Making capital from the early investments

By Benjamin Qiu (China Daily) Updated: 2014-07-14 07:02

There is an increasing number of China-based technology startups competing globally in the software, Internet, clean technology, and technical sectors.

Many of them have been founded by grass-root entrepreneurs and inspired by high-growth success stories such as Tencent and Youku, both of which are already successfully trading publicly on international stock markets.

From just a handful of venture capitalists back in 2000, a few hundred active VCs have now emerged, and many of them are enjoying huge success.

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Many of those investing in technology or high-growth Chinese companies are offshore funds, often based in the Cayman Islands but with ties to California's high-tech "Mecca" of Silicon Valley.

Notably, an increasing number of angel funds have also been set up by former Chinese entrepreneurs - sometimes serial entrepreneurs - to offer not just money but also guidance from experienced hands to founders of new startups.

Typical "exits" for these investors would be by initial public offering, often in the US, or through a sale to a more mature company in the investor's portfolio.

In either event, it would generally take place under US or Hong Kong law, and many of the legal terms used in the due diligence and transaction are modeled after those found in the Valley.

But there are also several differences between startups financing in China and those in California or the rest of the US.

In the latter, other than share purchases, there is an active market for banks and private equity investors providing venture loans to startups, even though the startups have little or no assets to provide as collateral.

In contrast, the venture loan market in China is still in its infancy and unlike in the US, investment funds backed by the Chinese state - such as State-owned companies, public universities, and government agencies - often provide funding to startups.

China-based VC investors tend to manage risk more carefully by applying more controls on their investment.