Venture Financing Strategy

Featured by computers, networks and communication technologies, the information technology revolution that started in 1940s, especially the high-tech revolution arising in 1980s has brought human civilization into a brand new era of knowledge-based economy. Just as the industrial economy, 200 years ago, radically changed the agricultural civilization that had lasted for thousands of years, the knowledge-based economy is now heavily shocking the economic theories and social economic running models formed by the industrial civilization. The success of a large amount of high-tech enterprises, in the process of transition to the knowledge-based society, is coming up with a new running model of enterprises clearly different from traditional economy. Sometimes a new industry is created by the development of new products, and sometimes the traditional industries are revived by introducing new technologies. There is definitely no new economy without venturing. Venture firms are the core drive for catalyzing the making and development of knowledge-based economy. In the era of knowledge-based economy, even though knowledge is taking place of capital to become the dominant drive, the marketing and industrialization of knowledge cannot exist without financial support. Because venture firms engage in the research and development of high-tech products, they demand high input. In the mean time, the high risk makes it rather difficult for them to raise needed funds from conventional financing channels like banks. So the high demand of capital and narrowness of financing channels make financing become the top concern to the venture firms. That is to say, the success of a venture firm, to a great extent, depends on the success of its financing strategy. This article, taking the process of venture firms'growth as its main line, focuses on the systematic study of venture firms'financing strategy. This article consists of 8 chapters, of which the structure, the basic contents and the main points are as follows: As a brief introduction, the basic function of Chapter 1 is to set the theme, answering questions as what a venture firm is, under what circumstance the study of venture firm's financing strategy comes out, and whether that worth the study or not. In Chapter 1, it demonstrates that venture is the innovation of economic resources allocation, and the goal of venture is to improve working efficiency. According to the trait of venture, this article starts from the standpoint of the firms to give the definition of venture firm, and believes that venture firms are the emerging small-and medium-sized high-tech enterprises based on scientific innovation, with high flexibility and growth potentials, aiming to increase efficiency of economic resourced utilization. And the emerging companies are the enterprises possessing high flexibility and creativity, but not reaching the balance between flexibility and creativity, and are just the enterprises in courtship stage, infant stage and go-go stage as Dr Ichak Adizes described in his theory of Corporate Lifecycles. After setting the basic concept of venture firm, this article illustrates the backgrounds of the study of venture firm's financing strategy, and then through description of new economic phenomena and the discussion on the making process of ideas of knowledge-based economy, demonstrates the revolutionary effects of knowledge-based economy on the human economic life. In this knowledge-based economy tide, knowledge is the basis of economic development, and venture spirit is the prime mover of success. Statistics shows that venture is shocking all walks of social economic life such as the traditional ways of economic increase, employment and world trade pattern. Venture, aiming at success and future, has become the fashion in the present time. This article indicates, by logical reasoning and raising example from positive and negative sides, that financing is the key point for venture's success, and further gives out the realistic significance of the study on this subject. Chapter 2 is the logical start point of this study, in which the strategic environment of venture firm's financing is illustrated. In order not to deviate from its focus, this article only concentrates on high-tech industrial park —the venture firm's growth environment and venture capital market —financial environment, which most directly and profoundly affects financing strategy. Just as the booming industrial economy in the early days demanded and depended on the factory structure and road construction, knowledge-based economy definitely seeks appropriate way of production organization and social running system. As an innovation of social organization system in the era of knowledge-based economy, high-tech industrial park, combining talented personnel, technology and funds, is the effective way of combination of production, education, and research. And it is also the forthgoer and the best carrier of knowledge-based economy, as well as the cradle of venture firms. First, this chapter illustrates the making and development experience of high-tech industrial park, then demonstrates the policy guidance and management method of high-tech industrial park, especially its unique venture "incubator"system, in an effort to indicate the significance of start-up and continuing growth of venture firms settled in high-tech industrial park. The study of modern finance theory is based on the capital market research. After World War