Why do VCs who have invested in the science creation board still live a poor life?

 Why do VCs who have invested in the science creation board still live a poor life?

Oh, what do you say?

What company is that? Is this valuation very strong?

Founded in 2001, Microcore Biology concentrates on the research and development of original and innovative drugs for cancer, metabolic diseases and immune diseases. Its products include Sidabentamine, a new drug that has been officially marketed, and Siglitamina, an innovative drug.

Microcore Biology is a rare profit-making enterprise among the existing original innovative drug companies. In terms of revenue, from 2016 to 2018, the operating income of Shenzhen Micro-core is 85.36 million yuan, 110 million yuan and 147 million yuan respectively, and its net profit is 53.99 million yuan, 25.9 million yuan and 31.2762 million yuan respectively. Its fist product is Sidabentam, while other heavy new drugs such as Siglitam sodium are waiting to be listed.

Wait a minute. You dont know what this P/E ratio is. Maotai is 39 times the number of stockholders, and the second-ranking company in Kechuang is 430 times.

Huh? You wait for me to check. I see that MICROCORE organisms are more than 300 times more valuable than they were when they were first established.

Thats right.

In March 2001, Vertex, Tedako and Beijing Science and Technology Venture Capital jointly participated in Microcore Biological A round financing, totaling 6 million US dollars. Among them, Vertex, which represents Singapores sovereign investment fund, contributed HK$7.5 million, accounting for 11.47% of registered capital, with a valuation of HK$68 million at that time. Its current stock number is nearly 24 million, accounting for 5.81% of the total equity, with a valuation of about 2 billion yuan and a return of more than 300 times.

300 times? Temasek will laugh in his dreams?

It took 18 years to complete 300 times, and 37% of the annual returns would not be particularly frightening.

37% is not high? If you think about bank financing, its only about 4%.

Wait a minute. Which venture capital company is not a nine-year-old, you only see a striking micro-core creature, not other silver drift.

According to statistics, nearly 60% of the companies from Round A to Round B will die, while the number between Round B and Round C is about 70%. The probability of going from angel to round D is only 1%.

It doesnt matter. Microcore is right when it succeeds. The VC invested in it can cash in a few dollars.

Wait a minute, havent you heard about the lock-in period?

According to the new rules, the reduction of shares by shareholders of KESCO is applicable to most of the relevant rules of the reduction of shares of listed companies on the Shanghai Stock Exchange. For example, the lock-in period of controlling shareholders and actual controllers is 36 months, and that of general shareholders is 12 months. The lock-in period of VCs shares shall be implemented in accordance with relevant regulations, and the fastest reduction time of VCs shares shall be one year later.

Then wait for one year. You can get huge returns if you dont fall too much in one year.

Wait a minute. Do you know you cant sell all of them immediately after the lock-in period?

According to the new rules, after the lock-in period expires, the proportion of shareholders who reduce their holdings through centralized bidding transactions can not exceed 1% quarterly, and the proportion of shareholders who reduce their holdings through bulk transactions can not exceed 2%. The proportion of directors, supervisors and senior managers can not exceed 25% annually during their tenure.

Hmm... Lets reduce our stake by bulk trading. We can also reduce Temaseks 5.81% stake in Microcore Biology in three quarters at most.

Where there is that simple, large-scale transactions, the first discount will be relatively large, second, the transferee has a six-month ban period, you can imagine how difficult it is to find the transferee (Pan Xia). Especially when the market is not good, VC usually chooses open bidding.

Most large transactions involve discounts, usually 5-10%, which can even reach 15% in a bad market.

According to the new rules, investors who transfer the shares of major shareholders through bulk transactions may not transfer the shares within six months after the transfer.

Temasek is no longer the worst. There is a company that plans to declare its board next year. A VC2 company invested tens of millions of dollars in its angel wheel in 2011. Now its share holdings are as high as 18%. Even if it can be listed next year, with a one-year ban period, it will take four and a half years to reduce its holdings in the open market. Obviously, it took huge risks and invested a lot of money to help the company grow. As a result, it was still very difficult to reduce its holding. I cant imagine the reason for this.

Thats okay. Slowly reduce your choke.

Whats the rush?

Dude, VC cant wait for this time.

VC investment includes four core links: raising, investing, managing and withdrawing. At the beginning of the foundation, VC needed to sign a partnership agreement with LP. Now most of the funds in the market use the 5 + 2 duration, i.e. five-year investment period and two-year withdrawal period. If necessary, it can be extended appropriately with the agreement of the PartnersCongress. So a large number of VC will be in Alexandria after 7 years, and there is an urgent need to withdraw from the project, realize the income, and distribute it to LP. Embodied in the IPO project, it is hoped to reduce its holdings as soon as possible and realize the return of funds. To put it bluntly, the LP behind the VC cant wait.

