context: The 16 June State Council executive meeting greenlit a plan to enhance financing for tech enterprises. Domestic observers have pointed out that China’s bank-driven financial system lacks ‘patient capital’, funds that can patiently wait for entrepreneurial innovations to turn profitable.
Tech start-ups should broaden their horizon beyond IPOs, argues Niu Wenxin 钮文新 China Economic Weekly chief commentator. He stresses that the IPO journey can be costly for smaller firms, with significant fees paid to intermediaries such as consulting, accounting, legal and audit entities, diverting resources from business development and R&D. Niu suggests that the root of the issue lies with early-stage investors who prioritise quick returns through IPOs, leading start-ups to take risky gambles that result in expenses going to intermediaries.
Niu advocates learning from Silicon Valley, where a mere 5 percent of innovative capital exits depend on IPOs, and 95 percent come from acquisitions by larger corporations. He points out that domestic corporate acquisition markets are weak due to
- a cultural mindset of ‘better to be a chicken head than a phoenix tail’ among start-ups
- a gap in understanding of the innovative value of start-ups among larger corporations
- the absence of incentives for corporate acquisitions in the capital market
Niu explains that SASAC (State-owned Assets Supervision and Administration Commission) recently conducted a high-level meeting focused on how CSOEs (central state-owned enterprises) can boost their core competitiveness through mergers and acquisitions. He perceives this to be a positive shift from the previous understanding that SOEs engage in mergers and acquisitions only to become stronger and bigger. He expresses hope that in the future SOEs will pay more attention to the integration of innovations into their own industrial chains when pursuing acquisitions. This approach could potentially conserve the social capital that would otherwise be drained by IPOs, Niu says.