Government can play key role in helping innovative startups to survive and grow
Print Edition
Chinese VIEWS
CHINA’s government plays an essential role in the country’s desire to develop more innovative businesses.
Most innovative startups fail, hence it takes a broad array of prospective innovators to produce a few startups that survive. However, when they first put in money to fund projects, government authorities or private investors find it difficult to determine which businesses will become vastly profitable in the future.
The government used to invest huge sums in a select few businesses, which often led to undesirable results. On the other hand, without official cash up front, private investors don’t have much incentive to finance highly risky projects.
If the authorities can support an extensive network of startups, providing them each with a proper amount of money, not only will it enlarge the base for innovation, it also will create room for private capital to step into the game.
The Silicon Valley model is a graphic instance of how government can play an exemplary role for interested private investors. Under this model, the US federal government lowers the entry barrier for startups, resulting in a spike of business registrations.
Under the guidance of third-party technical evaluators and investors (such as angel investors and private research and development labs), the government then proceeds to finance projects that are vetted for their feasibility and recognized for their potential. Moreover, during the latter phases of businesses’ R&D activities, enterprises with high valuations are eligible for tax breaks.
China’s central government needs to relax its requirements on business registration as well. Through minimum capital infusions into a large number of innovative startups, the government can expect a bigger contribution from the community of private investors.
Once government financial support is readily available, we need to speed up the creation of a multi-layered capital market so as to better disperse risks born of investments in startups. Otherwise, risk-averse private investors may be discouraged from embarking on this endeavor. Instead, they will turn to the financial sector, something not known as their field of expertise, and help to inflate asset bubbles in a way that will hinder the healthy development of China’s real economy.
What’s worse, they could inadvertently derail official efforts to improve innovation. Some private entrepreneurs, mainly angel investors, often insist on acquiring a considerable share of the target company in return for their investment.
Dispersing risks
Since innovative startups need to be funded over a longer period than traditional businesses, a multi-layered capital market is needed to attract investors with varying degrees of risk acceptance. Such a market goes a long way toward reducing the time for dispersing risks and generating returns on investments. It is for this purpose that China’s regulators ought to swiftly carry out steps to whittle down the role of administrative red tape in dealing with IPO applications.
In a similar vein, systems governing the transfer of listing of shares — for example, from the Growth Enterprises Market board to the main board — as well as delisting mechanisms need to be worked out as soon as possible.
At the forefront of innovation, entrepreneurs are desperate for a bond market that complements the equity market. The right to issue and sell bonds gives them the latitude to achieve the desired value of their projects. Such leeway also somewhat compensates innovative entrepreneurs for their inability to attain self-fulfillment — stymied by the restrictive impact of the “one share, one vote” rule.
The creation of a medium- and long-term trash bond market — like the one established under the Silicon Valley model — increases the type of bonds required for healthy interest rate liberalization. More importantly, it fosters the idea that entrepreneurs put a high premium on the value of their own projects.
The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
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