Class of 2020 | brali@wharton.upenn.edu
The venture capitalist industry in China has hit a huge milestone. How huge you may ask? Huge to the tune of $231 billion accrued in 2015 in government-backed venture funds. That sum of money is the biggest collection of money intended for funding start-ups in the world.
Recently, the Chinese economy has suffered due to rising home prices, rising debt, declining exports, and the lag of the usually reliable heavy industries. This has resulted in the slowest expansion of the economy since 2009.
Enter Premier Li Keqiang. The premier of China has begun a movement to mitigate China’s dependence on the heavy industries and decrease debt-fueled spending on infrastructure. Through the establishment of more than 1,600 start-up incubators, the Communist Party aims to shift the emphasis of economic development to the biotechnology, internet, and high-end manufacturing sectors. Long term, this effort is aimed at encouraging innovation and entrepreneurship as well as creating a wide variety of jobs outside of the traditional industries.
In order to spur this development, the central government has urged local administrators to spearhead the funding of venture capitalism funds in their respective provinces and cities. The basic model consists of obtaining funding from local limited partners and infusing it with government funding to form venture capitalist funds. The government then plans to not interfere with how the funds are run or suggest any investments to the teams. This has resulted in more than 780 local government funds trying to find the next big start-up, similar to successful tech firms like Xiaomi and Alibaba.
One of the most optimistic examples of this movement can be seen in the Hubei province. The Yangtze River fund already has an average contribution of $75 million from eight different institutions. With a goal of forming a silicon-valley like community, the managers of the fund aim to stimulate the already 200 software companies in the area.
The status of China’s venture capitalist sector is cause for optimism from foreign investors. With the effort of the government to level the playing field for foreign investors, investing in Chinese funds may be a real possibility soon. However, the world can only wait and see if China avoids the pitfalls that have plagued previous centrally-supported projects to improve the economy.
Figure 4: Government Backed Startups in China