Venture capital firms investing in companies in exchange for equities have come to a standstill after experiencing financial losses, due to investments in Shanghai technology startups. In order to stabilize and subsequently encourage these investors, Shanghai has decided to undertake a new initiative with the purpose of motivating venture capital firms to engage in greater risk – taking decisions.
They are planning to do so by firstly offering bail-outs to the investors that have incurred great loss. This is to ensure that the investors remain in the race of betting on technology startups despite the given circumstantial situation. This initiative is expected to start this year itself. Investors in Shanghai technology startups are given the liberty to apply for a compensation of 30 to 60 percent of their losses, according to a notice by the Shanghai Science Technology Commission.
However, the amount of the compensation will depend on certain factors. For starters, the size of the startup companies involved will be considered. Moreover, the revenue generated will also be looked upon. The compensation is said to cap at 3 million yuan ($640,000) per project and over six million yuan annually per investor. Further details on how losses will be calculated in order to reach a precise result are yet to be released.
Shanghai is recognized as a financial hub. However, over the years, it has struggled to build a hi – tech environment of the same standards as Beijing’s or Shenzhen’s.
Since, many startups refrain from taking a major risk at the inception of their company, subsidies encourage them to do so. “You can’t figure out the growth direction and possibility of future success for lots of technologies when they are in their early stage,” said Ma Xingfa, deputy director of the Shanghai technology commission.
There are also many other provinces who have undertaken such an initiative to help the investors. Apart from Shanghai, cities like Guangdong and Jiangsu have adopted this kind of subsidy on a trial basis.
Not only such a program is designed for the investors to recover the incurred losses but is also said to strive toward sustainability and increasing employment opportunities, as well. The central government is said to strive toward a sustainable investment in the Chinese industry thereby, maintaining a manufacturing edge, as well. Moreover, the supply – side overcapacity is also considered to be among the top priorities for the central government this year.
There is a critical swaying in the business that due to the uncertainty involved in this initiative, a possibility of this completely distorting the market instead of stabilizing it might occur.
“The last thing the world needs are VCs who make bad decisions being bailed out,” said Gary E. Rieschel, managing partner of Qiming Venture Partners in Shanghai, in an email.
“I don’t think this will change the general landscape. It may make some noise in the market, but the impact on business won’t be game changing,” said Ken Xu, partner of Shanghai-based Gobi Partners.