Sunday, June 26, 2005

SMEs' Diagnosis

(Post 4 of 5)

The Finance “Bowel Obstruction”

For a long time, SMEs’ difficulty with finance has been referred to as the “Goldbach’s conjecture” of Zhongguancun’s high-tech industry.

Investigation has shown that the main reason many enterprises go bankrupt is problems with funding at the early and middle development periods. Unable to climb up onto the first stage, they run out of time to grow and are selected out early on. Those enterprises that reach the “first stage” of enterprise development sometimes run into difficulties due to long term funding. This also causes enterprises to miss out on high-speed growth opportunities, in the end becoming static “small, old enterprises.”

How can the lack of capital in the early stages of enterprise development for SMEs be solved? This is a crucial problem for the development of Zhongguancun.

Whether it is a coincidence or not, during visits to 5 Zhongguancun enterprises this reporter learned that, to the present, none of the 5 had received venture capital or bank loans. Then, where can Zhongguancun SMEs get money?

Small and large, there are over 100 venture capital companies in Zhongguancun. But in choosing “the stage of investment projects” in which to invest, most favor long-term and mature projects. Venture capital investments continue to lean “away from poor and towards rich.” Venture capital companies focus primarily on large enterprises, paying little attention to SMEs that need venture capital the most. Large enterprises “have flowers added to their bouquets,” while SMEs “are alone in the snow without charcoal.”

People think that venture capital is cautious in this way because of the cold spell that fell on IT enterprises in 2001. Some enterprises are immoral and in the process of attracting venture capital hide their money. Once they get capital investment, they bankrupt the company or abscond with resources. Some enterprises, even though not intentionally deceiving others, will not invest in management. Hence, once capital is invested, they make large expenditures and hand out ruminations of over 10,000 yuan a month to employees, expecting that they can always depend on venture capital to survive.

Fang Xingdong in Losing Zhongguancun points out that capital has not favored Zhongguancun. Capital includes both IPOs and venture capital.

The data has shown that total investment in China for 2004 was 1.269 billion USD. 27% of this went to Shanghai and 19% went to Beijing, a lowly second. In the past year, the companies that listed on NASDAQ are all Shanghai Companies: Shanda, Ctrip, and EachNet.

Specialists have shown that the immaturity of relevant intermediary service organizations is an important factor that affects enterprise finance. One investigation showed that 78.6% of enterprises think that the undeveloped nature of intermediary organizations affects venture capital negatively.

Advanced systems produce advanced technology. Whether or not Zhongguancun can become China’s Silicon Valley, it is clear that a large amount of advanced technology in a short period of time that will not determine it. A perfected finance environment and system is the crucial factor determining the life or death of Zhongguancun.

The Zhongguancun Science & Technology Zone Management Committee once advanced a policy entitled the “Gazelle Plan.” This is a classic Silicon Valley import. This Plan aimed to reform the SME finance environment in the Zhongguancun Science & Technology Zone. According to estimates, the “Gazelle Plan” brings liquid capital in the amount of 5 billion yuan to “gazelle enterprises” in Zhongguancun.

And yet, if IT SMEs in Zhongguancun want to get loans and financing from these organizations, it is very difficult. “The amount of financing we need is not a lot--a trifling 3 million yuan. But we have tried many different methods, for example guaranteed loans from Zhongguancun Guarantee Company, and we even tried project loans, but we still have no sources,” complained a high-level figure in a Zhongguancun IT enterprise.

For the majority of Zhongguancun’s IT SMEs, loans require that they provide collateral; but even then the fees for the loans are not cheap. The materials required to apply are numerous and procedures are burdened with trivial details.

Because of this, financing for every enterprise requires the display of multiple skills. Through investigations, this reporter learned that a common solution is private fund-raising including underground finance. On the basis of several founding partners’ original capital, the enterprise starts-up. Then, as development continues, the company will be forced to find new partners and attract financing for the next step.

But private and underground financing are the manifestation of a lagging financial system. For growing enterprises, relying on capital and profits to develop is an nerve-racking and unseen danger. The phenomenon of “vanishing” companies will occasionally appear in Zhongguancun, wherein companies are unable to continue only because they are lacking a couple dozen thousands of yuan.

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