BOOK
REVIEW Nothing ventured
... Investing in China: the Emerging
Venture Capital Industry in China by
Jonsson Yinya Li
Reviewed by James
Borton
Earlier this month, private equity
investors witnessed the surprisingly successful
initial stock offering by Baidu, known as China's
Google, and Yahoo's $1 billion investment in
Chinese e-commerce company Alibaba. These
high-profile international deals are sending more
venture capitalists hurtling through time zones from Silicon
Valley to various science parks in China, like
modern Marco Polos. So the recent publication of
Investing in China: the Emerging Venture
Capital Industry in China by Jonsson Yinya Li,
could not be more auspicious, since it trumpets
the arrival of China's venture capital industry.
For sure, there are many private equity
investors who remain skeptical about the full
emergence of a venture capital system in the
state-planned economy. But Li's new guide does
provide ample documentation of more China-focused
funds coming of age in China's fast march to the
financial markets. Experienced US venture funds
along with Asian regional funds and a number of
domestic funds have adapted
to Beijing's evolving rules and regulations,
enabling many to build positive investment track
records.
In a recent interview with Asia
Times Online, Li revealed that in his role as an
academic researcher at Renmin University's Center
for the Study of China Venture Capital, he
assiduously pores over Chinese periodicals and
newspapers, and journals reporting on private
equity developments, each day.
With the
entrance of China into the World Trade
Organization and the opening up of the Chinese
economy, Chinese bureaucrats recognize that
venture capital-backed small and medium-sized
enterprises (SMEs) are fueling China's staggering
nearly 9% growth rate. All readers must certainly
give credit to the exhaustive research and the
prescience of this venture capital guide, which
includes excellent case studies of the financing
and development of e-commerce site Alibaba and
Asian news site AsianInfo.
Although the
guide does provide many details on the mechanics
of China's investment process, and an examination
of successful venture capital-backed SMEs
including due diligence and investment monitoring,
Li's boosterism for the advent of the industry
does not adequately address some of the policy
obstacles impacting on the flow of private equity
capital into China this year. For example, the new
and confusing investment circulars issued by the
State Administration of Foreign Exchange (SAFE)
are dampening the venture capital investment
climate. Professor Mannie Liu of Renmin
University's School of Finance, the director of
the China Venture Capital Research Institute,
speculates that the recent decline of venture
funds entering the country is linked directly to
the government's latest regulations prohibiting
state-owned enterprise assets from being illegally
removed from the country.
China remains
steeped in bureaucracy, and some venture
capitalists suggest that the overly numerous
filings at SAFE remain buried in a Great Wall of
paper, with an insufficient number of
administrative support and trained management to
process any timely reviews.
According to
the Beijing-based Zero2ipo research consultancy,
in spite of the venture capital slowdown, there's
an influx of entrepreneurial associations and
networks springing up in China, largely focused on
information technology developments. Companies
like Zero2ipo, along with the publication of this
new guide to the venture capital marketplace, do
succeed in showcasing and identifying new talent
to buttress the government's initiative of
"rejuvenating China with science and technology".
It is noteworthy that by the end of 2004,
with the direct assistance of venture capital
companies, SMIC, Shanda, Finance Street, 51job.com
and eLong, among others, executed significant
overseas initial public offerings (IPOs) and
raised $4.67 billion.
Recent efforts have
been made by the Chinese government to improve the
state of its venture capital industry, especially
with respect to foreign investment. Only a few
years ago, China allowed the formation of
foreign-managed domestic currency venture capital
funds, but this effort proved to be unsuccessful,
leading to the enactment of a new set of rules.
The new rules, including the creation of a
structure similar to a limited partnership,
provided foreign investors the same opportunities
as Chinese partners with respect to venture
capital investment. China also lowered the
barriers to entering its venture capital market by
reducing the minimum capitalization requirement
from $100 million to $10 million. As a result of
such reforms, foreign investors have increased
access to China's venture capital market.
In an e-mail interview, author Li
elaborated on the need for stronger policy
recommendations for the continued overhaul of the
venture capital industry:
Some policy recommendations for the
development of China's venture capital industry
have been suggested. They are as follows: to
amend the Company and the Partnership Acts to
provide a more flexible and effective operating
environment for the venture capital industry.
Partnerships are the usual form of organization
used in countries with mature venture capital
industries. The structures available in China
are much more rigid, making it more difficult
for investors and fund managers to divide
profits and risk.
Currently, China has
no law on regulations regarding limited
partnerships. Some provisions in the Partnership
Act even hinder the development of limited
partnerships ... the enactment of an Investment
Fund Act as well as a Venture Capital Investment
management Act [should be accelerated]. Their
aims should be to broaden the sources of capital
available for the venture capital industry.
Venture capital companies in China currently
face major restrictions on their a funding
sources; therefore, China should learn from and
apply overseas experience, by introducing
investment funds to provide a structure for
venture capital organizations.
The
Chinese are indeed quick studies, so the
authoritative guide effectively serves as a paean
for entrepreneurship inside China.
Despite
a projected modest downturn, Venture capital
organizations are expected to invest approximately
US$1 billion in China by the end of 2005, down
from a record $1.2 billion in 2004. Additionally,
the Chinese venture capital industry will generate
opportunities for more start-ups. It is likely
that mainstream venture capital firms will
establish new China offices, and there will be
many more overseas IPOs for Chinese companies.
Li's book does not claim that China will
become the new Silicon Valley, nor does he provide
a blueprint as to how that might occur.
Nevertheless, with the Chinese government building
more innovation centers and science parks, and
with the continuous return to China of graduates
with degrees from MIT, Stanford and other
institutions of higher learning, there's
nonetheless a compelling portrait of a new China
embedded in this financial tome.
Investing in China: the Emerging
Venture Capital Industry in China by Jonsson
Yinya Lim Adamas. GMB Publishing Ltd, September
2005. ISBN: 1905050135 (Hardcover version), and
1-905050-50-X (E-Book version). Price US$144, 288
pages. To order the book, please click here.
James
Borton is a veteran freelance journalist in
Asia and has been regularly reporting on China
media and private equity developments also found
at his new blog, www.chinaventurenews.com.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing
.)
zones from Silicon
Valley to various science parks in China, like
modern Marco Polos. So the recent publication of
Investing in China: the Emerging Venture
Capital Industry in China by Jonsson Yinya Li,
could not be more auspicious, since it trumpets
the arrival of China's venture capital industry.
