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Venture Capital Investment Report.doc.doc.doc

  1. 1. Aid Programme of MOST 2003 CHINA VENTURE CAPITAL DEVELOPMENT YEARBOOK 2003 VENTURE CAPITAL DEVELOPMENT YEARBOOK Editorial Group Edited by Songqi Wang, Aimin Li, Hanting Fang, Lijuan Han 2003.9 1
  2. 2. The yearbook is written by Chapter 1 Aimin Li, Haiying Liu Chapter 2 Weiguang Wang, Aimin Li Chapter 3 Hanting Fang, Weiguang Wang Translator Huitong Wang Proof-reader Hongbo Chen The Major Participant: National Research Center for Science and Technology for Development Center for Financial Research, Chinese Academy of Social Sciences Torch High Technology Industry Development Center, Ministry of Science & Technology, P. R. China Innovation Fund for Small Technology based Firms Beijing Venture Capital Association Shanghai Venture Capital Association Shenzheng Venture Capital Association Tianjing Venture Capital Association Zhejiang Venture Capital Association Venture Capital Association of Xiangfan hi-technology park Guangzhou Venture Capital Association Zhuhai Venture Capital Association Jiangshu Venture Capital Association Hubei Venture Capital Association Hunan Venture Capital Association Chengdu Venture Capital Association Shandong Venture Capital Association Liaonin Venture Capital Association Henan Venture Capital Association 2
  3. 3. Guangdong Venture Capital Association Enterprises Association of XIAN Hi-Tech Industrial Development Zone Chinese version of the yearbook is printed in Economic Management Press, Beijing, China, 2003.9 Please contact with editorial group if you want to quote data National Research Center for Science and Technology for Development 100038 2003 China Venture Capital Development Yearbook editorial group Tel: 86-10-68252457 Fax: 86-10-68251301 Email: wangwg@nrcstd.org.cn 3
  4. 4. CONTENTS Chapter One Venture capital organizations and Venture Capital 1.1 Venture capital organizations 1.2 Types of venture capital organizations 1.3 The venture capital 1.4 Composition of venture capital 1.5 Scale of fund management by the venture capital organizations 1.6 Regional Distribution of Chinese Venture capital organizations in 2002 Chapter Two Analysis on the Venture capital investments 2.1 General 2.2 Industrial analysis on the venture capital investment 2.3 Analysis on Stages of Venture capital investments 2.4 The scale of venture capital investments 2.5 The conditions of the invested organizations 2.6 The performance of venture capital 2.7 The popular areas for the venture capital 4
  5. 5. Chapter Three Management of venture capital and analysis on the regulatory environment 3.1 The information source 3.2 The key elements of the investment decision-making 3.3 Pricing of venture capital projects 5
  6. 6. 3.4 Supervision of projects after the investment 3.5 Main business lines of the venture capital organizations 3.6 Reasons for Unsatisfactory Performance of Venture Capital Organizations 3.7 Quality Defect of Persons Engaged in Venture Capital Activities 3.8 Major Factors Restricting the Development of Venture Capital 6
  7. 7. Index to Figure Fig. 1.1 the total number of venture capital organizations in China between 1994-2002 Figure1.2 the increment of venture capital organizations in China between 1994-2002 Fig. 1.3 Distribution of the natures of the venture capital Fig. 1.4 Total amount and changes in China’s venture capitals between 1994-2002 Fig. 1.5 Increase and changes in China’s venture capitals between 1994-2002 Figure.1.6 Fund channels of China’s venture capitals Fig. 1.7 Basic distribution of the fund management scales of China’s venture capital organizations in 2002 Fig. 1.8 Top ten areas in terms of the number venture capital organizations in China in 2002 Fig. 2.1 Distribution of industries involving venture capitals in 2002: investment cases Fig. 2.2 Comparasion between cases of venture capitals in innovative and high tech industries and traditional industries in 2002 Fig. 2.3 Distribution of stages of venture capital in 2002 : number of cases of investments Fig. 2.4 Distribution of stages in venture captials in 2002 : distribution of proportions of investment in various stages Fig 2.5 Intensity and changes in venture capitals in China between 1994-2002 Fig. 2.6 Distribution of the scales of the individual investment of the venture capital organizations in 2002 Fig. 2.7 Distribution of the amounts of individual investment in the joint investments of ventrure capital Fig. 2.8 Initial and follow up investments of venture capitals in 2002 Fig. 2.9 Distribution of minimums of individual project in 2002 7
  8. 8. Fig. 2.10 Distribution of top investment of individual project in 2002 Fig. 2.11 Distribution of the incomes of the invested organizations in 2002 Fig. 2.12 Profits of the invested organizations Fig. 2.13 Distribution of paid-in capital of the invested organizations in 2002 Fig. 2.14 Number of employees in the invested organizations Fig. 2.15 Term of operation of the invested organization in 2002 Fig. 2.16 Analysis on the performance of venture capital organization Fig.2.17 Top ten areas in China where venture capital concetrated in 2002 Fig. 2.18 Ten areas first selected by venture capital organizations in China in 2002 Fig. 3.1 The most important three infomation source for venture capital organizations Fig. 3.2 Analysis on the key elements of the investment decision-making Fig. 3.3 Factors affecting the pricing of ventue capital projects Fig. 3.4 Supervision of projects after the investment Fig.3.5 Main business lines of the venture capital organizations Fig. 3.6 Reasons for Unsatisfactory Fig.3.7 Main knowledge abesent of persons Fig.3.8 Major Factors Restricting the Development of venture capital 8
  9. 9. Index to Tables Table1.1 The top 10 domestic venture capital organizations in terms of fund management scale Table 1.2 Active foreign venture capital organizations in Mainland China Table1.3 Venture capital organizations engaged in more joint ventures with other venture capital organizations Table2.1 Distribution of the Stages of Venture capital investments: Proportions of investment amounts at each stage Table2.2 Distribution of the stages of the venture capital investments in various industries in 2002 9
