My view on venture capital

An old article, but it helped me a lot. Share the original book: Xu Hong: (1) venture capitalists and entrepreneurs are a cooperative game relationship. If the entrepreneur compared to a steed, venture capitalists are bole. "Maxima" must be carefully fed, if only let it eat ordinary "forage", and even often eat not enough belly, "maxima" will eventually become a "vulgar horse", so venture capitalists must provide personalized value-added services to enterprises. (2) The cultivation of listed companies is a strategic task of venture capital, the cultivation of listed companies similar to the 0 ℃ of ice heating to 100 ℃ water vapor, is a long-term arduous pioneering process, the need for venture capitalists and entrepreneurs of weal and woe and close cooperation. (3) Mergers and acquisitions are more difficult in the practical operation of venture capital and should not be the main exit mode of venture capital. China urgently needs a multi-level capital market system, which requires entrepreneurs to change their ideas and create a healthy entrepreneurial culture. (4) The exit of venture capital should be done from the source, the author advocates the concept of export-oriented investment, joint investment, chain-type investment and scale investment, and argues that venture capital and investment banks should strengthen cooperation. Key words: Venture capital Foster Enterprise merger and acquisition idea Innovation one, venture capitalist and entrepreneur is a kind of cooperative game relationship at present, China's venture capital industry is experiencing severe winter. With the deterioration of the external business environment, there are more and more conflicts of interest between venture capitalists and entrepreneurs. The author thinks that the venture capitalists should not be bitter, but should face the reality positively, take effective countermeasures to adapt to the change of the environment, try to solve the realistic difficulties and problems, and first of all, we should change the management idea and realize that the venture capitalist is a cooperative game relationship with the entrepreneur. The definition of venture capital in China's venture capital industry is often cited by the OECD Committee on Science and Technology policy: "Venture capital is the act of providing equity capital to new or small businesses with great potential for development." Its basic characteristic is: the investment cycle is long, generally is 3-7 years; investors in addition to investment, but also to the investment party to provide business management advice and help, investors through the investment at the end of the transfer of equity to obtain returns. "The author believes that this definition is actually a description of a phenomenon of venture capital, although it has some reasonable and reasonable, but did not reveal the nature of venture capital." We can consider the operating process of venture capital as a process of "product processing", the "raw materials" for processing are: technology, capital, team, business model and entrepreneurial entrepreneurial innovation ability, and other factors of production; "Products" is the venture capitalist creative planning and operation, the technology, capital, team, The business model and entrepreneurial entrepreneur and other elements are organically combined to form an organic life entity, that is, a start-up enterprise. In other words, venture capital institutions are specialized producers of "production" start-ups and entrepreneurs. Of course, at the right time, venture capitalists mustWill sell this "product" to obtain capital gains, which is determined by the stage investment characteristics of venture capital, and the process is similar to hatching eggs into chicks. In general, venture capitalists will not wait until "chickens" grow into "old chickens", expect "old chickens" to lay eggs, but will "chicken" carefully nurtured, slightly grow up to sell. With the continuous development of entrepreneurial enterprises, entrepreneurial entrepreneurs have gradually grown up. In general, entrepreneurs should have some unique innate qualities, but entrepreneurs are not born, and his growth must be a longer process of nurturing. The author thinks that if entrepreneurs are likened to "Maxima", then venture capitalists are "Bole". People often complain that "maxima often, and bole not often in", in fact, Maxima and bole are very rare. Venture capitalists looking for good projects, first of all to find the "maxima" of the potential quality of the entrepreneur. Therefore, "people" has always been the most critical factor, this is a popular quote in the venture capital industry: "Better cast first-class team and second-rate products, also do not invest in second-rate teams and first-class products." "Maxima" must be carefully fed, if only let it eat ordinary "forage", and even often eat not enough belly, this "maxima" will eventually become a "vulgar horse", this is why venture capitalists to act as a start-up enterprise management consultants and provide personalized value-added services. The international venture capital generally does not seek to hold, its implied premise has two: first, admits the venture capitalist cannot replace the entrepreneur, otherwise the venture capital profession does not have the existence the necessity, this is the social division of labor causes; the other is if the venture capitalist is a real entrepreneur, then the venture capitalist is only willing to To create conditions to make people rich, venture capitalists can hitch a ride and get rich. From the view of modern game theory, this