VC, PE firms to spur innovation

Startup funding to improve as Government Work Report underlines policy backing

The trend of venture capital and private equity firms powering China's innovation boom will intensify in the years ahead, amid accelerated industry upgrade and a more supportive policy environment, analysts said.

Their remarks came after a review of the Government Work Report that was presented to the country's top legislature on Tuesday.

China will support the development of venture capital as part of efforts to boost innovation, said Premier Li Keqiang while delivering the report.

Ha Nan, a Beijing-based small-time entrepreneur, would probably agree with the analysts' view that the advent of VC and PE firms in China has made a remarkable difference to startups' evolution in the country.

Ha started up with Beijing Liushanmen Technology, a catering business, in 2015. But profit proved elusive as a paucity of initial funding meant the startup could not afford to hire top talent. That, in turn, reflected in its performance.

It could have proved a vicious circle but for the introduction of necessary funding from Matrix Partners China, a VC firm, in 2017, which was a "turning point", said Ha, Liushanmen's founder and CEO.

"Matrix's funding, support and industry contacts helped us to hire a food delivery industry veteran, who helped us to build a professional team rapidly and enabled our new business model."

Liushanmen began mass-producing semi-finished dishes for mid-and small-sized restaurant chains. "With tech-based innovation, we aim to provide our clients like restaurants with standardized food supplies. In the past, these could be afforded only by catering giants," Ha said.

Food supply is by no means the only sector that saw plenty of VC and PE activity in recent times.

According to Beijing-based industry research institute Zero2IPO Research, three industries received a great deal of attention from PE and VC firms last year: information technology, internet, and biotechnology, including healthcare.

These are the areas where technological innovations and new business models abound.

More than 5,300 deals entailing overall investment of 331.2 billion yuan ($49.4 billion) were clinched across the three industries. In terms of deals, they accounted for 53 percent of the national total, according to Zero2IPO data.

"PE and VC funds are important drivers of China's innovation-orientated growth," said Song Guoliang, member of the self-discipline and supervision committee of the Asset Management Association of China, the national self-regulatory association of fund managers.

"Mid-and small-sized private companies are the main sources of innovation, whose finance is heavily reliant on PE and VC funds."

According to Song, tech and innovation startups struggle to get bank loans as the former cannot offer satisfactory collateral. Stock and bond markets may consider any attempts by startups to raise capital as risky.

Liao Junxia, partner of PE fund of funds at CreditEase, a Beijing-headquartered fintech company, said China's PE/VC industry has entered a phase of high-quality growth.

Strong players are expected to squeeze out a large number of unprofessional firms in the years ahead. In fact, a virtual shakeout had begun last year when deleveraging moves and the stock market downturn made it much harder for weak players to raise money, Liao said.

"This is helping refill the industry with trustworthy fund managers that can better serve the real economy with expertise in choosing target firms and aiding their development."

In 2018, capital raised in the PE/VC market dropped by nearly 26 percent to 1.33 trillion yuan, reversing a five-year uptrend that saw more than a 52-percent annual uptick on average, Zero2IPO data showed.

Zhou Xuan, a professor at the University of International Business and Economics in Beijing, said he expects the PE/VC industry to recover from the recent slack this year amid policy moves to increase capital flows into the market and brighter stock-market performance.

On Feb 14, the government announced a top-level guideline to strengthen the financial system's ability to serve the private sector. The country will continue to improve tax policies in order to support venture capital.

The guideline said the current restrictions that bar insurers from making for-profit investments in certain industries will be reviewed.

Zhou called for deregulation of the industry. "PE/VC funds represent a type of capital that is most willing to take risks in supporting the real economy. So they deserve a separate regulatory system."