Venture Capital Exits and the Structure of Stock Markets : Lessons from China

Existing literature suggests a strong relationship between a vibrant venture capital market and an active stock market: venture capital flourishes when venture capitalists can readily exit from successful portfolio companies through initial public offerings (“IPOs”), and IPOs are in turn facilitated by active and efficient stock markets. Despite being relatively new to venture capital investment, China's concerted government efforts have successfully engineered the second-largest venture capital market (by investment volume) in the world to date. China's economy has also undergone a drastic transformation from a planned to market economy in the last 20 years. Given these factors, does the positive correlation between an active stock market and vibrant venture capital market hold true in China? This article uses China as a case study to explore the connection between the stock market and venture capital market. It also seeks to identify major problems for venture capital-backed IPOs and to propose solutions. Through both empirical studies and extensive interviews, this article both confirms and refines the existing literature by demonstrating a close connection between the stock market and venture capital market in China. It also finds that, for venture capital availability, laws and policies indeed matter in China: strong and sustained law reforms and government policies aimed at improving the institutional structure and regulatory environment of the stock market can facilitate venture capital-backed exits, which in turn lead to an increase in new venture capital availability in China. Nonetheless, numerous IPO closures have led to freeze-ups in China's venture capital market. Also, there remain a multiplicity of institutional impediments to the efficient operation of the stock market and the effective implementation of IPO reforms in China. These may in turn hinder the development of the Chinese venture capital industry