A Study On Operational Mechanism Of Venture Capital In China

Venture capital plays increasingly prominent role in modern economy. Startup companies, creative technologies, innovative products, and even brand-new industries, mostly are inseparable from the support and driven of the venture capital. Since its introduction to China in the mid-1980s, venture capital has made considerable progress during the past three decades. However, due to various factors, the development of venture capital industry in China is still in the early stage:the relevant policies and regulations need to be improved, the fund-raising channels and capital resources are relatively limited, the exit channels are not smooth enough, and so on. In addition to above mentioned problems existing in macroeconomic policies and industrial environment, the operational mechanism of venture firms is remain to be researched and improved, all these factors affect the further development of the venture capital. Utilizing contract theory and organization theory of information economics and new institutional economics, this disstertation analyzes the operational mechanism of venture capital industry in China, and draws some important conclusions.First of all, at present there are three forms of organizational structure for venture capital firms:corporation, limited partnership and trust. While the form of limited partnership dominates overseas, corporation takes main stream domestically. Different from the majority point of view in the domestic that advocating the development of limited partnership system, the author thinks that, either form of corporation or limited partnership has its own advantages. The government should allow healthy competition between them to achive their organic and orderly evolution. Based on the author’s experience, advanced corporation has both the advantages of traditional corporation and limited partnership, and at the same time, avoid their possible drawbacks. However, necessary regulations are needed to safeguard the smooth running of this advanced corporation form. And the same is ture about necessary competions against other forms.Secondly, about financing and funding options of venture capital firms, in view of the fact that current financing channel of venture capital in China is single and mainly through the government and state-owned enterprises controlled by government, the author suggests that the government play a guiding and supporting role in the early stage of the development of venture capital investment industry to trigger the "induced effects", while at the same time the actual operational platform for the venture capital should be the open market as venture capital investment is essentially an utilization of market opportunities. And to raise funds through the market, it is necessary to follow the preferences of market participants, design contract arrangement to maximize their payoffs, explore potential profitable business opportunities, and realize the benefits of specialization and professionalism. Therefore, the meaning of the development of venture capital investment industry should be strengthening the education for private investors and creating diversified financing channels for them through a variety of contractual arrangements.Thirdly, about decision-making mechanism of venture capital, the author focuses on investment related evaluation system after a description of project selection procedures, constructs a Gray Multilevel Evaluation model based on the transformation of the AHP model, and provides a basis to assess the risks and returns of targeted projects. The essay also reveals the strategic decision-making such as high decision-making costs, lack of professional personnel and insufficiency of due-diligence investigation.Fourthly, about supervision of invested venture capital, based on Principal-agent theory, the essay illustrates importance of post-investment financial management rather than the intervention of investment decision for invested projects. Furthermore, post-investment management can be categorized into supervising activities and value-adding activities. The supervising activities conducted by investors include the supervision of cash/account management, marketing, change of ownership, compensation for CEO and financing. The value-added activities include planning corporate strategies, consulting of management issues, recruiting senior management, contacting potential customers, establishing an effective board and others. The author takes early-stage investment as an example to illustrate the process form project selection to exit.Fifthly, about exit strategy, the author mainly discusses three important issues:exit timing, exit pricing and exit manners. Key factors of how to choose the best exit time, negotiate exit price, and choose exit manners are revealed and analyzed. The author also emphasizes that investors should select different exit manners and channels depending on specific situation. Risk is everywhere during the whole process of investment. With more and more speculative investment opportunities in the market, the risk will grow bigger without timely exit. The ultimate goal of venture capital investment is to recover the invested capital and gain of added value, therefore investors should consider various exit manners and policies to reduce risk.Finally, based on the analysis of venture capital firm’s organizational form, financing and funding options, decision-making mechanism, regulatory environment and exit strategies, the author offers the policy recommendations to optimize operational mechanism of venture capital investment in China.