is a typical cooperative game model. The author thinks that venture capitalists and entrepreneurs must realize the importance of cooperation in order to realize the goal of "double win". From the point of view of venture capitalists, venture capital is the process of cultivating start-up enterprises and entrepreneurial entrepreneurs. Only enterprises grow up, business entrepreneurs make money, VCs can get investment income. Second, the cultivation of listed companies is a strategic task of venture capital in view of the complete value chain of a multi-level capital market, the venture capitalist is in the upstream position of the chain, and its activity field is mainly the private equity capital (equities) market before the IPO. According to the principle of specialization division of the modern market economy, the venture capital should focus on the equity investment of the high growth small and medium-sized enterprises, and finally, the resources of qualified listed companies, including direct IPO and takeover by listed companies, will be continuously delivered to the open capital market. In this sense, in addition to the phased acquisition of equity spreads, the ultimate strategic goal of the venture capital industry should be to cultivate listed companies. Of course, in the long night before the IPO, the different venture capital organizations will focus on selectingVenture capital in different stages. Analogy: Under normal atmospheric pressure, we make a rough division of the process of heating the ice from 0 ℃ to 100 ℃ water vapor to indicate the different stages of the venture capital project. 1, 0 ℃ ice, that is, the "seed period" of venture capital, refers to the entrepreneur has only a certain "idea", or a technology is still in the laboratory stage. Before the technology goes into industrialization, it is necessary to test the reliability, stability and feasibility of the technology by several amplification experiments. Through the tireless efforts of professional and technical personnel, if the technology through authoritative identification and have the conditions to go out of the laboratory, then entered the 0 ℃ water stage. The 0 ℃ of ice into 0 ℃ of water is a qualitative leap. At this stage, a small amount of venture capital has begun to intervene, generally through cooperative research and development, or by establishing a professional incubator to specialize in this business. This stage of investment has a small amount of money, huge profits, risk is also a great feature, once successful, will be a huge return on investment. 2, is in the 0℃-10℃ water, is the product introduction period or the initial period. This phase of the project, there will be small batch production, technology is still immature, product performance is not stable enough, the market has just started, sales orders have a small increase, the enterprise began to have a few positive cash flow. Some venture capital firms that prefer early project investments are willing to intervene. At this stage, not only to start and nurture the market needs a certain cost, and users of the product identification also requires a process. At the same time, products and technologies themselves need to be further improved, with appropriate increases in capital investment. Although the demand of venture capital is not too big, but there are many uncertain factors such as technology, product, market and internal management of enterprise, so the risk of investment is very high. 3, is in 10℃-90℃ water, then enters the project the rapid growth and the scale expansion stage. In the stage of project growth and expansion, with the increase of product sales and the enlargement of market scale, the demand for financing of enterprise production and operation activities will increase synchronously, and equity financing is still the preferred way of financing. In other words, in order to accelerate the development of enterprises, timely launch of a new round of equity financing will inevitably. Usually, companies will actively seek new investors to join. With the expansion of enterprise growth and scale, especially the entry of new strategic investors, the ownership structure and corporate governance structure will change obviously, the enterprise internal management gradually standardize, information transparency gradually improve. At this time, although the proportion of the venture capital has been diluted, but the value generally has different degrees of promotion, it is important that the subsequent capital operation space will be expanded. 4, is in 90℃-99℃ water, namely enters IPO the last round private placement stage. With the prospect of an IPO, a large number of strategic investment institutions with different backgrounds will have a strong interest, especially if investors with strong financial backgrounds are actively involved. No matter from which point of view, to become a listed company should be a dream of entrepreneurs, and as a venture capital, its benefits are self-evident. The biggest goodis because of the increase in the liquidity of equity, can easily realize the shareholder "vote with the foot" function. Therefore, the international venture capital has no exception to the IPO as the preferred way of capital withdrawal. 