Venture Capital in China
It would seem that venture capital in China would be an oxymoron. The truth is that the idea of Communism as a sound economic policy is pretty much dead world wide including China.
The venture capital industry in China is very new. Communism did not encourage capital investment in any form as it was trying to establish capital as one of the enemies in a class war theory. Yet, reality has set in even in China. The globalization of the world market place and the movement toward what is really an information based economy has forced China to wake up to the need to do all it can to encourage technology based industry.
The whole concept here is very new. The first major venture capital firm established in China was called The China New Technology Start-Up Investment Company. Even the name, so primitive and original by United States standards, shows the newness of the concept in China. This company actually failed completely. It went bankrupt in 1997.
In the first years of the new century, the Chinese government got behind the venture capital industry and almost 100 different companies now operate in China. The industry is still described as sluggish by the Chinese themselves, but it is showing signs of growth. There are some major problems that still must be overcome. One of them is the inexperience of Chinese fund managers compared to the skill level in countries where venture finance has been around for years.
Another problem is the structure of the Chinese economy where many industries tend to be owned or controlled by couples or families. The years of communist economy did not leave a large base of investor owned companies. These family controlled companies vehemently resist surrendering equity control which is the key to venture capital investment. There is a tradition of information falsification or withholding that must be overcome. Chinese business managers were used to covering up failures rather than honestly dealing with them.
The Chinese have opened up some competition with outside international venture capital funds to spur the growth of the industry. This hurts them in some way because the international companies have such a large lead in the area of evaluation and management so essential in good investment selection, but it also has tended to raise the level of the Chinese firms that are being forced to compete. The present state of China’s venture capital industry may be sluggish, but its future is bright.