As China is a developing and transitional country, its venture capital market has some special characteristics.
1. China’s venture capital practices lag behind the international norm
High-tech companies in China, which depend on various sources of capital, have gone through a difficult development process. Although China has quite a few high-caliber entrepreneurs in the high-tech industry, a large number of these companies (16,000 in Beijing and 72,000 nationwide) are run by inexperienced people.
a) Serious information asymmetry
First, there is an information asymmetry between managers of high-tech companies and outside investors.
Second, there is an information asymmetry between high-tech companies and venture capital firms. According to international practice, both parties must be honest with each other and exchange information openly. After all, venture capitalists add value by using their management and technology expertise to improve company performance.
b) Serious exclusionism
High-tech companies in China, particularly those run by locals, tend to refuse to cooperate with outside investors.
c) High investment cost
Chinese high-tech companies, particularly those run by locals, are mostly controlled by couples or families. These ownership structures make it difficult and expensive to follow the standard practice for venture capital investments, whereby venture capitalists receive a substantial share of ownership and control of companies.
2. Company managers, rather than venture capital investors, retain majority control
It is common practice for managers of some high-tech companies in China to demand a majority stake in cooperation with venture capital firms. There can be many explanations for such behavior, but the main reason lies in the influence of traditional Chinese thinking. This thinking is based on the belief that control of the business will be lost without majority ownership or a leadership role in the business.
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 appraisal centers. Unfortunately, China still lacks agencies offering adequate services to the venture capital community.
Today, venture capital firms in China have to take on the multiple tasks of searching for investment projects, evaluating projects, avoiding legal risks, planning the finances of invested companies, and helping the portfolio company go public. of values.
4. The legal framework for venture capital investments is inadequate
Although China has established the national strategy of “revitalizing the country through science and education,” it has yet to establish a legal framework in support of venture capital investments. The Chinese venture capital community has been growing in the absence of adequate legal protection.
5. Chinese capital markets provide inadequate exit channels for venture capital investments.
The returns of a venture capital firm do not depend on annual dividends, but rather on the acquisition or initial public offering of the companies in which it invests. Such liquidity events require mature capital markets, which China currently lacks.
Venture capital financing has created a dynamic system of modern financial products and services by introducing a number of innovations. Visit online http://www.dynastyresources.net in New York City.