VC exit could through restructuring, acquisition or IPO, however, before completing the deal they have to face illiquidity. More than this, its risky and unpredictable. To offset these situation, their return in the IPO should be covered and exceeded their total investment. Therefore, the VC backed IPO should outperform public equity performance.
Furthermore, (Stanley, 2011) pointed out the return of the venture capital investments is related to some factors, including the duration of the investment, investment amount, the share proportion owned by the VC, the PE ratios before and after the IPO, and at what stage the venture capital made the investment. In this paper will not specifically introduce further.
(3) The comparison of VC backed and non-VC backed IPOs
Due to limited information, its difficult to probe all the financial indicators in the market, but it without surprise that the comparison of the VC-backed and non VC-backed IPOs indicates that the VC-backed IPOs outperform the non VC-backed ones. However, behind the high valuation, it cannot be ignored the existence of the huge bubbles in the market, when it comes to mass investors, should take it into account in a comprehensive way whether their invested portfolio could experience year-by-year growth compared to their sky-high potential growth.
The survey of Shikhar Ghosh is studied in period 2004 to 2010 VC investment of more than $1 million, more than 2000 start-up companies, obtained "venture-backed startups failure rate is as high as 75%," The rate of failure to get an investment is high, not to mention the self-made entrepreneurs.Besides that, Shikhar Ghosh, points out that even if has the support of venture capital, there are still 75% of start-ups can't give venture back to a penny, and 30% to 40% of the business enterprise bankruptcy liquidation is to let the VC to compensate the lose everything(Michel, 2014).
It is not surprising that companies tend to retain highly reputable underwriters, as this sample is entirely composed of IPO backed by VC. Compared with all VC support IPO over the same period (not shown here), the company and the provided features are actually quite representative.
4.5 Empirical Findings
4.5.1 The role of VC
It is not easy to go public. According to Chinext official website, before listing, SMEs need a series criteria, for example, in terms of net profit, in the past two consecutive years, net profit should be positive; in terms of revenue, in last one year revenue should be no less than RMB 50 million. To approach these ratios, without VC participation its incapable to accomplish. They are a professional team, familiar with listing process, legal issues,etc. For specific investment model could refer to section 3.2.
After VC investment, SMEs will lose part of their equities, but VC financing is also a process for initial shareholders cashing out their equities. As a result, once SMEs go public, VC could realize exit, initial shareholders could liquidate by selling stocks. Naturally, if SMEs could be successfully listed, their stock right could circulate on a larger market.
listed companies 1991 477 862 651
Market Capitalization
(RMB,million) 22,515,574 7,587,112 9,963,942 4,964,519
Stcok Issued Capital 1,762,595 731924 723855 306815
Stock Market Volume 22,452,515 744581 993586 504309
Stock Trading Volume 237,395 6209 8717 5053
Average P/E ratio 35 25 41 50
Average Turnover rate 2.0
(Table 2: Adapted from https://www.szse.cn/main/en/chinext)
Nonetheless, behind the buoyant stock market, VC is a long-term strategic investment, enterprise investment is not for the purpose of a certain commercial profits in the short term, but after growth through the equity transfer and get high returns, period normally should be for 3 to 5 years. In the meantime, it is called "patient capital" because it needs to increase better off capital in the process of IPO.
In terms of the main financing difficulties for enterprise development, , if financing is not smooth enough would result in missing the best time for project investment, and slow the development of enterprises, some enterprises due to the capital chain leading bankruptcy, Therefore VC paves the way to solve the enterprise financing difficulties and broaden the financing channels. In a market economy, high risk inevitably corresponds to high returns, while enterprises need to experience a high-risk process to develop and expand their operations. Through VC introducing equity capital, the development of enterprises are reflected by the increase of equity capital prices. The expected return of VC is the price of the stock investors future earnings of the visual display, the future returns are unlimited, so VC can give operators a vast profit opportunities, can effectively solve the problem of asymmetric risk premium.