  10. 10. Chapter One Venture capital organizations and Venture Capital With the promotion of the reform of socialist market economic system and the changes in the macroeconomic environment, such as the economic policies, etc., venture capital investments in China have experienced three stages, namely, exploration, gradual development and rapid growth. Since 2001, it has stepped into a stage of adjustment, when its growth generally has slowed down to a certain extent in the whole country except in a limited number of areas. 1.1 Venture capital organizations It is difficult to define what is a venture capital organization in China since there is no unified definition at present, and moreover regional rules vary in this regard. This report is based on the following two principles, with respect to the definition of what is an available sample, namely, the venture capital organization referred to herein: First, the investment company (fund) or the investment management company that focuses on the venture capital investment or the Hi-Tech investment; Second, the venture capital controlled by the organization is over $1.81million. Look at the total number of venture capital organizations, new establishments (especially the increment) and the changes in the whole country from 1994 to 2002, see Fig. 1.1 and Fig. 1.2. The venture capital organizations in the whole country have kept increasing progressively year by year before 2000, and its number peaked in 2000. Thereafter it has showed a trend of annual decrease, among them the annual growth in 2002 was only 1/9 of the rate of increase of 2000. 10
  11. 11. Fig. 1.1 Total number and changes in the number of venture capital organizations in China between 1994-200 Fig. 1.1 the total number of venture capital organizations in China between 1994-2002 图1.1 1994-2002年中国创业投资机构总量及其变化 (单位:家) 296 266 206 96 60 38 20 21 24 1994年 1995年 1996年 1997年 1998年 1999年 2000年 2001年 2002年 Figure1.2 the increment of venture capital organizations in China between 1994-2002 110 60 36 30 22 5 1 3 14 1994 1995 1996 1997 1998 1999 2000 2001 2002 年 年 年 年 年 年 年 年 年 11
  12. 12. 1.2 Types of venture capital organizations Fig. 1.3 Distribution of the natures of the venture capital organizations in China in 2002 2 0 0 2 年中国创业投资机构的性质分布 图1 . 3 20.1% 15.1% 31.5% 33.3% Sole and joint Domestic Governmental Investment 独资合资 venture enterprise 国内企业 政府参股 holding 政府独资 solely made by governments Fig. 1.3 shows the distribution of the types of the startup-organizations in this survey. After the comparative analysis on the statistics of surveys in different years, we can discover some new changes with the distribution mainly in the following: 12
  13. 13. 1.3 The venture capital 1.5 Fig. 1.4, Fig shows the total amount of the venture capital in the whole country, its increment and the trend of its changes between 1994-2002. The variation tendency of the capital and that of the venture capital organizations are basically the same. It increased annually before 2000, and peaked in 2000. Subsequently there is a trend of gradual decrease. However, the changes in the venture capital and that in the venture capital organizations are slightly different. First, this survey has included the follow-up financing and thus the increase of capital and the increase of organizations are out of step. Second the growth rate of venture capital had not undergone a great change in 1998, 1999 and 2000 mainly due to foreign capital. Because the international capital market was very active in 1998 and 1999, when the overseas venture capital organization raised more funds. Fig. 1.4 Total amount and changes in China’s venture capitals between 1994-2002 (Unit : $1 million) 图 1.4 1994 - 2002 年中国创业资本总量及其变化 (单位:亿 元) 702.3 642.5 527.4 310.1 177.9 100.9 50.4 52.9 56.9 1994 1995 1996 1997 1998 1999 2000 2001 2002 13
  14. 14. Fig. 1.5 Increase and changes2002 年中国创业资本增量及其变化 图 1.5 1994 - in China’s venture capitals between 1994-2002 (Unit : $1 million ) (单位:亿 元) 217.4 132.1 115.1 76.9 59.8 44.1 5.8 2.5 3.9 1994 1995 1996 1997 1998 1999 2000 2001 2002 年 年 年 年 年 年 年 年 年 1.4 Composition of venture capital Fig. 1.6 Fund channels of China’s venture capitals 图1.6 2002年中国创业资本构成 35% 35% 3% 4% 23% Government Domestic enterprise Financial Other organization Foreign capital 政府资金 国内企业资金 金融机构资金 其他机构资金 外资资金 institution 14
  15. 15. After several years of development, the structure of venture capital in China has been increasingly diversified, including governmental venture capital, venture capital of domestic enterprises (also as private capital), venture capital of foreign organizations, financial institutions and other types. Fig. 1.6 shows the composition of venture capital in 2002. 1.5 Scale of fund management by the venture capital organizations With over ten years of development, the scale of fund management by the venture capital organizations in China has reached a fairly large quantity, with each organization managing $24.2 million on average at present. Fig. 1.7 shows the basic distribution of the scales of the fund management by venture capital organizations of China in 2002. Fig. 1.7 Basic distribution of the fund management scales of China’s venture capital organizations in 2002 图1.7 2002年中国创业投资机构资金管理规模的基本分布 28.0% 25.0% 24.0% 14.0% 9.0% Under1500万元以下6.0-12.1 Million 1.8 Million 5000万元-1亿元 12.1-24.2 Million 1亿-2亿元 2亿-5亿元Million 24.2-60.4 5亿元以上 60.4 Million above Table 1.1 The top 10 domestic venture capital organizations in terms of fund management scale Corporate names Establish Registered Managed capital ment capital (annual) ($1 billion) ($1 billion) Shenzhen Innovation Investment Group Co., Ltd. 1999 16 30 Shanghai Venture Investment Company 1999 4 14.5 15
