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Inside China’s $445 billion state-backed startup boom

Workers use computers at their desks inside Tech Temple, a co-working space for start-up companies, in Beijing. Photo: Tomohiro Ohsumi/BloombergChina is getting into the venture capital business in a big way. A really, really big way. The country’s government-backed venture funds raised about 1.5 trillion yuan ($311 billion) in 2015, tripling the amount under management in a single year to 2.2 trillion yuan, according to data compiled by the consultancy Zero2IPO Group. That’s the biggest pot of money for startups in the world and almost five times the sum raised by other venture firms last year globally, according to London-based consultancy Preqin. The money’s in what are known as government guidance funds, where local and central agencies play some role. With 780 such funds nationwide and a lot of experimentation, there’s no set model for how they’re managed or funded. The bulk of their capital comes from tax revenue or state-backed loans. The money is part of Premier Li Keqiang’s effort to bolster the slowing Chinese economy through innovation and reducing its dependence on heavy industry. The country began a campaign to support entrepreneurship in 2014 and has since opened 1600 high-tech incubators for startups.
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The huge influx of cash raises the possibility of a boom-and-bust cycle like the government-led investment in China’s solar and wind power sectors, said Gary Rieschel, founder of Qiming Venture Partners. “They have a fantasy that if they give everyone money they’ll create entrepreneurs,” he said. But inexperienced or corrupt managers are likely to invest in dozens of regional copycats unable to get big enough to be profitable, he said. “What it will result in is catastrophic losses for the government.” It’s unclear how quickly the funds will be deployed. Regulations and market practices remain to be finalised, Zero2IPO said in its report. But it’s clear that governments are marshalling their resources. Central China’s Wuhan, the capital of Hubei Province, is leading the push with a 200 billion yuan fund, the country’s biggest, with a mix of local and central government financing. The government there says it wants to grow that eventually to 1 trillion yuan, including private money. Hubei’s government hasn’t granted requests for an interview. This story Administrator ready to work first appeared on Nanjing Night Net.

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