Venture Capital And Enterprises’ Value Creation

As the booster of high-tech industries, venture capital is the engine of economic growth. It has played an irreplaceable role in supporting the innovation activities. In the past two decades, China’s venture investment not only supports the rapid development of high-tech industries, but also alleviate the shortage of funds for small and medium enterprises.How do we continuely get better knowledge of venture capital, learn from past experience, and propose a new path of development, to be invincible in the competition in the era of knowledge economy? To answer this question we need to more clearly understand that, on the micro level, how venture capital effectively combines with small and medium enterprises and participate in their value creation process.From the perspective of information asymmetry, this study has built a theoretical framework by answering the following three questions. First, how does venture capital filters out the enterprises suited, and control the investment risk? Second, after the capital infusion, how does venture capitalists add value to the enterprises, and what is the specific performance of the enterprises? Third, when venture capital make enterprise value marketable, what determines its exit decision?This study is orgnized with six chapters to discuss and analysis these three issues. The conclusions are as followed. Firstly, venture capitals can solve the problem of information asymmetry better than commercial banks, and more effectively filter and evaluate the enterprises. Enterprises with higher strategic risk, larger intellectual property value, lower liquidation value and higher control premium is preferred by venture capital. And venture capital contracts can effectively achieve the important means of incentives for entrepreneurs. Secondly, venture capitalists can effectively enhance the operational efficiency of the board of the enterprises. Venture capital backed enterprises have dispersed shareholding, reducing the possibility of controller’s encroachment of minority shareholders’rights. They also have larger and mor independent and experienced board. Althoug the defects of the current stock issuing system and pricing rules hinder the venture capital backed enterprises having higher issuing prices, but venture capitals’ market power can rise their IPO underpricing up. Thirdly, the effective exits of venture capital is determined by their condition and ability to solve the information asymmetry problem between new buyers and the enterprises. Those mature enterprises with large capital demand, invested by venture capitals of limited partnership or with banking background, with contracts of stage financing or sydication, will have greater probability of IPO exit. Those initial enterprises with low capital demand, invested by venture capitals of limited partnership, with investment banking background or large control rights of the enterprises, will lengthen the investment duration of venture capitals.Based on the above conclusions, policy recommendations are proposed. Firstly, the development of venture capital industry should be encouraged and supported by a series of legal protection. Secondly, the market power of venture capital in China’s stock market should be reasonablely guided to be a rational market forces. Last but not leas, the Third Market and SME equity transfer market and the corresponding regulatory rules should be introduced as soon as possible, to reasonablely guide venture capitals’ investment and exit, achieving the interface between small and medium enterprises and capital market.