  16. 16. Shandong NInnovative and 2000 12 12 High-technological Investment Co., Ltd. Shanghai Lianchuang Investment Management Co., Ltd. 1999 0.1 9.5 Shanghai Scientific and Technological Investment 1992 5.5 9.2 Company Guangdong Yueke Risk Investment Group Co., Ltd. 2000 8.8 8.8 Beijing Scientific and technological risk investment Co., 1998 5 8 Ltd Jiangsu Province Innovative and 1993 1.8 7.2 High Technology Venture Company Tianjin Venture Capital Management Co., Ltd. 2000 0.2 7 At the rim of Bohai Sea Heilongjiagn Chenneng Harbin Industrial University 2002 6.3 6.3 Hi-Tech risk investment Co., Ltd. This survey indicates that the proportion of venture capital organizations with fund management scale under $24.2 million is relatively larger, accounting for 3/4 with distribution basically equal in several scale sections, while the proportion of venture capital organizations with fund management scale over $24.2 million is relatively smaller, accounting for less than 1/4. Generally, the capital of foreign venture capital organizations is larger than that of domestic counterparts, above $60.4 million on average. Table 1.2 Active foreign venture capital organizations in Mainland China (In alphabetical order) Corporate names Corporate names Acer Technology Ventures Asia Pacific Ltd IDG Technology Venture Investment AFCO Investment(Hong Kong)Ltd Walden International Baring Capital Partners Softbank Asian Infrastructnre Fund ChinaVest Limited WarburgPincus H&Q Asia Pacific 16
  17. 17. WI Harper Group Table 1.1 provides 10 domestic venture capital organizations of larger fund management scale as well as their scale of the fund; Table 1.2 shows the more active foreign venture capital organization capital in Mainland China. In addition, Table 1.3 indicates the names of venture capital organizations engaged in more joint ventures with other venture capital organizations. 1.6 Regional Distribution of Chinese Venture capital organizations in 2002 In 2002, the Chinese Venture capital organizations mainly concentrated in areas with more developed economies, among them, Beijing, Shanghai, Shenzhen, Tianjin, Jiangsu, etc. are the favored area. Fig. 1.8 provides 10 areas where the venture capital organizations relatively concentrated in 2002. Fig. 1.8 Top ten areas in terms of the number venture capital organizations in China in 2002 图1 . 8 2 0 0 2 年全国创业投资机构数排前1 0 位地区 45 43 40 20 16 15 12 11 11 9 Beijing Shanghai Shenzhen Tianjing Zhejiang Jiangsu Guangdong Hubei Shaanxi Shandong 北京 上海 深圳 天津 浙江 江苏 广东 湖北 陕西 山东 Table 1.3 Venture capital organizations engaged in more joint ventures with other venture capital organizations Shanghai Chuangye Investment Co., Ltd Wuhan Donghu Innovation Investment Co., Ltd. Shanghai Lianchuang Investment Managemetn Shandong Innovative and Co., Ltd. High Technology Investment Company Anhui Scientific and technological Industry IDGTechnological Innovation Investment Investment Company Fund Shenzhen Innovation Investment Group Co., Shenzhen Guocheng Scientific and 17
  18. 18. Ltd. Technological Investment Co., Ltd. Guangzhou Scientific and Technological Venture Capital Inc. 18
  19. 19. Chapter Two Analysis on the Venture capital investments 2.1 General The first chapter has made an objective analysis on the general conditions of venture capital in terms of organization and capita. This chapter will focus on the industries and stages of venture capital investments, its scale, the operation of the organizations invested, its achievements and fields involved, etc.. 2.2 Industrial analysis on the venture capital investment 2.2.1 General analysis on the industries of venture capital investments As far as the industries of venture capital are concerned, software, general IT, medicine and health care, new material, manufacturing industry, etc. are the industries most concentrated with venture capital investments of China, which accounted for 50.8% of the cases of venture capital investments in 2002 (Fig. 2.1). And the venture capital investment projects in other industries, such as communication, agriculture, etc. were very small in proportion, generally under 5%. This proves that the overall trend of venture capital investments has not changed compared with the survey made last year, namely venture capital investments still concentrate mainly on a few key industries. These industries generally have a good prospect of growth, and also are the focal point for the domestic and international investments in all the industries at present. This survey shows that the traditional manufacturing industry has gained energetic support from venture capital investments compared with the past. Compared with the survey last year, another feature of venture capital investments in 2002 was that new high-tech industries, such as software, medicine and health care, new material, etc. continued to be a definitely key field for venture capital investments, while the network industry has gradually been wiped out of the hot investment fields. The network industry has "lost favor" mainly because of the vanishing of network myths, and another important contributing factor is that the venture capital organizations have become increasingly rational day by day at the same time. This indicates that venture capital 19
  20. 20. investments are moving towards maturity gradually. Fig. 2.1 Distribution of industries involving venture capitals in 2002: investment cases 图2.1 2002创业投资的行业分布:投资案例 Nuclear application核应用技术 technology 0% 网络产业 Network industry 1% New energy, highly efficient and energy 新能源、高效节能技术 2% saving technology 传统型非科技企业 3% Traditional non-tech enterprises 环保工程 3% Environmental projects 计算机硬件产业 3% Computer hardware industry 资源开发工业 3% Resource development industry 半导体 3% Semi-conductor 其他重点科技 4% Other key S&T 农业 4% Agriculture 通讯 5% Communication 光电子与光机电一体化 6% photoelectron and optical machinary 科技服务 6% S&T service 生物科技 7% Biotech 制造业 Manufacturing 7% 新材料工业 New material industry 9% Medince and health care 医药保健 10% General一般IT行业 IT industry 12% Software 软件产业 12% 2.2.2 Comparison Between investments made by venture capital organizations in the new high-tech industries and traditional industries New high-tech industry remained an absolute focal point for venture capital investment in 2002 , accounting for 85.8% of all the cases of venture capital investments, while industries other than the new high-tech industry only accounted for 14.2%. The industrial distribution of the venture capital investments in 2002 varied to a certain point compared with the survey in last year. That point was " one rise and one drop", namely the proportion of new high-tech industry dropped by 85.8% in 2002 from the past 87.4%, while that of 20
