China's Venture Capital Risk-benefit Analysis

It has been over 30 years for the venture capital emerged in China since the late 80 s.The economy is growing rapidly in China during the period,so is the venture capital(VC),as China become the second largest venture capital market in the world.Under the slogan of "Start your own business and make innovations.” which means encouraging innovation and entrepreneurship socially,it is a sign that China's economic is going to another stage.The venture market is booming during the time and the venture capital market shall undergo new opportunities of development.Venture capital,a high risky investment associate with a potential high return,has been broadly accepted by the public in China right now.Under the new era of development in economy,it has been become a hot topic,discussed between the politicians,scholars and business society,of how to allocating the capital and taking advantage of VC to accelerate the further development for economy.We concentrated on three topics: 1)the corelation between the risk and return in Venture Capital,2)paths of obtaining the excess returns and 3)the future of VC in China from the angle of risk and return in the full life cycle of VC.Based on the topics above,we applied theoretical analysis,case analysis and other methods to sort out the venture capital and its process.We explored the history of venture capital in China,discussed the current challenges in venture capital industry in China and tried to raise policy suggestions.Through our research in this paper,we find out that overall the return matches the risk from an asset class perspective,even the 20/80 rule make lot of investor suffered in their return simultaneous.Pareto principle works in venture capital in China as well,which reflects the characteristics of this industry.We also raise the paths for how to achieving the excess return which reflected in fund raising,investment,internal management and exit,the four components in Venture Capital industry.After the analysis of the Venture Capital industry in China,we concluded several challenges we are facing.For example,the lack of domestic fund of funds,weak performance for lot of VC firms,inflated valuations and the discontinuing profit of the invested companies and so on,we propose to establish the eco-system of VC and to increase the allocation to venture capital from financial institutions,to enhance the domestic capital market.Meanwhile,we need to strive to improve the professional level of venture capital firms,keep the construction of local talents pool.Venture capitalist shall get more hands on manage their investment portfolio to help the company to enhance business capacity,ensuring the future return.On the regulation side,the government shall take more market oriented approach and play a role of "escort" to protect the still young industry.Under the new era of the financial industry,more institutionnized fund management firm will growing fast and became a trend of industry.And Venture capital investment will play a very important role in China's future economic development.