Incentive Mechanism Of Venture Capital Investment Leading Fund For Private Capital, Venture Capital Enterprise And Venture Capital Investor

Since1985, China has explored the venture capital supported by financial funds. Inthe past over20years, the financial department has provided funds to set upstate-owned venture capital firms which are engaged in the venture capital. In the aboveoperation process, it is difficulty to establish revenue-incentive mechanism andrisk-constraints mechanism, and play the financial funds’ role in lever amplification.After2005, Chinese government made an attempt to set up the venture capital leadingfund, i.e. the government helps set up and develop commercial venture capitalenterprises and directs the social fund into the venture capital field, instead of beingengaged in the venture capital investment directly and seeking profits. The setting of theleading fund not only avoids the market intervention from the government, but alsogives full play to the leverage of the financial fund, so as to attract more venture capitalinvestment into innovative enterprises in seed and early stages, and solve the defect ofmarket-oriented venture capital. The leading fund marks the conversion of the venturecapital development promoted by the government, and is an important milestone in theChinese venture capital development.From the view of the venture capital development directed by the government,taking private capital, venture capital enterprise and venture capital investor as itsobjects, collecting relevant documents and regulations at home and abroad, referring tothe foreign operation mode of the leading fund, combining the objective condition andthe policy background in Chinese capital market, and aiming at insufficient incentivemechanism of the leading fund, this paper discusses the interest competition andresponding incentive mechanism of participants in each stage of venture capitalinvestment, and provides the theory evidence and policy proposal to improve andadvance the operational efficiency of the leading fund. The paper includes the followingresearch contents:1. Study on the compensatory mechanism of attracting private capital into theventure capital investment. The purpose of the public capital involvement in the venturecapital is to increase the investment on innovative projects in early stage, but it oftenconflicts with that of profit maximization by weighing the risk/profit. Therefore, thepublic capital shall make compensation in order to attract more private capital into theventure capital field. At present, Governments in many countries have various compensatory mechanisms about the private capital. The features of these compensatorymechanisms, how to drive the private capital, the difference influence upon the socialwelfare and how to choose proper compensatory mechanism in different conditions inmany places, which are the main issues studied in this paper.2. Study on the incentive mechanism of venture capital enterprises under multipletargets. The theoretical research about the commercial venture capital investmentindicates that the conclusion of the contract with rent-sharing system basing on theobservable output (profit) standard will solve the agency problem between sponsors andventure capital enterprises. In the operation of leading fund, venture capital enterprisesshall give attention to both the specific projects appointed by the government and oneschosen by them, so the rent-sharing system with fixed ratio may weaken the enterprises,that is, the investment projects at the late stage will have smaller risk and higher averagerevenue, and the enterprises have no incentive to realize the goal that the governmenthopes to increase the investment into innovative projects or specific industries (fields)in early stage. However, the mandatory provision that the enterprises must investprojects appointed by the government with certain ratio can not meet the restraint ofincentive compatibility. Consequently, the paper mainly discusses how to formulateproper incentive agreements so as to the enterprises are willing to give considerationinto both self interest and targets of the government when choosing investment projects.3. Study on the incentive mechanism of venture investors based on agents’ privateinterest. It is usually assumed that venture investors achieve the goal of revenuemaximization in projects without private goals, and the incentive mechanism aboutinvestors mainly focuses on how to encourage them. The paper divides revenues ofventure capital activities from investors into internal private benefit and external privatebenefit, analyzes the design optimal incentive agreements under the frame of realoptions, and discusses the influence upon optimal investment, incentive efficiency andcost from different agents.The paper includes the following innovative contents:1. Divide multiple different compensatory methods of private fund into loss breakeven, loss compensation, revenue compensation and risk/profit exclusive ownershipaccording to their characteristics. Under the assumption of private investors transferringrisk, it is proved that the mechanism of compensating loss with a promise in advancewill inspire the entry of private capital effectively, while the present method of revenuecompensation is a kind of lose-lose mechanism, which provides the theoretical evidence for the improvement of the prevailing compensation mechanism.2. The incentive mode of venture capital enterprises can be changed into theconclusion of incentive agreements with many tasks, by introducing the relevancearising from different tasks and relative importance of tasks. Theoretically, the paperproves that the optimal incentive agreement can be antagonistic, if the outputdistribution among the tasks is positively correlated or the importance among themdiffers, that is, the incentive strength on another task must be reduce while another kindof strength is enhanced. In theory, the paper widens the classic conclusion that theincentive strength among different task shall be complementary put forward byHolmstrom and Milgrom (1991). The paper also demonstrates that differentialmechanisms shall be carried out to projects appointed by the government and oneschosen by investors, especially, the incentive mechanism shall be stricter that that ofoptional projects if projects appointed by the government is very important. If thegovernment organizes different venture investment funds to be invested in projectsappointed by the government and optional ones, the government shall get higher netsurplus from the professional mode of division of labor. In such mode, the incentivemechanism on investors is carried out by comparison with relative achievement, inorder to improve the role of the government.3. By the introduction of the factor of agents’ self interest, the study on theinvestors’ incentive mechanism from predecessors has been expanded. From the newviewpoint of how to encourage investors to choose optimal investment, the paperdiscusses the incentive agreements affected by different self-interests of agents, findsout that the external private benefit and the internal private benefit got by investors dueto the relevant information shall play a role in the choice of optimal investment and theresponding mechanism in two sides.