  21. 21. other industries rose in 2002 by 1.6 percentage points compared with the past. Fig. 2.2 Comparasion年高新技术产业与传统产业创业投资案例比较 tech 图2 . 2 2 0 0 2 between cases of venture capitals in innovative and high industries and traditional industries in 2002 Traditional industries 传统产业 14.2% Innovative and high tech industries 高新技术产 业 85.8% 2.3 Analysis on Stages of Venture capital investments 2.3.1 General distribution of all the stages of venture capital investments Judging from the stages of the investment projects, the overwhelming majority of venture capital investments in 2002 concentrated on the " middle stage " with two smaller ends, presenting an olive shape structure: most of the investment projects concentrated on the growing stage, up to 30.7%, while the starting stage accounted for 28.1%, and the expanding stage and mature stage, accounted for 13.4% and 11.8% respectively (Fig. 2.3). 21
  22. 22. Fig. 2.3 Distribution 20stages of venture capital in 2002 : number of cases of investments 图2. 3 of 02 年创业投资阶段分布:投资案件数 11.8% 16.0% 13.4% 28.1% 30.7% Starting stage Growing stage Expanding stage Mature stage Seeding stage 种子阶段 起步阶段 成长阶段 扩张阶段 成熟阶段 Table 2.1 Distribution of the Stages of Venture capital investments: Proportions of investment amounts at each stage Stage Seeding Starting Growing Expanding Mature stage stage stage stage stage Proportion (%) (>9.2->9.2 (>30.3->30.3 (>31.1->31.1 (>15.2->15.2 14.2->14.2 (> As far as the proportions of investment amounts are concerned (Table 2.1 and Fig. 2.4), investment amounts concentrated mostly at the middle stage, i.e. starting stage and growing stage, which accounted for over 60% of total venture capital investments, increased by 9% compared with last year. Fig. 2.4 Distribution of stages in venture captials in 2002 : distribution of proportions of 图2.4 2002年创业投资阶段分布:各阶段投资金额比例分布 investment in various stages 14.2% 9.2% 15.2% 30.3% 31.1% Seeding stage Starting stage Expangding stage Mature 种子阶段 起步阶段 成长阶段 Growing stage 扩张阶段 成熟阶段 22
  23. 23. 2.3.2 Distribution of stages of venture capital investments in major industries Looking from the distribution of stages of venture capital investments in various industries, the overwhelming majority of venture capital investments concentrated in the starting stage and growing stage. The industries at these stages generally have smaller technological risks and market risks, and moreover have a good prospect of development. For example, venture capital investment concentrated in the seeding stage of the industries, such as medicine and health care, biotechnology, etc. and such distribution is closely related to the feature of growth of these industries. As for the software, computer hardware, communication and general information industry, venture capital investments concentrated mainly on starting stage and growing stage. Also this kind of distribution is closely linked with the feature of the development of these industries. Table 2.2 Distribution of the stages of the venture capital investments in various industries in 2002. Unit: % Industries Seeding Starting Growin Expanding Mature stage stage g stage stage stage Software industry 8.5 35.6 28.8 13.6 13.6 Industry of the computer hardware 7.7 30.8 46.2 7.7 7.7 Network industry 16.7 50.0 16.7 16.7 0 Communication 20.8 37.5 20.8 16.7 4.2 General IT industry 20.3 39.0 27.1 10.2 3.4 Semiconductor 31.3 37.5 18.8 12.5 0 Medicine and health care 32.7 13.5 23.1 11.5 19.2 Environmental protection project 7.7 15.4 23.1 46.2 7.7 Biotechnology 17.1 17.1 42.9 8.6 14.3 New material industry 12.8 21.3 34.0 12.8 19.1 Resources development industry 6.7 46.7 26.7 0 20 Photoelectron and optical, mechanical and 13.8 20.7 37.9 20.7 6.9 electronic integration Scientific and technological service 9.7 38.7 35.5 12.9 3.2 New energy, high-efficient power-saving 40.0 20.0 20.0 0 20 technology Nuclear application technology 0 0 100.0 0 0 Other key science and technology 25.0 45.0 25.0 0 5.0 Manufacturing industry 0 13.0 51.4 16.2 18.9 Agriculture 9.5 19.0 23.8 28.6 19.0 23
  24. 24. Traditional non- scientific and technological 15.4 38.5 15.4 15.4 15.4 enterprises 2.4 The scale of venture capital investments The scale of venture capital investment mainly refers to various elements that occurred with the venture capital organizations during the survey, such as investment projects, investment amount, average scale of investment, the intensity of investment, purpose of investment scale, etc. These indexes mainly reflected the general characteristic of the investments made by the venture capital organizations. The venture capital organizations often invest in several projects or participate in the joint investments in one project because there are many risks in the course of venture capital investment, and the restrictions of the scale of controllable capital of the venture capital, etc. 2.4.1 Changes in the scale of venture capital investment: Intensity of project investment Looking from the total trend (Fig. 2.5), the average scale of venture capital investment (i.e. the intensity of investment) in China is improving gradually. Before 2000, the intensity of investment did not change much, generally within the small range from $0.6 million to $0.6 million; since 2000, it has been obviously accelerated, and among them it was $754831 on average in 2001, while reaching $1050725 in 2002. 24
  25. 25. Fig 2.5 Intensity and changes in venture capitals in China between 1994-2002 (Unit : thousand 图 2.5 1994 - 2002 年中国创业投资强度及其变化 (单位:万元 / dollar/per project) 项) 105.4 82.4 71.9 75.6 67.2 75.5 63.2 64.9 41.9 1994 1995 1996 1997 1998 1999 2000 2001 2002 年 年 年 年 年 年 年 年 年 2.4.2 the scale of actual investments in 2002 The distribution of the amount of individual investment made in 2002 by venture capital organizations has the following characteristics: First, the larger the intensity of investment, the smaller the proportion of the investment by governmental agencies, and the larger by non-governmental organizations; Second, the greater the investment intensity, the smaller the possibility of a joint investment selected by the venture capital organizations, and the stronger the initiative of investment, or else the more are manifested as follow-up investments; Third, in general, the investments by venture capital organizations and other organizations are roughly equal in terms of the scale in the common investment project, namely, the greater, the scale of investment the venture capital organization has, the larger the common capital contributed by other organizations is. As for the joint investments, the next section will deal with them. 25
