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

Venture capital is an important source of financial capital for startups and has been widely recognized as a powerful engine for driving a nation’s innovation, job creation, and economic growth. Developing and sustaining a robust venture capital market is now a key national strategy for many governments. How and how far can a nation engineer a vibrant venture capital ecosystem? Existing literature has identified a strong correlation between the size and liquidity of a nation’s stock market and the extent of its venture capital market: venture capital flourishes when venture capitalists can readily exit from successful portfolio companies through IPOs, and IPOs are in turn facilitated by active and efficient stock markets.

However, existing research focuses primarily on the UK and US, and the link between the stock and venture capital markets has not been tested against China, which, by 2015 figures, now ranks second only to the United States in terms of venture capital investments. My article 'Venture Capital Exits and the Structure of Stock Markets: Lessons from China' seeks to fill the literature gap by first providing a comprehensive look into China’s stock and venture capital markets before exploring the correlation between these markets given China’s unique context. Based on empirical studies, I find that there is a close connection between the Chinese stock market and venture capital market. This is consistent with the general theory that a link exists between stock markets and venture capital markets.

Building on these findings, I then discuss the major legal and regulatory obstacles faced by venture capital-backed IPOs in China, providing solutions where appropriate. I find that laws and policies also matter for venture capital availability in China, impacting the venture capital market both positively and negatively. On one hand, strong and sustained law reforms and government policies aimed at improving the institutional structure and regulatory environment of the stock market have facilitated venture capital-backed exits, which in turn enhanced new venture capital availability. On the other hand, numerous IPO closures by regulatory authorities have negatively impacted the venture capital market.

My findings may be of interest to lawmakers and practitioners hoping to understand the Chinese markets. The findings offer lessons that could be valuable to other countries that are attempting to promote the formation and growth of a venture capital sector.

Lin Lin is an Assistant Professor at the Faculty of Law of the National University of Singapore.