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Venture Capital Fund Organization And Its Legislation Improvement In China

Posted on:2006-12-30Degree:MasterType:Thesis
Country:ChinaCandidate:J LiuFull Text:PDF
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Venture capital, in the sense of financing new ventures, is not only a new kind of instrument of investment ,but also a kind of innovative financial system which can speed up industrial development and thus overall economic development. I define VC as a special style of capital operation, in which the professional venture capitalists raise the collective fund, then invest high-growth unlisted firms or ventures by means of equity or quasi-equity, provide value-added service in order to get high capital gains from the equity transfer after the venture being successful.The fact that there are uncertainty, asymmetric information between ventures and investors, bring about traditional outside financing obstacle. Venture capital mechanism can mitigate information asymmetry and agency cost. The institutional advantages and operational procedure of VC model can facilitate the efficient utilization of three kinds of resources, e.g. financial capitals, human capitals and information resources . the monitoring function of VCs and their ability to function as expert consultants help to increase return potential, lower risk and reduce agency cost concerned.According to the different resources of the investment ,Venture capital fund can be divided into commercial VC fund and govertnmental VC fund . Commercial VC fund has two kind of organization model, one is VC company , the other is VC limited partnership. The operation efficiency of VC is decided by the VC organization form and agency cost. To protect the investors from the possibility that the venture capitalists will make decision against their interest. On one hand, the compensation system is structured to give the venture capitalists and entrepreneurs appropriate incentive. The use of convertible preferred stock allows the issuers and investors to agree on a price despite different perceptions regarding potential return and risks. Meanwhile, the issuance of preferred stock provides strong performance incentive to entrepreneurs. Managerial stock ownership account for entrepreneur's total compensation. The earn-out arrangement allows entrepreneurs to increase their ownership share if certain performance objectives are met. Staged financing also provides incentives to the entrepreneur teams.On the other hand, Convenance and restrictions play an important role in alleviating the conflict between VCs and VC fund investors, also are the key to combine the interest of VCs with that of entrepreneurs. First, the investors and VCs preserve the right to withdraw from funding, so the staging of capital infusion is one of the control mechanism. Second, the life of a VC fund is limited. Third, the mandatory distribution policy ensures the proceeds from the sale of asset in the portfolio to return the investors. Finally the VCs are often explicitly prohibited from self-dealing. To develop VC industry in china ,it is important to change the involvement model of the government and give full play to governmental fund, innovating financial system .the leading role of the governmental fund can encourage the folk investment activity and foreign investment.
Keywords/Search Tags:Venture Capital, Venture Capital fund, Venture Capital company Venture Capital limited partnership, Governmental Venture Capital fund
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