It sounds like VC is so hard, its not as shining as you usually think.

VC is an important force to support new economic enterprises from start to sustainable development, and is the main pusher to promote entrepreneurship, innovation and industrial upgrading. According to the statistics of China Securities Investment Fund Association, nearly 80% of private equity funds invest in the initial and expansion period of enterprises. In the first quarter of this year, Chinas VC mainly invested in emerging strategic industries such as biotechnology/health, IT, Internet, electronics and optoelectronic equipment; the penetration rate of venture capital to IPO enterprises exceeded 56%; the penetration rate of enterprises accepted by Sci-Tech Board exceeded 80%; and the penetration rate to local Unicorn enterprises reached 100%. It can be seen that VC is an efficient catalyst for scientific and technological innovation, and also an important engine to promote economic restructuring and upgrading.

Wow... This contribution is too great. We should properly take vigorous support for VC as our national strategy. Is there no preferential policy for the reduction of VC?

The Securities Regulatory Commission issued Document No. 4 in March 2018. Qualified venture capital funds can reduce their pre-IPO shares through centralized bidding through stock exchanges after the initial listing of small and medium-sized enterprises or high-tech enterprises. If the investment period is longer, the pace of reduction can be faster. Up to the acceptance of the application materials for IPO, if the investment period is less than 36 months, the total number of shares reduced within three months shall not exceed 1% of the total number of shares of the company, which is the same as the requirement for the major shareholders of the listed company under the new rules for reduction of shares; if the investment period is from 36 months to 48 months, it shall be reduced by less than 1% within two months; if the investment period is more than 48 months, it may be reduced within one month. Less than 1%.

Thats great! Its a lot faster!

In fact, this qualified is not as easy as it seems.

Requirements for the filing of funds in the Fund Industry Association are as follows:

(1) The scope of investment is limited to unlisted enterprises, except for the non-transferable portion of the shares held by the invested enterprises after listing and the portion obtained through the distribution or distribution of new shares by the listed companies;

(2) The mode of investment is limited to equity investment or equity investment that can be converted into equity according to law;

(3) Among the amount of foreign investment, the total amount of investment in early small and medium-sized enterprises and high-tech enterprises accounts for more than 50%.

When the venture capital fund invests in the enterprise for the first time, the enterprise meets the following conditions:

(1) less than 60 months after its establishment;

(2) Upon approval by the labour and social security departments at or above the county level or the social insurance fund management units where the enterprise is located, the number of employees shall not exceed 500;

(3) According to the consolidated annual accounting statements audited by accounting firms, annual sales shall not exceed 200 million yuan and total assets shall not exceed 200 million yuan.

Why is it that the qualifications of the projects invested are not enough and that the whole fund is qualified?

Yes, and many definitions are vague and difficult to implement in practice.

Take the foreign investment amount, the total investment amount of early small and medium-sized enterprises and high-tech enterprises accounted for more than 50% for example, the relevant departments need to verify each investment of the VC to judge whether it is up to the standard, the work is heavy and time-consuming.


Major shareholders (more than 5% of shares) and supervisor Gao plan to reduce their holdings through centralized bidding transactions on the stock exchange. They report to the stock exchange 15 days before the first sale and disclose the reduction plan in advance. The disclosure includes the number, source, reduction time interval, mode, price interval and reduction of the proposed shares. Reason.

Why does the announcement of a reduction cause the stock price to weaken?

When Chinese shareholders hear the word reduction, they think that it is a terrible flood. In fact, this is a great misunderstanding of VC.

Generally speaking, VC is only a financial investor. The main way to realize cash recovery is to reduce the holding and withdraw after the listed company. The term of life of the fund has a great influence on the strategy of reducing the holding of VC. In most cases, VC can not hold a company in the secondary market for a long time. Therefore, the withdrawal of VC after listing does not mean that the company is not optimistic about its short-term/long-term development. This is essentially different from the reduction of holdings of corporate controllers or executives.

It seems a little miserable.

Well, and who knows if there will be any moths in the stock market in the next two years? (Microcore organisms have fallen for six days, a record low)

So what is the U.S. regulation on reducing VC holdings, and is it so troublesome? (suspected soothing divergence)

If so?

