Venture capital fund a way to reduce risks
By Wang Hongjun (chinadaily.com.cn)
Updated: 2004-04-06 15:09

Establishing a venture capital fund is expected to be a way to reduce risks in the process, said Tien-Lai Hwang, Managing Director and General Manager of Acorn Campus Shanghai Management Co Ltd, at the forum.

Hwang said venture capital is a way for investors to reap profits with such features as high risks, high investment and high profit returns, therefore, it is unlikely for each investor to reach profitability. Under the condition, it is best to set up a venture capital fund and invest in different companies to ward off risks.

The venture capital fund should also be managed by an experienced company, which mainly engages in seeking the source of consumption and deciding where and when to invest. The company should also be capable of managing the investments and knowing what to do next.

There are two types of limited partnerships in the venture capital investment: one is the limited partnership, which specializes in investing in venture capital funds; the other is general partnership, which mainly engages in managing the business funds.

The majority of US venture capital funds are managed by general partners, while the limited partners are only passive investors.

A venture capital ejection takes as many as 10 years to reach a profit due to fact that the duration of a venture capital fund is seven years, or two to three years before that. Therefore, the investors and the investment managing companies must have mutual trust between them.

Limited Partnership

Limited Partnerships in general: In a Limited Partnership, one or more ‘general" partners manage the business while "limited" partners contribute capital and share in the profits but take no part in running the business. General partners remain personally liable for partnership debts while limited partners incur no liability with respect to partnership obligations beyond their capital contributions. The purpose of this form of business is to encourage investors to invest without risking more than the capital they have contributed.

Duration: Death, disability, or withdrawal of a general partner dissolves the partnership unless the partnership agreement provides otherwise or all partners agree, in writing, to substitute a general partner. Note, death or incompetence of a Limited Partner has no effect on the partnership

Formalities: The formalities of setting up and operating a limited partnership are very similar to that of starting a small, for-profit corporation. The California Limited Partnership Act, for example, requires the filing of a certificate with the Secretary of State, applies restrictions on the use and availability of partnership names, contains statutory requirements with respect to the manner of calling and holding meetings, and contains many corporation-like requirements.

General Partnerships

In General: A form of business entity in which 2 or more co-owners engage in business for profit. For the most part, the partners own the business assets together and are personally liable for business debts.

Sharing Profits: In the absence of a partnership agreement, profits are shared equally amongst the partners. A partnership agreement, however, will usually provide for the manner in which profits and losses are to be shared.

Unlimited Personal Liability for Losses: Each Partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor's claims, the partners' personal assets are subject to attachment and liquidation to pay the business debts.

Liability for a Co-partner's debts: Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can he held liable for his dealings with third persons.

Liability for a co-partner's wrongdoing: Each partner may be held jointly and severally liable for a co-partner's wrongdoing or tortious act (e.g. the misapplication of another person's money or property.

Duration: Technically, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most partnership agreements provide for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.

Management and Control: In the absence of a partnership agreement, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners

Transferability: Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners. However, a partner may assign his share of the profits and losses and right to receive distributions ("transferable interest"). Further a partner's judgement creditor may obtain an order charging the partner's "transferable interest" to satisfy a judgment.

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