  26. 26. Fig. 2.6 Distribution of the scales of the individual investment of the venture capital organizations in 2002 (unit : 图 2.6 2002 年创业投资机构单项投资规模分布 (单位:万 thousand dollar) 元) 28.0% 19.4% 17.4% 16.4% 10.6% 8.2% Under 122 Over 2416 100 以 1208 - 2416 2000 以 362 - 下 122-362 604-1208 上 604 2.4. 3 The joint investments in the venture capital investments In 2002, 45.7% of the projects adopted the form of joint investment. Among the joint investment projects, the ratio between the investments made by the venture capital organizations and other investment organizations is 1:2. 5. In the joint investment projects, the investment matching rate between the venture capital organizations and other investment organizations is inversely proportional to the average intensity of investment of the projects invested: the higher the intensity of investment is, the lower the investment matching rate is. For example, when the investment intensity of venture capital organizations is under $0.6 million, the ratio of investment made by venture capital organizations and other organizations is 1:4; when the investment intensity of venture capital organizations is between $0.6 million and $1.2 million, the ratio of investment made by venture capital organizations and other organizations is 1:3; when the same over $1.2 million above, the ratio is 1:1.8. 26
  27. 27. Fig. 2.7 Distribution of the amounts of individual investment in the joint investments of ventrure capital (Unit : 图 2.7 2002 年创业投资联合投资的单项投资金额分布 (单位:万 thousand dollar) 元) 19.9% 16.8% 15.8% 13.4% 12.2% Under 122 Over 2416 100 以 2000 以 下 1208 - 上 122-604 604-1208 2416 See Fig. 2.7 for the scales of investments by other organizations in the joint investment project. 2.4. 4 the initial investment and follow-up investments In 2002, 83.3% of the venture capital was the initial investment, while the follow-up investments only accounted for 16.7%. The contributing factors probably include: (1) most invested enterprises were not fast in development, and their demands for funds were not big, thus they need not to further expand their investment; (2) because of the policy barriers, the venture capital organizations were relatively not good at re-financing, thus it affected their abilities in super-addition of investments. 27
  28. 28. Fig. 2.8 Initial and follow up investments of venture capitals in 2002 图2.8 2002年中国创业投资的首轮投资与后续投资 Follow up investment 后续投资 16.7% Initial investment 首轮投资 83.3% 2.4. 5 The investment limit of individual projects On the whole, 61.7% of the minimum of venture capital had been under $0.1 million. The minimum between 0.1 million and 0.6 million accounted for 29.4%, while the projects with investments of 0.6 million- 1.2 million, 1.2 million – 2.4 million, and above 2.4 million were only 8.8%. That is to say, venture capital with a minimum scale under $0.6 million had accounted for 90%. A remarkable difference between this kind of distribution of investments with the survey of last year is that the number of projects with individual investment under $ 0.1 million has increased, while that between $0.1 million- 0.6 million decreased sharply. The contributing factor may be that the environment for venture capital was not good and the average investment intensities of the state-owned and non-state owned venture capital organizations were different. Fig. 2.9 Distribution of minimums of individual project in 2002 (Unit : thousand dollar) 图 2.9 2002 年单个项目最低投资额分布 ( 单位:万 元) 61.7% 29.4% 6.0% 0.4% 2.4% Under 122 Over 2416 100 以 下 122 - 604 - 1208 - 2000 604 1208 2416 28
  29. 29. The average scale of the largest individual venture capital in 2002 was $2149758. The scale of the individual largest investments concentrated mainly in three intervals: under 0.6 million, 0.6 million-1.2 million and 1.2 million- 2.4 million, totaling up to 70.3%, while the investment projects between 2.4 million- 6 million and over 50 million had taken the smallest proportion (Fig. 2.10). This kind of distribution indicates that the scales and partialities of the investments made by different venture capital organizations had great differences. Fig. 2.10 Distribution of top investment of individual project in 2002 (Unit : thousand dollar) 图 2.10 2002 年单个项目最高投资额分布 (单位:万 元) 23.3% 23.3% 23.7% 18.1% 11.0% Over 6039 5001 以 604 - 1208 - 2416 - 上 0- 1208 2416 6039 604 2.5 The conditions of the invested organizations 2.5.1 Operations of the invested organizations The survey shows that the average annual income of the organization having been invested is $3.1 million. The incomes of the invested organizations mainly distributed between $1.2 million- 3.6 million (inclusive), accounting for 25.9%. See Fig. 2.11 for other different distributions of the income. Judging from the profits of the invested organizations in the same year, the annual return was $350242 on average, among them, the invested organizations having earned profits between 0 and 1 million took the largest proportion, i.e. 32.0%. See Fig. 2.12 for details. After the analysis on the annual incomes and profit distribution of the invested 29
  30. 30. organizations, it is not difficult to discover that only those organizations relying on their own strength to survive and having comparatively steady cash flow are more probable to win the favor of the venture capital organizations. Fig. 2.11 Distribution of the incomes of the invested organizations in 2002 图 2.11 thousand 年被投资机构的收入分布情况 (Unit : Ten 2002 yuan) (单位:万 元) 25.9% 23.9% 17.3% 13.2% 11.7% 8.1% Under 122 Over 6039 100 以 5000 以 122 - 604 - 1208 3623 下 上 604 1208 - - 3623 6039 Fig.图2.12 被投资机构的盈利水平 2.12 Profits of the invested organizations 32.0% 26.9% 17.3% 9.1% 8.6% 6.1% Loss Under 100 Over 1000 亏损 100以下 100-300 300-500 500-1000 1000以上 On average, the ratio of the amount of investment made by venture capital organizations to the annual l return of the invested organizations is 2.6:1. If the projects at the mature stage are neglected, the proportion would be around 8:1. 2.5.2 Scale of capital of the invested organizations The average scale of capital of the invested organizations was $3.6 million. Among all the 30