5, for entrepreneurs, venture capital is usually "timely". Venture capitalists and entrepreneurs through the long night of thick and thin and the test, finally to the 99 ℃, when investment banks are generally willing to "icing on the cake", began to intervene. Through professional coaching and IPO sponsorship of investment banks, 99 ℃ of water has been turned into 100 ℃ of steam. In the heating process from 0 ℃ ice cubes to 100 ℃ water vapor, there are two "qualitative changes", one is 0 ℃ ice in the laboratory stage becomes 0 ℃; One IPO becomes a listed company, that is, 100 ℃ water becomes 100 ℃ steam. Qiushi, through the long night of venture capitalists and entrepreneurs to work together, and eventually become a listed company, for enterprises and entrepreneurs, should have a change, this is a venture capitalist and entrepreneurial entrepreneurs to achieve a phased success of a symbol. Third, the merger and acquisition should not become the main exit mode of venture capital. At present, the venture capital industry of our country is popular with one viewpoint: without gem capital market, the risk capitalization can be realized by merger and acquisition, the reason is international is so, some authority personage also holds similar viewpoint. I think that this view seems reasonable, in fact, unreasonable, and very harmful. A famous American economist once said that no famous multinational company in the United States was developed through mergers and acquisitions. Therefore, it can be said that mergers and acquisitions should be the main way of enterprise growth. But the main way to exit as a venture capital is hard to make sense in China. At present, more than 1200 listed companies in Shenzhen and Shanghai are idle funds, the overall performance is not satisfactory, we should urgently need new growth point of performance, and there should be internal mergers and acquisitions impulses and conditions to complete a large number of mergers and acquisitions. However, the actual acquisition of small and medium-sized enterprises in China's listed companies is not often the case. Why? Cultural factors play a very important role. On the one hand, China's listed companies tend to invest in their own projects, rather than mergers and acquisitions enterprises, because it can send their own to operate and manage, to facilitate the control of investment projects. Ignoring the role of social division of Labor, everything wants to do their own, perhaps a long history of Chinese traditional culture is a feature. On the other hand, entrepreneurs in small and medium enterprises also lack the subjective will to be acquired by others. It should be said that being able to be acquired by others means that the enterprise is valuable, and most entrepreneurs do not see it that way. In their eyes, the enterprise is his "son", anything can be sold, but "son" is under any conditions are absolutely not to sell, which is very different from the entrepreneurial culture in Silicon Valley. In Silicon Valley, entrepreneurs usually see the shot, can often betray the enterprise, and constantly create new enterprises, in their view, enterprises are enterprises, but a special commodity, a means of making money. Again from the windIn the aspect of risk investment, because the international practice says that venture capital can only be used as a small shareholder, it is necessary to diversify the investment to spread the risk, so our venture capital institution has a low shareholding ratio. However, the fact that this international concept of decentralized investment has not only reduced risk to Chinese venture capital, but rather a part of the risk is caused. Because it is a small shareholder, so of course, to step aside, in the major business decision-making venture capitalists ' opinions often can not get due attention. That is, the "vote by hand" function often fails, so what about "voting with the foot"? Needless to say, a merger without control transfer is generally not likely to cause interest in the merger of listed companies. And, in the eyes of new investors, letting him in when you want to run seems enough to give new investors a good reason to feel like they're not. In fact, due to asymmetric information, the equity transfer market of venture capital has become a typical "second-hand market", and the result of bargaining between the buyers and sellers will inevitably result in a transaction at a reasonable price. How to solve this problem? A practical approach is to be honest, while increasing the transparency of the information, venture capital commitment is not in a hurry to transfer the current equity, that is, through the increase in capital shares, continue to enlarge the size of enterprises to prepare conditions for IPO listing. Of course, if the luck is good, in the increase in the stock to achieve the equity part of the withdrawal, I think most venture capitalists probably will not give up. If you can not achieve the partial realization of the withdrawal of the target, the second step, to increase capital expansion shares, is also a wise choice. There are two core issues of increasing capital and expanding shares: first, the price problem. The price of capital increases is low, new investors are happy, but they are detrimental to the interests of the original entrepreneur, including the interests of the original venture capital institutions; In the current economic downturn, the expansion of equity capital for any small and medium-sized enterprises to resist external risks, will certainly be beneficial, for this reason, venture capital may have to make some concessions. In this sense, it should be a good time for venture capital institutions to invest in new projects and to implement mergers and acquisitions of existing projects. But it is not so simple, there is another question, whether entrepreneurs are "willing" to increase the share of the issue. Why do entrepreneurs have problems with their subjective will if they can scale up and resist risk? Because the increase in