| When the world steps into an intellectual economy age, science and technology devote more and more to the society. Facing the challenge of country's comprehensive power, each nation sets the example of the success of America and takes high technology industry as a strategic emphasis. Venture Capital plays a very important role in the strategic. It is a hot topic how to develop the Venture Capital industry. But at first we should understand the thing. The purpose of this paper is to analyze the essentials and operation mechanism of Venture Capital and draw some conclusion of promotion this industry on the basis of the practice of Venture Capital in China.This paper is made up of four chapters.Chapter One is the summary of Venture Capital. From the analysis of the literature about Venture Capital, I conclude three characteristics of Venture Capital: (1) Venture Capital is the combination of financing and investment. (2) The target of Venture Capital is the high technology firm with the potential of high grows. (3) Venture Capital is an entire financial process including three stages: financing, investment and exit of Venture Capital. On the basis of the characteristics, I define the Venture Capital as that: Venture Capital is a new investment model, which combine the fund, technology and innovation spirits and realize the risk- transfer and profit-gain.Chapter Two is the analysis in the point of economics. At first, the Institution Economics is used to explain that the Venture Capital is a result of institution transition. In the intellectual economic age, venture firm is the main body of technology innovation. But the technology is immaterial, which make it difficult for the venture firm to raise fund from the traditional financial intermediate, such as bank and investment bank. This situation hinder the process of transforming the technology into product power, which means the new institution demand. The institution supply is Venture Capital, which act as the financial intermediate for the venture firm and realize the combination of finance and technology. In the other point, I point out that it is very important for Venture Capital to design a operation mechanism to cope with the situation of information asymmetry in the process of financing and investment. Venture Capital firm is a special institution to solve this problem of "moral hazards" and "adverse choice". All these depend on the mechanism of incentive and constraint by the contract devise between the fund supplier and Venture Capital firm. The information economics is a good way to explain that. Chapter Three puts emphasis on the operation mechanism of Venture Capital. It is a main part of this paper. The definition of operation mechanism is at the first step. It means the essential of a thing. The mechanism of Venture Capital is made up of four mechanism, which guarantee the operation of Venture Capital.(1) the mechanism of financing. It includes three parts: the source of fund and the method of financing.(2)the mechanism of investment. The important points are that the evaluation of investment target, the method of grading investment and a series of special investment tool (connotative option characteristic) (3) the mechanism of exit, which is the most important one. The purpose of Venture Capital is not control a firm but gain the extra profit by the exit. There are four main way to exit: going public, sale, repurchase and bankruptcy. It depends on the fact of high technology firm for Venture Capital firm to chose the best exit way. (4) the mechanism of incentive and constraint. The two sets of contract arrangement generate the double principle-agent relation, which results in a double-level mechanism of incentive and constraint. The author analyzes the issue from the angles of average investors vs. Venture Capital firm and high-tech venture entrepreneur vs. Business novice. It concludes that the former relation needs limited partnership to construct the mechanism of incentive and constraint, while the latter needs convertible preferred... |
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