Venture capital viewed as essential for promoting industrial innovation Go back »

2008-11-17 | Shanghai

VENTURE capital investment has become an essential tool to promote China's high-tech industries, especially during the global financial turmoil.

The speed of development in innovative industries in the United States and Europe in the past 10 years proves that VC investment can enhance a nation's capabilities extremely quickly. Many developing countries are also embracing VC investment.

"The government should help stimulate VC investment and guide capital into all types of innovative companies when the market is full of idle capital and companies don't have a quick channel to financing," said Song Dezheng, deputy director of the Facility and Finance Department under the Ministry of Science and Technology.

"An improved VC investment system and a mature capital market can speed up the development of high-tech companies," Song said.

On average, VC investments account for about 1 percent of gross domestic product in the US, while in China they account for only 0.025 percent.

"China's VC market has a lot of potential but it is still short of an advanced legal system, local talents and self-regulated rules," Song said. He also stressed the need for more exit channels for VC cash -- ways in which investors can cash in their investment, such as IPOs.

The ministry allocated 200 million yuan (US$29.2 million) in 2007 and 2008 to a guidance fund, which has attracted more than 4 billion yuan of VC funding. The fund mainly supports emerging small and medium companies.

"Small and medium companies are more flexible and willing to undertake risks, but they always face a shortage of capital and it is hard for them to raise financing through normal channels," said Chen Gongmeng, director of the China Venture Capital Research Institute.

"However, as technology improved in SMEs, both the supply and demand of innovative products boomed, which in turn reduced market risks, so VCs poured into the sector because of its high added-value," Chen said.

Local encouragement

"Local governments should offer stimulus services for VCs, banks and research agencies to attract them to set up offices in their local areas," Chen said.

Municipal science and technology departments have followed the central government to create funds to support VC investments.

Shanghai's Yangpu District recently issued stimulus policies in an effort to build itself up as a VC hub for Shanghai, including offering a 15-million-yuan subsidy for VC firms.

The district has also set up a guidance fund to attract VC funds to invest in small and medium companies.

On top of this, Yangpu has established the Knowledge and Innovation Community, a building complex housing a number of IT firms, to gather VCs, innovative minds and research agencies in the same area.

Luring VCs is key to promoting technological breakthroughs, said Zhou Zhenhua, director of the Shanghai Development Research Center.

"Many VCs focus on innovative projects and prefer gathering around universities and innovative communities," Zhou said. Fourteen colleges and more than 150 research organizations are located in the district.

Pudong New Area has also made great efforts to enhance the development of small and medium-sized high-tech enterprises by expanding financial channels and creating a good environment for them.

The district plans to expand its guidance fund, the country's first fund set up by a district government to attract venture capital, from 1 billion yuan to 2 billion yuan to help the development of high-tech enterprises.

The government has contracts with world-renowned venture capital firms such as DFJ, Gobi Partners and BioVeda to bring 11 funds worth more than 14 billion yuan to Pudong. It also has pumped 620 million yuan into a guidance fund since 2006. It aims to attract venture capital worth more than 30 billion yuan into Pudong by 2010.

Green technology

"We have seen a strong trend in the past few years that an increasing amount of venture capital funds invested in America, China and global international markets have gone into green technologies," said Jim Wunderman, president and CEO of Bay Area Council, a business-backed public policy organization in the Silicon Valley area, in the US, during a recent green-tech summit.

The venture capital community is not worried about a green-tech investment bubble, and expects investment in the green-tech sector to significantly increase in 2009, according to a report by the US audit, tax and advisory firm KPMG LLC.

KPMG found that around 50 percent of respondents including venture capitalists, corporate executives, entrepreneurs and bankers thought investment activity in green technology will increase by 20 percent or more in 2009 over 2008 levels, while another 34 percent expected investment levels to increase 10 to 19 percent.

Global venture capitalists have poured increasing amounts of money into China's technology development. Intel Capital has invested US$20 million in Trony Solar Holdings Co, one of China's largest solar energy and wind-power equipment makers.

Amid the global economic slowdown, the Chinese government has tabled a 4-trillion-yuan stimulus package to shore up the domestic economy. Green tech and environmental protection are among the 10 top priorities in the government's plan.

"In general, investors are cautious about everything (in the middle of a global financial crisis), but the record amount of capital for green technology and the rising awareness of the importance of environmental protection means this sector can weather the storm," Wunderman said. "Green-technology investment could be a haven for the storm."

Venture capital firms raised US$492 million in the third quarter in China, 84 percent less than the second quarter, according to the Zero2IPO Research Center.

The information technology industry continued to take the lead in attracting VCs in the third quarter of this year, followed by more traditional sectors such as services. Health care and clean-tech businesses attracted less investment.

 Source - Shanghai Daily, 15th November 2008.

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