The Rise Of Venture Capital In China

From the early 1990s onward, China’s economic and business landscape has been in a constant state of evolution. As the country has adapted to the movement from a state system which largely depended upon command and control economics to a more open economic state the economic landscape has undergone vast changes.

The first wave of startups appeared as research and development centers along with universities began to provide the technology and capital for startups. The original startups were largely made up of individuals leaving universities or research centers and were largely funded by the universities or research centers they left.

Following the initial wave of new startups and their investors came a second wave which were Chinese banks, who provided the majority of later stage investments in the Torch Program. The Torch Program, however only provided funding at the startup, initial development stage.

The third phase of capital provision came from Technology zones with Science and Technological Business Parks. Within these parks were Torch Technology Business Incubators with local governments supporting startup businesses with the belief that by these new ventures would contribute to the local economic development.

Chinese leaders did come to the conclusion, however, that the Torch Program couldn’t be the primary source of funding for all startups. Also, by the mid-1990s local governments and banks had the level of capital necessary for the scale of development the country needed. The development of state-funded VC firms, followed by VC firms backed by universities were not an immediate success due to the fact that they were not profit-orientated enterprises.

At this point the Chinese government did not recognize VC firms as a legitimate organizational type. However, following the initial failures, foreign VC firms which had entered China in the early 1990s had caused a shift in the governments opinion. It wasn’t until 1998 that corporate-backed VC firms could be established and that caused a wave of VC funds being developed, backed by government, corporations and foreign capital.

Looking at the Chinese VC industry today and it is almost unrecognizable to the industry just 10 years ago. The VC and PE industry is booming in China with over 1000 firms actively investing. Whilst most early deals were completed by off-shore funds, more and more firms are developing Renminbi funds. By operating in the local currency, much of the complications experienced previously with funds operating in Dollars. Renminbi funds also face fewer restrictions regarding the industries which they are able to invest in.

Given the short time the Chinese VC industry has taken to pass through several stages of development, learning and evolving from each stage it is safe to say that the Chinese venture capital industry looks set to play a major role in the global system in the coming years.

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