Venture Capital in China, Past, Present, and Future
Introduction China’s stifled economy has experienced an unprecedented period of growth since the introduction of new economic policies at the Third Plenum of the 11th Congress of the Chinese Communist Party in 1978. The long-suppressed entrepreneurial zeal of the Chinese people was rekindled with the lifting of restriction on private business ownership. Later, the advent of Western-style venture capital funds provided budding Chinese entrepreneurs with sources of hitherto unavailable capital. Western investments, advice, and discipline, combined with Chinese entrepreneurialism, knowledge, and circumstances, have produced a blossoming venture capital industry that has produced some spectacular results. Both the Chinese government and international investors have focused on the potential of this industry: the former hoping to foster the industry into an steady driver of future economic growth, while the latter eyeing the potential for outsized returns. It would, however, be simplistic to assume that Western venture capital and the Chinese entrepreneurs it funds are the creation of the last two decades. In fact, today’s proliferation of venture capital investments and boom in entrepreneurial drive are similar
in many ways to the economic transformation that took place in China during the early part of the 20th century, when local entrepreneurs and investments in new technologies and manufacturing flourished. This paper seeks to offer a brief examination of the rise, current status, and future potential of the Western-style venture capital industry in China (and the modern entrepreneurs in whom it invests). Part one of the paper will lay out the historical context for the rise of modern entrepreneurialism and venture capital investing in China, focusing on the social, economic, and political environments that led to the rise of entrepreneurs who flourished by adapting Western technologies and manufacturing processes in the early part of the 20th century. Part two aims to give a quantitative economic overview of the venture capital industry in China today. Part three will explore the operating and regulatory environments which the industry faces today. Finally, part four will attempt to explore some of the challenges and opportunities facing the industry in the future.
Part I: The Historical Context for Entrepreneurialism in China In the most basic sense, venture capitalists represent investors who give entrepreneurs relatively small amounts of money to finance the transformation of their ideas into business realities. As such, the emergence of a flourishing entrepreneurial class is a necessary pre-condition to the advent and existence of venture capitalists. In today’s China, the term “venture capital” immediately conjures up images of hot technology companies, founded by foreign-educated Chinese engineers and MBA’s, that are listed on American and European stock exchanges. Such perceptions unsurprisingly foster a belief that entrepreneurialism in China constitutes a relatively modern phenomenon. This belief,
however, stands far from the truth. The rise of the modern Chinese entrepreneur could, in fact, be traced to the early 20th century, when the last imperial dynasty neared its end and a new republic was emerging. In order to better understand venture capital in China today, it would be beneficial to first examine and compare the historical context to the current one for entrepreneurs and those who invest in them. This exercise will help shed light on the current state of the venture capital industry in China. The modern entrepreneur, for the purpose of this paper, is defined as one who utilizes new technologies and ideas (typically Western in origin) to found business enterprises that create economic value. According to historians like Parks Coble and Marie-Claire...