Production Modes in China's Venture Capital Finance Sector: An Empirical Study on Stage Financing in China

This paper examines the effect of regulatory institutions on venture capitalists' (VCs) investment activities in China. Interviews with VCs and systematic examinations on the investment data of 436 venture capital backed companies confirm that China's institutions affect the corporate governance structure of venture capital firms (VCFs) that in turn determine their investment strategies in stage financing, one of the most important mechanisms deployed in venture capital investment. Due to the regulatory restrictions, VCFs in China are divided into two groups in terms of corporate structure: limited partnership, which is a more decentralized organizational form; and, limited company structure, which is a more centralized organizational form. It is revealed that VCFs under limited partnership employ stage financing much more often than VCFs under limited company structure. Furthermore, for VCFs under limited partnership, their stage financing strategies are closely associated with agency problems and the performance of investment that is similar to the US practice. As for VCFs structured as limited companies, they rarely deploy stage financing and the structure of their stage financing do not show visible patterns