II, the revival of capital market in Western countries brought along the prosperity and development of finance theory research. In 1980s, the scientific and financial tides had been looming large, and the industrialization of scientific achievements demanded the innovation of capital market. As the venture firms emerged, venture capital market —a new capital market, fitting to the characteristics of development of high-tech industry, were getting to be made in the interactional process of technological innovation and financial innovation. This chapter re-defines the function and range of venture capital market, and believes that venture capital market is, in accordance with the characteristics of venture firms, an unique market system distinguished from common capital market in the aspects of investor, investing policy, way of operation, administration structure and supervision model. Common capital market is the market, from which the government and mature large-and medium-sized enterprises are sourcing the long-term capital, but venture capital market is where venture firms can source owners'equity. The major point to distinguish venture capital from non-venture capital is see whether the object of capital investment is the venture firm or not, and whether it is the equity investment or not; not to see whether the capital exchange is made openly on the public market or it is done privately. The basic function of venture capital market is to continually provide the owners'equity capital needed by venture firms, which is also the fundamental point of difference between venture capital market from common one. Starting from this point, we define the venture capital market as equity venture capital market, which includes not only private equity venture capital market, but also public equity venture capital market. Hereinto, private equity venture capital market can be divided into angel capital market, venture fund market and enterprise capital market, while public equity venture capital market is just the stock market, i.e. second-tier market, specially designed for the venture firms. After the connotation and extension of venture capital market are defined, this article makes a historical analysis on the function and operation system of private venture capital market and second-tier market respectively, then especially goes into a deep discussion on development status and existing problems of venture capital market in our country, laying foundations for subsequent research. The aim of Chapter 3 is to clarify the general guidance and principle for the management of venture firm's financing strategy, which includes 2 main aspects, strategic goal and strategic guideline.On the strategic goal, this article, taking modern enterprise theory as its basis, succeeds to the behavior assumption of maximization of firm value, through the comparing analysis on financing goals such as profit maximization and shareholder's wealth maximization, and then demonstrates, according to the characteristics of venture firms, that maximization of venture firm value is in accordance with venture firm's continuing growth. This article discusses on the relations between financing and firm value, by making historical analysis on idealistic changes of financing theory, then demonstrates the maladjustment of dividend maximization to venture firms, and believes that financing goal of venture firms can only be the present values maximization of capital gains. On the strategic guideline, this article believes that venture firms should work out the financing strategy by stages, considering the difference between the development stages and the relevant characteristics of capital demand. From the point firm's financing, this article divides the growth process of venture firms into 3 stages: start-up stage, growth stage, and expansion stage. The options of financing strategies to different stages are: private placement of venture capital in start-up stage; getting into debt properly in growth stage; initial public offering in a proper time and listing on the second-tier market in expansion stage. As core parts, Chapter4, Chapter 5 and Chapter6 demonstrate the financing strategy in start-up stage, growth stage and expansion stage respectively. In Chapter 4, this article first illustrates how entrepreneurs seek opportunities of capital support according to the internal conditions and external environment, then indicates the function and basic contents of business plan, and finally demonstrates the financing contract design and issues of residual right of control. In the financing contract design, this article mainly discusses, starting from opinions in contract theories and agency theories, on the function of financing by stages, and the system of convertible preferred stock. On the issues of residual right of control, two basic solutions, manager's stock option reward and capitalist's participation in management, are put forward according to the theory of property rights. In Chapter 5, we first discuss on motivational characteristics of firm's running with debts in growth stage, and believe that the fundamental drive of venture firm's being in debt to finance is not tax shield, and not the function of signal transfer, but the entrepreneur's concern on the dilution of control of firm and shareholder's equity. In the process of making analysis on financial leverage, we believe that, even though venture firms are confronted with low present earnings, their high growing ability predicts