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Chinabeing a developing and transitioning country, its venture capital market hassome special characteristics. 1. China's venture capital practices lagbehind the international normThehigh-tech enterprises in China, relying on various sources of capital, haveundergone a difficult process of development. Although China has quite a fewhigh-caliber entrepreneurs in the high-tech industry, a large number of thesecompanies (16,000 in Beijing while 72,000 nationwide) are run by inexperiencedindividuals. a)Serious information asymmetryFirst,there exists an information asymmetry between the managers of high-techcompanies and the outside investors.Second,there exists an information asymmetry between high-tech companies and venturecapital firms. By international practice, both parties should be honest witheach other and exchange information openly. After all, the venture capitalinvestors add value by using their management and technological expertise toimprove the company's performance. b)Serious exclusionismHigh-techcompanies in China, particularly those run by the locals, have a tendency torefuse to cooperate with outside investors. c) Highcost of investmentChinesehigh-tech companies, particularly those run by the locals, are mostly under thecontrol of couples or families. These ownership structures make it difficultand costly to follow the customary practice for venture capital investments,under which venture capitalists receive a substantial portion of ownership andcontrol in the companies 2. Company managers, rather than venturecapital investors, retain majority controlIt is acommon practice for the managers of some high-tech companies in China to demandfor majority holding in cooperation with venture capital firms. There may bemany explanations for such behavior, yet the primary reason lies in theinfluence of traditional Chinese thinking. This thinking is based on the beliefthat one will lose control over the company without majority holding or aleadership role in the company. 3. China lacks an infrastructure of serviceprofessionals to support venture capital firmsThegrowth of venture capital involves not only high-tech companies and venturecapital firms, but also intermediary agencies such as law firms, accountingfirms and assessment centers. Unfortunately, China still lacks agencies thatoffer proper services to the venture capital community. Atpresent, venture capital firms in China have to shoulder the multiple tasks ofseeking for investment projects, assessing the projects, avoiding legal risks,planning the finances of invested companies and helping the portfolio companyto list on the stock market. 4. The legal framework for venture capitalinvestments is inadequateAlthoughChina has set the national strategy of "revitalizing the country throughscience and education," it has yet to set up a legal framework in supportof venture capital investments. The Chinese venture capital community has beengrowing in the absence of proper protection by law. 5. The Chinese capital markets providesinadequate exit channels for venture capital investmentsThereturns of a venture capital firm do not depend on yearly dividends but on theacquisition or the initial public offering of its invested companies. Suchliquidity events require mature capital markets, which China lacks at present. venturecapital financing has given rise to a dynamic system of modern financialproducts and services by introducing a series of innovations. Please visitonline http://www.dynastyresources.netin NewYork city.
Venture,capital,investment,mar