capital shares will "dilute" the entrepreneur's equity, will promote the start-up enterprise's corporate governance structure changes, thus shaking its control position in the enterprise management, and may even threaten some entrepreneur's nonstandard operation, therefore some entrepreneur will not cooperate actively in this aspect, causes the increase capital to expand the stock to be difficult to carry on. Iv. the exit of venture capital should be grasped from the source the venture capital activity is a whole business cycle, the investment exit is in the back end of the chain, so the project exit of venture capital must start from the source of the cycle. In terms of the quality of the project itself, investment decisions are the mostAs an important link. It should be a basic principle for venture capital activities to choose good objects for venture capital and arrange the capital operation properly at the beginning of investment. According to the expert in the venture capital industry, the so-called "export-oriented investment", that is, the first to have an export, can be imported; This is the difference between venture capital and other industrial investment. Specifically, there are several aspects that need to be highly valued by venture capital. First, export-oriented investment. At the beginning of the capital, we should put warn in the front, make proper arrangements for the future project, especially to give the venture capital the leadership in this business, we must ask the venture shareholder to make a commitment. There is usually a provision in an investment agreement or a company's charter that, under the same price conditions, the original shareholder has the right to transfer shares in priority, and only when the original shareholder abandons the purchase can the equity be transferred to other investors. In fact, this agreement for the protection of venture capital equity transfer is not much benefit, because for our small and medium-sized enterprises, if not involved in the transfer of control rights, mergers and acquisitions will occur less, and more commonly occurs is the increase in capital shares. If the venture capital is a small shareholder, when the venture capital unilaterally puts forward the plan, it is very likely that the shareholders will be opposed by the original venture shareholder, so that the scheme can not be implemented. There are not only price problems, but also the instinctive resistance of original entrepreneurs to investors introduced by venture capitalists. In order to protect the interests of risk investors, in the investment agreement not only to join the "one vote veto" clause, that is, the agreed major business decisions must be "unanimous" to pass, and to join the relevant capital operation of the "one vote decision", that is, the relevant issues such as the increase in equity and IPO listing, venture capital must have the dominant right, Other shareholders shall not obstruct. In order to implement this right of venture capital, it is necessary to set up a conditional "shrinkage clause", that is, when the venture shareholder does not respect the right of venture capital, it is compulsory to reduce the proportion of entrepreneur's equity. This seems to be unequal treaties, in the case of asymmetric information and serious insider control, I think this may be a wise choice to protect the interests of investors. Second, joint investment. As far as the shareholding ratio of venture capital is concerned, still adhere to the international spread of investment and the principle of not big shareholders, is a single venture capital holding project enterprises in the proportion of small shares, entrepreneurs can be the largest shareholder, but all the joint venture capital and other strategic investors in the stake together, should be in a holding position. In the joint investment Partners, it is best to have the international and domestic different background of venture capital or financial institutions, as well as multinational companies and listed companies, in the equity structure and corporate governance structure to protect the interests of investors in the arrangement, so as to fundamentally solve the entrepreneur "one share" and "information shielding" problem, It is also a foreshadowing of future mergers and acquisitions and other capital operations. A notable feature of venture capital industry is that cooperation is more than competition, and venture capital institutionsAlso often has the geographical division of labor, namely the so-called venture capital is "bully" industry. Therefore, the different venture capital organizations need to strengthen cooperation between, can be at the same time, can also have first, the joint investment can share cost, optimize the ownership structure and reduce investment risk. The author thinks that in the present situation, it should be a wise choice for the domestic venture capital institutions to promote the stock structure adjustment through the increment capital investment, that is, to enlarge the capital scale of some investment projects by introducing new venture capital, and thus to strengthen the capital strength and the ability of resisting risk. Third, the chain-type investment. From the project's industrial background, to avoid the single technology or single product investment in isolation, but pay attention to the construction of industrial chain and related market cultivation, along a certain industry chain of related derivative products and technology investment. In the investment to actively absorb a strong technical background and the strength of the industry group to