China's Venture Capital Markets: Nascent, but growing

Editor's Note: Brian Hoyt is a consultant with the Financial and Private Sector Development Vice Presidency of the World Bank Group.

The World Bank recently held a workshop on Closing the Private Equity Gap that discussed how government policy can nurture the growth and sustainability of emerging market private equity. Venture capital investments play an important role in filling the early stage funding gap, and China is one of the world's largest emerging markets for venture capital (VC).

Last May, the Bank released a report, Promoting Enterprise-Led Innovation in China, which gives an overview of the Chinese VC market, whose investments have grown from $764m to $3.88bn between 2003 and 2007. In order to mantain this growth, the report calls on the Chinese governement to continue building its venture capital infrastructure:

Despite its relatively early start in the mid-1980s and strong government backing, China’s domestic VC industry remains in a nascent stage of development. This is so largely because creating a viable VC industry is more about the creation of an ecosystem than about setting up and capitalizing a number of individual VC firms. And gaps remain in some key dimensions of this ecosystem.

In order to improve its VC "ecosystem", China must address four issues:

1. Close legal loopholes;

2. Expand sources of VC funding by including institutional investors;

3. Enhance corporate governance; and,

4. Widen avenues for exits.

One of the workshop's keynote speakers was Gordon Murray, Professor of Management at the University of Exeter. Professor Murray warned that governments make "lousy VC investors," as they lack the cunning to compete with private venture capitalists, who will take advantage of you any time they get the chance. Murray's observations confirm the report's recommendations that the Chinese government needs to improve its VC environment in order to allow room for more private investors.