big increase in future earnings. So venture firms can still use high-proportion debt financing. On the issue of capital structure, we believe, by making analysis on Jensen and Meckling Model as well as Lelan and Pyle Model, that agency costs are the decisive factors to the firm's ownership structure, that entrepreneurs, as owners and managers, need to establish a scientifically reasonable goal capital structure, to effectively allocate liabilities and outside shares. Finally, this article makes an analysis on venture leasing which concentratedly characterizes debt financing of venture firm, especially on the characteristics and running system of sale and leaseback of intellectural property. In Chapter 6, we discuss on pubilcization, listing policy and stock valuation issue in this process. By making analysis on advantages and disadvantages of publicization and listing, and comparing listing standards and expenses in different markets, as well as analyzing different effects of listing time to firms, we demonstrate that firms should decide if they want to go listing, where to go listing and when to go listing, according to its own goals of development and circumstances. On the issue of stock valuatin, we believe that the traditional dividend discount models cannot fully recognize the value of venture firms, that managerial option plays a great role in venture firms, and that the theoretical value of venture firm should be the sum of the value decided by dividend discount models and value of managerial option. We believe, the value of managerial option can be decided by referring to Black andScholes'OPM, or by using decision tree and analog techniques. Besides, the final formation of stock price depends on market pricing system. In analogy of stock price, the index adopted by venture firms should not be price-earnings ration, but the multiple of revenue or cash flow. In Chapter 7, we illustrate the roles of governments and investment banks in financing process of venture firms. The establishment and development of venture firms attribute, to a great extent, to the government's active participation and strong support. From the point of financing, participation of government's fund and policy support are the important guarantee for firms to succed in operation. Participation of fund are mainly equity investment, government loan and policy subsidies, policy support including financing warranty, government purchase and taxation impetus. Investment bank is praised to be financing engineer in the market economy, which participates, in flexible forms, in the resource allocation of capital market, and becomes the important link between fund provider and fund receiver. In the process of venture firm's financing, even though investment banks may pariticipate, as investors, in the joint investment, the real goal of this kind of investment is not only aimed at return of investment, but, more importantly, is hoping to get the right of stock issuing and consulting service from those firms by establishing relations with them. As media of direct financing, investment banks are acting as such important roles as private placemetn agents, listing sponsors and stock distributors in the financing process of venture firms. Acting as private placement agents, is a process, in which investment banks recommend the private placement stock issued by venture firms to the potential investors, and negotiate, on behalf of venture firms, with investors on all kinds of issuing conditions. In the process of first-time stock issuing and listing, investment banks play an important role as media, as well as a indispensable organizer of listing. In one hand, investment banks, as the sponsors of listing firms, help firms to analyze the possibility and make plans for listing; on the other hand, they, as stock distribution agents, are engaged in selling the stock to the public investors and investment institutions. Chapter 8, the last chapter of this article, makes analysis on typical cases of successful financing of venture firms, in order to strengthening the illustration of financing theory and inspecting its effectiveness. The financing history of US Genetech, especially the process of its venture capital private placement, has become an example be followed by all venture firms on the globe. Since the economic reform and opening, venturing waves have been continually emerging. We experienced 1980s when a large amount of scientific personnel went to do business, and 1990s when overseas Chinese students returned to China, and the turn of century when college students established firms. In the mean time, there have emerged a lot of successes of venture financing: Neu-Alpine, in the process of economic system transfer, led in a financing and listing road with unique Chinese characteristics; Asiainfo went out of China and came back with foreign funds, management and techniques, successfully push Chinese's business to Wall Street across the Pacific, and creating a path for overseas Chinese students to work for China; Syn-tech, coming out of the College Student Contest of Venture Plans, is moving ahead and creating a venturing legend of Chinese students through venture financing run by Chinese media agency and participated by listing firms in localization. Those firms represent different venture groups, and are engaged in different sectors, and source the venture capitals from different capital markets. All of them, to some extent, outline the general picture of financing of venture firms.