Venture Capital

Venture Capital

Executive Summary

This paper provides an overview of the venture capital industry, and its development in China and US. Venture capital plays an important role in innovation and economic growth. Indeed, the resurgence of the United States as a technology leader is intimately linked to the success of Silicon Valley. As China enters the next phase of economic development, the creation of internal engines of growth is an urgent task. China government has done much to provide an environment for entrepreneurship to thrive. Its success at replicating the Silicon Valley culture will be important for China's future economic success.

Table of Content

Executive Summary2

Chapter 1: Introduction5

Research Background6

Personal Interest8

Understanding Frequently Used Terms8

Chapter 2: Literature Review11

The role of venture capital in the economy11

The role of venture capital in financial intermediation13

Venture capital vs. other forms of corporate governance15

Venture capital and entrepreneurship17

Venture Capital Investment19

Staged Capital Investment22

Investment and Control Rights22

IPOs and Venture Capital Investment23

The Technology Factor24

The Importance of Venture Capital25

4. Factors that affect venture capital26

Initial public offerings27

Labor market rigidities28

Financial reporting standards29

Private pension funds30

Macroeconomic variables31

Government programs32

Chapter 3: Methodology33

Research Design33

Data Analysis of the United States35

U.S Venture Capital History35

The Statistics of Silicon Valley's History38

U.S. Laws, Limitations and Regulations39

The Fall of Silicon Valley: Observations41

In depth highlights43

A Look at Ten VC Firms In Silicon Valley46

VC Firm Highlights46

Data Analysis of China51

China's Venture Capital History51

China's Venture Capital Statistics54

China's Laws, Limitations and Regulations58

A Look at Ten VC Firms in China59

VC Firm Highlights60

Venture Capitalists and GDP65

Venture Capitalists Effect On Employment65

The Relationship Between Venture Capital and Policies67

Venture Capitalism and Technology68

China: The New Role Model69

CHAPTER 6: RECOMMENDATIONS71

Economic Instability71

Increasing Technology Standards72

Evaluation of the Objectives75

What Would Have Been Done Differently78

Perception of Myself80

My Recommendations81

References85

Chapter 1: Introduction

Venture capital has been widely studied in the US. However, its examination in other settings has been limited. In Asia, the examination of the industry is almost nonexistent, despite the fact that the industry raised new investable capital of over US$7.4 billion in 1998 alone. It cannot be assumed, however, that Western practices are universal around the world.

China is one of the world's fastest growing economies and is home to approximately one-quarter of the world's population. Based on three dozen interviews within venture capital firms active in China, this article examines that nation's venture capital industry. It establishes from this information a basic understanding of how institutions within the country shape the venture capital industry(Hurry 1991 pp.45-96).

It is clear from the information developed that both the challenges encountered by venture capitalists and the nature of the investment framework employed in China differs markedly from that of the West. For example, the screens employed to initially evaluate ventures are different than in the West. The need to fund ventures within reasonable physical distance to accurately monitor those firms and the avoidance of firms without proven or checkable financials are among two differences from of the US. Similarly, since the ability to accurately obtain full information on a firm is so constrained, due diligence commonly focuses on the entrepreneur's background and their contracts even more so than in the ...