  31. 31. respondents, the proportion of organizations with capital scale above $1.2 million was 58.5%, while the capital scale of nearly 30 percent of the invested organizations was between $1.2 million- 3.6 million. See Fig. 2.13 for the distributions of other different capital scales. Analysis on the relationship between the intensity of venture capital and the paid-in capital of the invested organizations shows: the intensity and scale of venture capital are in reverse proportion to the paid-in capital of the invested organizations: With the increase of the intensity of project investment, the ratio of the scale of venture capital to the paid-in capital the invested organizations will decrease, see Table 2.2. Table 2.2 Ratio of the scale of venture capital to the paid-in capital of the invested organizations in 2002 Scale of the capital Under 122 122-362 362-604 604-1208 1208-2416 Over 2416 (thousand dollar) Ratio 1:8 1:7 1:7 1:4.5 1:3.4 1:2.5 Fig. 2.13 Distribution of paid-in capital of the invested organizations in 2002 (Unit : thousand 图 2.13 2002 年被投资机构的实收资本规模分布(单位:万 dollar) 元) 28.6% 24.1% 17.4% 16.5% 13.4% Under 604 Over 6039 500 以 5000 以 604 - 1208 - 3623 - 下 上 1208 3623 6039 2.5.3 Number of employees in the invested organizations 31
  32. 32. 图2.14 Number of employees in the invested organizations (Unit: person) Fig. 2.14 2002年被投资机构的雇员人数分布 (单位:人) 41.1% 20.6% 15.0% 12.8% 6.8% 3.8% Under 10 Over 200 10以下 10-50 50-100 100-150 150-200 200以上 The average number of employees in the invested organizations is 90 persons, seeing Fig. 2.14 for details. In 2002, the venture capital mainly targeted small organizations with employees of less than 50 persons. The invested organizations with similar number of employees took the largest proportion, up to 62%; among them, the small enterprises with 10-50 employees attracted more interest from the venture capital organizations. 2.5.4 Terms of operation of the invested organizations As far the terms of operation of the invested organizations are concerned (Fig. 2.15). The focus of the venture capital was on the small enterprises with a certain foundation for operation. Nearly 50% of the terms of the invested organizations management are 1-3 years. This shows that the enterprises with shorter terms of operation, especially less than 3 years, are the absolute focal point of investment by the venture capital organizations. Fig. 2.15 Term of operation of the invested organization in 2002 图2 . 1 5 2 0 0 2 年被投资机构的经营时间 47.6% 22.3% 17.2% 12.9% Under 1 year 1-3 years 3-5 years Above 5 years 1年以下 1~3年 3~5年 5年以上 32
  33. 33. 2.6 The performance of venture capital In the survey on over 2000 invested organizations, it was found that the general performance of the invested organizations was outstanding. By the end of 2002, nearly 4% of the invested organizations had been listed, and about 10% are planning to be listed, another 64% operate normally. Only about 5% had been liquidated (Fig. 2.16). This indicates that the invested organizations were in normal operation, which was far better than the enterprises of other types at the same period. Fig. 2.16 Analysis on the performance of venture capital organization : 图2 . 1 6 创业投资机构业绩分析:被投资机构的运作情况 operation of the invested organizations 5.0% 4.0% 10.0% 11.0% 6.0% 64.0% Acquired by other Repurchase Normal Listed 已上市 准备上市 被其他企业收购 企业回购 of 正常运行 Prepare listing for enterprise enterprise operation Liquidatio 清算 n 33
  34. 34. 2.7 The popular areas for the venture capital 图2.17 2002年中国创业投资项目集中的前10个地区 Fig.2.17 Top ten areas in China where venture capital concetrated in 2002 15.0% 9.9% 9.5% 8.3% 8.1% 5.9% 5.0% 4.8% 4.6% 3.9% Shanghai Zhejiang Beijing Jiangsu Shenzhen Hubei Shangdong Guangdong Shaanxi Tianjing 上海 浙江 北京 江苏 深圳 湖北 山东 广东 陕西 天津 Judging from the proportions of the venture capital cases in different regions, Shanghai witnessed the most venture capital projects in China, accounting for 15.0%. Zhejiang and Beijing took the second and the third place, accounting for 9.9% and 9.5% respectively. The areas, such as Jiangsu, Shenzhen, Hubei, Shandong, Guangdong, Shaanxi and Tianjin,etc. rank 10th--14th- respectively (Shenzhen is listed independently from Guangdong here, because venture capital landed there earlier in China, also it is one of the areas with larger venture capital scale), 75% of the venture capital projects in China concentrated in the above-mentioned 10 areas in 2002 (Fig. 2.17). In order to further reflect the regional partialities held by different venture capital organizations, the survey let the respondents to select freely the areas they preferred for ventures. According to the statistics, Beijing and Shanghai are the most favored places, accounting for 17.0%- 16.7 separately; Guangdong, Tianjin, Shenzhen, Zhejiang, Jiangsu, Anhui, Shaanxi, Shandong,etc. ranked 3rd-10th respectively. About 81% of the venture capital organizations have regarded the above-mentioned 10 areas as the first-choice. (Fig.2.18). The areas where venture capital organizations comparatively concentrate will attract 34
  35. 35. more investment projects. The large number of investment projects and good atmosphere for ventures will in turn attract more venture capital organizations to settle down. Fig. 2.18 Ten areas2002年中国创业投资机构优先选择的前10个地区 in 2002 图2.18 first selected by venture capital organizations in China 0.17 0.167 0.148 0.079 0.06 0.054 0.043 0.034 0.032 0.028 Beijing Shanghai Guangdong Tianjing Shenzhen Zhejiang Jiangsu Anhui Shaanxi Shandong 北京 上海 Shandong 广东 天津 深圳 浙江 江苏 安徽 陕西 山东 35
