aspects of the invested ventures. We discuss these findings and suggest directions for future research. Although venture capital (VC) industry in China is in its infancy, it is now growing at a rapid rate. The development of VC industry provides an important source for Chinese entrepreneurs to solve problems associated with inadequate systems of corporate governance and the lack of long-term financing for restructuring and growth (White, Gao, and Zhang 2005; Zhang 2001). VC has played an increasingly important role, helping small and medium-sized start-up businesses in China (Fung, Liu, and Shen 2004). Given the potential existence of

European Business Organization Law Review, 2020

There is little empirical work examining contractual innovation in the context of China, which is the second largest venture capital market in the world, after the United States. Drawing upon extensive interviews, a hand-collected dataset of investment agreements and judgments made by Chinese courts on venture capital disputes, this article examines a unique contractual design that is common in the Chinese venture capital sector—the valuation adjustment mechanism (“VAM”). A VAM provides investors with a right to adjust a portfolio company’s original valuation and to get compensation by cash or equity upon the occurrence of certain future events (such as failing to meet financial or non-financial performance indicators). The prevalence of VAMs in China is potentially attributable to: (1) severe information asymmetry in the less informed market, (2) the lack of convertible preferred stock under Chinese law and excessive legal restrictions over investment tools and contractual mechanisms in venture capital financing, and (3) insufficient legal protection for investors under Chinese law. This article argues that, unlike American venture capital contracts, which are designed to encourage long-term, sustainable investor-entrepreneur relationships, VAMs are predominantly investors’ self-help mechanisms to address specific and serious investor protection issues in the transitional and less informed Chinese market. Thus, it suggests that the problems regarding investor protection motivating the use of VAMs can be better solved by law reforms such as allowing limited liability companies to issue convertible preferred stock, introducing more legal remedies for minority investors, as well as an improved regulatory environment governing venture financing.