The prohibition period is 6 months and can be reduced to a limited extent after the prohibition period.

U.S. Stock Reduction Rules

According to Regulation 144, if you are the actual controller of the company, you need to satisfy the following five conditions:

1. These restricted securities must be held for six months before they are sold.

2. The latest information of the issuer of securities must be published before selling. This means that the issuer must prepare regular financial statements and report in advance.

4. Such sales must be regarded as routine transactions in all respects. No advertising, brokers can not charge commissions above the normal level to prevent profit transmission.

VC is generally not the actual controller, how to reduce it?

After the prohibition period, it can be reduced unconditionally.

In U.S. stocks, in practice, the lock-in period of VC after IPO is usually 6 months, and stocks can be sold after maturity. The latest information of the issuer of securities must be released before selling.

Hmm... Has the U.S. been so friendly about reducing VC holdings?

In fact, the view of the United States on VC reduction is gradually improving.

The Securities Act, introduced in 1933 by the 144 Regulations of the United States, was introduced. The focus of Regulation 144 is to regulate disorderly registration exemptions and strengthen the protection of investors.

Historically, Regulation 144 has undergone two major amendments.

In 1997 and 2007, the SEC shortened the requirement of holding period in Regulation 144, respectively. The First Amendment shortened the original prohibition period from two years to one year. The second revision reduced one year to six months.

It is worth mentioning that the second amendment also simplifies the restrictions on resale of non-affiliated persons so that they can be transferred unconditionally after the expiration of the term.

Ah, so good, why support the development of VC so much?

There are many considerations.

VC contributes a lot to Americas leading position as a technological power in the world. After more than 60 years of tortuous development, Silicon Valley has become the worlds high-tech center, giving birth to our well-known industry giants, including Apple, Google, Amazon and so on. At present, Silicon Valley has formed a complete investment and financing system. Among them, VC plays a very important role in Silicon Valley entrepreneurship ecosystem. Data show that in recent years, Silicon Valley has attracted more than 30% of the VC in the United States. Venture capital firms across Silicon Valley come from a variety of sources, including individuals, families, pension funds, University funds, banks, governments or private companies.

Well, thats only one river away from Shenzhen. Whats Hong Kong doing in Dawan District?

Its much the same as American stocks.

In Hong Kong stocks, the prohibition period for controlling shareholders (30% or more) is within six months after the companys listing. The controlling shareholders are not allowed to sell any companys stocks (nor to issue new shares of the company). The controlling shareholders are entitled to sell the companys stocks within six months, but they cannot lose their status as controlling shareholders. That is to say, as long as the controlling shareholders keep the controlling position, they can issue new shares after six months of listing. For non-controlling shareholders, that is, general VC, issuers generally agree with pre-listing investors for a period of six months or more. But the HKEx will not have any restrictions. Shareholders can buy and sell freely after the end of the prohibition period.

Well, Hong Kong is so relaxed, too?

I believe that Shenzhen will catch up soon.

On July 26, 2019, Shenzhen Special Economic Zone, as a window of reform and opening-up, once again accepted the new mission of the central government, and will build a Pioneer Demonstration Zone of Socialism with Chinese Characteristics. Shenzhen should implement innovation-driven development strategy in depth to become a national economic center city and a national innovative city, vigorously develop strategic emerging industries, including high-end communications devices, high-performance medical devices and other industries in the future. As mentioned above, VC is an important force to support new economic enterprises from start to sustainable development, and is the main promoter of entrepreneurship, innovation and industrial upgrading. Shenzhen will continue to deepen reform and promote the development of VC.

What do you think of the future?

Maintain confidence and look forward to the spring breeze of Kechuang and GEM!

Two suggestions

VC, which connects industry and capital, is an important force in the development of new economy in China. Continuing to steadily promote financial innovation, fully mobilizing the subjective initiative of VC, and integrating with international standards will be the top priority of regulatory agencies in the future.

1) It is suggested that the regulatory logic should be changed. VC should not be regarded as a financial investors reduction as a catastrophe, but should be defined as a normal, reasonable market behavior that does not affect the long-term value of stocks.

2) The supplement of No. 4 to the new regulations well demonstrates the determination of the state and provides preferential policies for VC investment in early projects. However, in practice, the procedures for the qualification of VC are cumbersome and difficult to implement. In view of the direct link between the reduction preferential policy and the project, it is suggested that the qualification should be defined as a single investment project, and the restrictions on the investment situation at the fund level should be removed.

Source: Editor-in-Charge of Dongfang Fuhai: Ren Hui_NBJ9607