  36. 36. Chapter Three Management of venture capital and analysis on the regulatory environment Good management is the important guarantee for the normal circulation of venture capital and the sound development of venture capital-- or else, the venture capital is hard to be value-added. The management of venture capital does not merely involve its operational organization, but also involves various respects of the invested organizations as well as the favorable regulatory environment. The businesses and capabilities, management styles of venture capital organizations, project selection, resources and management of the invested organizations, governmental macro-policies, etc. are important factors for the whole course of management of venture capital. The following are empirical analyses on the determined factors of venture capital and its industrial development, such as the information sources, project decision-making and supervision of the investment projects, venture talents and regulatory environments etc. 3.1 The information source How to obtain the information for venture capital determines whether it can find any good projects. At present the information channels are still imperfect, two main sources of the project information are the "voluntary contacts of project owners" and " the recommendations of competent authorities", accounting for 22.2% and 21.6% respectively. With the development of market intermediaries in recent years, the "project intermediaries" have also become one of the mains sources of information for venture capital organizations, accounting for 14.4%. This indicates that making energetic efforts in the development of market intermediaries will contribute to expanding the channels of project sources for venture capital organizations. Recommendations by acquaintances, such as a friend, or by shareholders are also one important source of projects for the venture capital organizations. Generally, the project information sources of the venture capital organization are still relatively limited and the existing information channels have not been fully utilized. Certainly, lacking a relatively smooth information exchange platform may be one of the important reasons for the aforesaid question. 36
  37. 37. Fig. 3.1 The most important three infomation source for venture capital organizations 图3 . 1 创业投资机构的最重要的3 个投资信息源 22.2% 21.6% 14.4% voluntary contacts of project owners he recomendations of competent project intermediaries 项目业主主动联系 政府主管部门推荐 authorities 项目中介机构 3.2 The key elements of the investment decision-making Fig. 3.2 Analysis on the key elements of the 图3 . 2 影响创业投资 决策的最重要的几 个因素 investment decision-making 37.3% 27.2% 术先进性 major investment technological advance 9.8% 9.8% 技术成熟度 maturity management group 市场前景 prospect technological 管理团队 主要投资项目的技 market projects of According to the surveys, "market prospect", "management group" and "technological advance of major investment projects" and "technological maturity", etc. are major factors affecting the decision-making of venture capital projects in China. Among them, nearly 37% of the venture capital organizations hold that the first factor they will consider when making decisions of investments is whether the market prospect is good or can be predicted. And nearly 30% of the venture capital organizations hold this view that a good management team is the key to success in the project. Although technology is an important factor, which has not been strongly advocated, only less than 10% are of the opinion that the advancement and maturity of technologies are very important. Therefore, the venture capital organizations in China give relatively less consideration of the technological factor in selecting the project. In addition, the venture capital organizations seldom pay attention to the factors of market competition in project investment. These indicate that the venture capital organizations in China paid close attention to some projects mainly with good market prospect. The results in this survey are different to some extent with their foreign counterparts. In selecting investment targets, the foreign venture capital considers the following 3 factors in sequence: management, market and technology, but their counterparts in China put the 37
  38. 38. market in the most important position. Perhaps this choice reflects the difference of market environments in the developed counties and in China. The Chinese markets are still not sound and the unordered market competition and relatively high requirements for entry lead to great difficulties in market development. Therefore, the first thing the venture capital organizations take into account is the prospect of the market when they are making decisions of investments. Fig. 3.3 Factors affecting the pricing of 图3 . 3 影响创业投资项目定价的因素 venture capital projects 7.8% 1.8% 16.1% 7.3% 20.1% 25.8% 21.1% 项目的开发成本 proj Development cost of 项目的市场价格of the 潜在市场竞争 market Market price Potential Future cash flow of the projects competition 项目的未来现金流量 一般由双方商定 by both 宏观经济环境 economic projects ects Generally decided Macro others parties 其他 3.3 Pricing of venture capital projects In evaluating investment projects, 25.8% of the venture capital organizations maintain that cash flow of the project in future should be considered first. 21.1% of the venture capital organizations hold that the potential market competitions should be considered first. 20.1% of the venture capital organizations believe that the first important factor in deciding the price of investment projects is to determine a reasonable market price for the projects. Other factors affecting pricing are shown in Fig. 3.3. Generally, the venture capital organizations are seeking the maximization of profits in the future on the basis of considering market competitions. 3.4 Supervision of projects after the investment Fig. 3.4 Supervision of projects after the 图3 . 4 对被 投资机构 的监管 方式 investment 5.6% 1.6% 17.1% 32.9% 21.0% 21.8% 参加董事会 board of Participation in the provision of consultancy for 基本不提供上述服务 提供管理咨询 Basically not offer the above service directors management accrediting financial others 派驻财务人员 personnel into the invested Accrediting senior management 派驻高层管理人员 其他 organizations 38
