In the past 20 years, countries around the world have recognized the importance of venture capital for the development of infant industries, especially high-tech ones. As a new financial system arrangement, VC investment is mainly referred to as a financing method that is provided by firms or funds to small, early-stage, emerging firms with high growth potential or those that have demonstrated high growth employees, or annual revenues, or both. In general, VC firms or funds invest in high-technology startups in exchange for equity, or an ownership stake, in the companies they invest in. Startups always face uncertainty as their leaders are a lack of company management experience and the likelihood that the new technologies fail to be developed into products is high. However, venture capitalists provide support for the growth of these firms based on innovative technology or business model as they have strong technical backgrounds and professional management knowledge. As many companies from high technology industries are grown up with venture capitalists, Silicon Valley has led the booming “new economy” in the US and has helped spread venture capital to the rest of the world.
Existing studies indicate that the VC firms and funds are likely to concentrate spatially to exploit capital and information. For example, US venture capital is largely concentrated in the three metropolitan areas of San Francisco/San Jose, Boston, and New York (Chen et al. 2010). Scholars have also found similar spatial concentration patterns for VC firms in countries such as the UK and Israel (Manson and Harrison 2002; Schwartz and Bar-El 2007). Economists have long investigated the relationship between spatial agglomeration and economic growth. Therefore, studying the spatial distribution of venture capital activities and its impact on local economies enriches our understanding of economic policies at the city level.
Since the first VC company established in 1985, venture capital has been as a key driver of both innovation and high-tech startups. Venture capital is now an important part of China’s capital market. Moreover, VC investment in China is not limited to high-tech industrial enterprises. They are also interested in some enterprises in traditional industries. In this report, venture capital is defined as an investment from individual, government-backed, institutional, or foreign investment entities made to finance a new, growing, or troubled business.
The data in this report comes from the Zero2IPO Group, one of the leading entrepreneurial and investment data companies in China. This data covers the information on VC firms or funds since 1992 including limited partners, investment firms, funds, their management personnel, venture investments, investment portfolio companies. The time period in this report is from 1998 to the first half of 2018. This report covers all Chinese the prefecture-level-and-above cities in China. We merge the VC firms located in county-level cities into their corresponding prefecture-level cities. Since venture capital in China was introduced in 1980s, the capital market is not mature, and some data is not fully available. But the information that is disclosed is highly representative.
The main findings are as follows:
•The number of VC firms, the number of VC funds, and the amount of VC investment have increased substantially between 1998 and 2018.
•Unlike US venture capital firms, which favor hard-technology-oriented companies, VC firms or funds in China prefers high-tech firms specializing in consumer services.
•China’s VC investment is highly concentrated in several top cities.
•VC firms and funds based on different cities in China have illustrated similar preferences as they favor investing in firms with close geographic proximity, in consumer-service high-tech firms, and in startups.
•Beijing, Shanghai, and Shenzhen are three key nodes of China’s investment network of venture capital across cities.
