Despite more than two decades of development at a meaningful scale, China’s venture capital (VC) industry has not accumulated sufficient historical experience, and no clear pattern of investment styles regarding preferences for investment stages has emerged. Many firms prefer pre-IPO (initial public offering) projects, while the government tries to shift funds to earlier stages to support the development of technological innovation and small and medium- sized enterprises. From fund managers’ perspective, are there significant differences in the returns when VC investments are made at different stages of projects? This issue is of critical relevance to both the development of the VC industry and policymaking.
Due to the complexity and inaccuracy of industry data, it is difficult to quantify this issue. Based on existing literature and using the historical data of a company in China, this research attempts to ascertain the relationship between VC firms’ project holding time and the returns on the investment. The author formerly worked with S company, which was established in 1999; the firm has by far the largest number of investment projects and most prominent performance among all native Chinese VC firms. As of March 2021, S company had invested in 1,244 projects, including 183 projects that had been publicly listed via IPOs or listed through M&A. These investments are spread across the entire country, cover various industries, and involve all stages of project development. As such, S company offers the best Chinese case for this study.
In this study, multiple regression analyses are performed using the following parameters: absolute return (multiple) and relative return (annualized average return) are the dependent variables; project holding time (from investment to IPO) is the independent variable; and a variety of variables, i.e., IPO board, exit method, project characteristics, and stock issuance intensity (the number of issuances in the year the VC investment was made and went public via an IPO), are used as control variables. The analyses lead to the following conclusions. Absolute return is positively correlated with holding time, and relative return is negatively correlated with holding time; given the projects’ relatively high rates of return, in a time of low interest rates, it would be a sound choice for fund investors to entrust experienced fund managers to invest in early stages of projects and hold the investments for a reasonable amount of time; additionally, IPO board has a significant impact on return, and project size, geographic area in which the project is located, and capital market environment do not have a significant impact on exit return, indicating that the VC industry is insensitive to short-term macro factors and that, to some extent, its operations can transcend investment periods. In addition to the regression analyses, this study reviews other indicators of S company, for example, the historical exit rate and the current value of projects that have not gone public, to examine the relationship between a fund’s overall rate of return and holding time. This study also performs a supplemental analysis using data on peer VC firms, and the results support the above findings.