  39. 39. Participation in the board of directors is a primary way for venture capital organizations in China to conduct supervision on and management of investment projects, which about 33% of the venture capital organizations have adopted. 22% of the respondents hold that provision of consultancy for management is also an important means for venture capital organizations to strengthen the project management and improve the possibility of success of the projects. However, more than 20% of the venture capital organizations maintained that to supervise and manage the project after investment will not necessarily adopt such means as participating in the board of directors, accrediting the top management team or financial personnel, offering management consulting service, etc, the probable causes may be that the venture capital organizations themselves are limited in their business or it is determined by the economic nature of these organizations (the majority are venture capital organizations with backgrounds in connection with state-owned sectors). In addition, 17% are of the view that accrediting financial personnel into the invested organizations may be conducive to strengthening supervision. 3.5 Main business lines of the venture capital organizations According to survey (Fig. 3.5), the first business of venture capital organizations is investing venture capital and 31% of venture capital organizations can offer this business. The second major business of the venture capital organizations is to act as an " investment consultant ", accounting for 24% while "financing consultancy for enterprises" and " fund management " rank the third and the fourth, accounting for 20% and 19% respectively. Besides, about 6% mainly rely on such business as offering "incubator", "general consultancy", etc. One important reason why the businesses of venture capital organizations in China are so diversified and contrary to those of their overseas counterparts is that they have to make a living by relying on non-core businesses in such an unsound venture capital investment environment, in particular the regulatory environment. Fig.3.5 Main business lines of the venture 图3 . 5 中国创业投资机构的主要业务选择 capital organizations 6% 20% 31% 24% 19% 创业投资 基金管理 投资顾问 investment 企业融资咨询 其他 investing venture capitals fund management others consultant 3.6 Reasons for Unsatisfactory Performance of Venture Capital Organizations 39
  40. 40. There are many reasons for unsatisfactory performance of venture capital organizations. In the survey, 23% of the venture capital organizations maintained that the first cause is the " the limited capacity of the management"; "Inadequate market penetrating efforts" is another important influencing factor, moreover, the bad faith of the management may also be a contributory factor. The venture capital organizations that have selected the last two factors are 22% and 15% respectively. The market, technology, policy and other factors have little impact on the normal operation of the invested enterprises. This proves that investors have to take up such important tasks as how to deal with the management personnel and the management after making project decisions. Lacking high-quality management personnel is the key factor restricting the normal operation of the invested projects and the growth of the enterprises. 图3 . 6 3.6 Reasons for Unsatisfactory Fig. 被投 资机构经营不理想的主要原因 23.3% Performance of Venture Capital 22.4% 15.3% 管理者的管理水平有限 市场开拓力不够 the limited capacity of the management Inadequate market penetrating efforts bad 管理者诚信不佳 faith of the management 3.7 Quality Defect of Persons Engaged in Venture Capital Activities At present, the knowledge and ability that the persons engaged in venture capital activities lack most is "assessing the value of venture capital enterprises", the proportion of venture capital organizations selecting this factor is the highest, accounting for 21%; The proportion of lacking knowledge of "participating in the management of venture capital enterprises " is 16%, taking second place, while lacking " knowledge of present scientific and technological front" ranks the third, accounting for 13%. The above-mentioned three factors are the knowledge and ability needed most at present. The venture capital organizations selecting lacking " legal knowledge ", " financial knowledge " and "ability in negotiation and draft agreement " account for only a bit more than 10%. This indicates, persons engaged in venture capital activities generally have solid common knowledge 40
  41. 41. foundation and abilities, which are closely linked with the their higher learning experiences . Moreover, they also lack of knowledge of "management of venture fund ", " formulating and withdrawal strategy for venture capital" and " comprehension of science and technology ", etc. However, these factors take only small proportions. Thus, this also shows that they are not in desperate need of " the professional knowledge ", but a stage that can give full play to their " professional knowledge ", an environment for venture capital. 图3.7 Main knowledge abesent of persons Fig.3.7 创业投资从业人员缺乏的主要知识 engaged in venture capital activities 20.5% 15.9% 12.6% 12.0% 12.0% 略 值 理 解 金 战 价 管 了 基 assessing value 出 业 的 的 业 of venture participating in the 退 企 业 沿 创 knowledge of present formulatingand capital management of 的 management of venture 业 企 作 前 scientific and withdrawal strategy 资 创 业 技 运 enterprises capital enterprises technological front venture fund for venture capitals 投 估 创 科 业 评 与 前 创 参 当 定 对 制 3.8 Major Factors Restricting the Development of Venture Capital Fig.3.8 8Major Factors Restricting the Development of 图3 . 制约中国创业投资产业发展的主要因素 Venture Capitals 22.7% 16.3% 15.4% 13.6% 创业投资 Unsound legal framework inadequacy of regulatory 10.1% undeveloped financial Bad basis for social Absence of sound 程度 market 金融市场的发 差credit favor 迟没出台 创业投资 不够 没有完 信用基 政策 不够 撤出 机制 社会 优 惠 善 的 育 础 较 法 规 迟 At present, three major factors restrict the development of venture capital: absence of sound withdrawal channel, undeveloped financial market and bad social credit. According to the survey, the three factors mentioned above take the largest proportions among the 10 41
  42. 42. influencing factors for the development of venture capital, which is 22.7%, 16.3%, 15.4% respectively, up to 54.3% in total. Two other important factors are the absence of legal support for venture capital and inadequacy of regulatory favor, accounting for 13.6% and 10.1% separately. Meanwhile, the inadequacy of their professional knowledge (8.8%), low content of technology of venture capital enterprises, etc. also restrict the development of venture capital to a certain extent. Therefore, how to set up sound withdrawal mechanism of venture capital, promote the development of the financial market, build social credit system and formulate applicable laws as soon as possible will also directly influence the future development of venture capital. 42

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