participate in investment, while absorbing other venture capital and financial institutions to jointly invest, this will be conducive to the establishment of a more reasonable shareholder structure, easy to play the different background of the resources of investment institutions complementary role, including in the technical support, Customer and market resources and capital operation and other aspects of complementary role, thus reducing the risk of project production and management and improve its core competitiveness. From the angle of industrial chain, the establishment of various professional incubators will help to enlarge and hatch the early scientific and technological achievements, and also help the venture capital organizations to seize the high quality project resources, and can play the role of integrating "upstream industry". As far as the "downstream industry" is concerned, through the strategic merger and acquisition of listed companies, the construction of their own industrial chain, that is, listed companies constantly from the capital market into funds, and then acquire the venture capital of high-quality projects, so as to achieve a virtuous cycle of venture capital and value-added. It should be said that this idea has certain rationality. While constructing the dynamic industry chain, we should pay attention to the vertical and horizontal strategic integration within the investment plate, form the organic connection among the project, and construct the complementarity between the products, technology and market, so as to increase the cohesion within the plate and reduce the investment risk greatly. Iv. investment in scale. In the past investment practice, we have been pursuing scale investment and boutique investment concept, and then realized that the two are not tied relationship. Generally speaking, the scale investment is the means, the fine investment is the goal. No investment in scale, there will be no fine investment, in other words, only the scale of investment, only boutique investment. This is an objective law proved by practice. "Scale" has two meanings: first, the investment project itself must have a certain scale of assets. The asset scale of the project enterprise is too small, the ability to resist risk is weak, the investment risk will be very big. The second is to the investment project's shareholding ratio should be moderately concentrated. In the first tier, projects that are generally too early are usually risky and can only be invested in small amounts. At the latter level, the proportion of shareholding is large, although it is contrary to the original meaning of venture capital, but too low is not conducive to equity in private capital market mergers and acquisitions, mergers and acquisitions are usually accompanied by the transfer of corporate control, the scaleThere seems to be a contradiction between investment and venture capital. The author advocates that the shareholding ratio should be "moderately" concentrated and seek joint investment with other venture capital institutions. At present, China has not a more perfect gem market situation, China's venture capital if the United States model, that is, the pursuit of decentralized shareholding, the result must be difficult to achieve the withdrawal of venture capital. Five, working with investment banks. According to my understanding, from the point of view of capital market value creation, venture capital industry can be understood as the upstream business of broad investment bank. As far as the trajectory of capital movement is concerned, from the private capital market to the IPO of the enterprise, from the securities trading in the level two market to the merger and reorganization of listed companies, to the wide application of various derivative financial instruments, each link needs the investment bank to provide professional financial intermediary services. Obviously, this is a chain of capital movement and a chain of capital value increment, and venture capital is in the upstream position of this chain. Since venture capital is the upstream business of a broad investment bank, the chain of capital movement cannot be broken. In this sense, the establishment of a fully functional gem capital market has a very important strategic significance. Talking about improving the quality of listed companies, perfecting the corporate governance structure of listed companies and talking about the development of venture capital industry in isolation are all "piecemeal" and lack of strategic vision. China's venture capital industry should be included in the development of China's capital market and the adjustment of HIGH-TECH industrial structure as well as the overall strategy of the development of small and medium-sized enterprises. Finally, it is to improve the comprehensive business quality of investment managers in venture capital institutions, do a solid job of due diligence, prudent and scientific investment decision-making, in the Agreement on the financing of the explicit dilution, information disclosure and financial monitoring and other provisions, the use of convertible preferred shares and options and other financial instruments to participate in the formation of a reasonable structure of the management team, In particular, the financial Director, Technical director and Sales Director of the staffing, venture capital should have a say, and so on. In a word, venture capital withdrawal is an important link in the whole cycle chain of venture investment business, and VCs should have systematic thinking and strategic vision to make an overall arrangement for the whole business cycle.