Venture Capital Guiding Fund for Technology-based SMEs Li Wenlei Administration Center of Innovation Fund for Technology-based SMEs Ministry of Science and Technology, P.R. China July 3, 2008

Outline Background of VC Guiding Fund Objectives of VC Guiding Fund Strategy of VC Guiding Fund Operation of VC Guiding Fund Current Achievement & Next Plan

Background of VC Guiding Fund 1. No. of VC investment organizations in China increased significantly in 21 century

Background of VC Guiding Fund 2. The amount of VC investment in China also increased significantly in 2007 RMB

Background of VC Guiding Fund 3. No. & amount of VC investment in technology based companies occupy about 60% among the total no. & amount of VC investment in China

Background of VC Guiding Fund 4. Lack of VC investment in early stage of tech-based SMEs due to high risk and high uncertainty Million RMB IPO 35-45 Lack of VC investment In early stage 3rd Round Profit>RMB30m 25-35 2nd Round Breakeven,Profitable 10-15 Most VC funds invest in mature stage 1st Round Revenue 3-5 Seed Prototype Establishment 2 3 4 5 6 7 8 Yrs

Background of VC Guiding Fund 5. Government and state-owned VC investment is still the largest source of VC, the portion of private VC is insufficient compared with mature foreign VC market Foreign VC 6% Government Others 16% 13% SOE Individual 17% 5% Bank 8% Listed company LLC 4% 31%

Background of VC Guiding Fund 6. The development of tech-based SMEs in China Over the past 20 years, tech-based SMEs in China contributed 65% of patents, 75% of technology innovations and 80% of new products. Lack of capital is the biggest bottleneck for the growth of tech-based SMEs. Most founders of tech-based SMEs are strong in R&D but weak in management, sales & marketing, fundraising etc.

Objectives of VC Guiding Fund To ease up the bottleneck of fundraising of tech-based SMEs by encouraging earlier-stage VC investment. To attract private capital flowing into VC by profit sharing policy To develop tech-based founders on entrepreneurship by post-investment management To foster professional early-stage investment and management team

Strategy of VC Guiding Fund Innovation of Government Financing Indirect investment: leverage the methodology of VC and guide the investment of multiple private capital sources Equity investment vs grants VC experts appraisal vs technology experts appraisal

Strategy of VC Guiding Fund Target on Demand of tech-based SMEs Focus on earlier-stage tech-based SMEs Leverage more equity investment Bring more added value through VC experts to foster professional early-stage investment and management team

Strategy of VC Guiding Fund Candidate category of VC Guiding Fund VC firms VC management firms Incubators with investment skills Potential deal flow

Strategy of VC Guiding Fund Four ways of VC Guiding Fund Fund of funds: <=25%, with condition, sharing profit principle Parallel investment: max. of 3M RMB, 50% profit as reward to VC Subsidy to VC: 5% of investment amount with max. of 5M RMB Pre & Post-investment subsidy: max. of 3M RMB

Operation of VC Guiding Fund Interim Measures on Administration of Venture Capital Guiding Fund for Tech-based SMEs (Caiqi 2007 128#) was promulgated by Ministry of Finance and Ministry of Science and Technology (MOST), effective as of July, 2007 Fund source comes from central financial budget annually

Operation of VC Guiding Fund Ministry of Finance and MOST are co-in charge of decision making Investment Advisory Committee provides expertise in VC investment Administration Center of Innovation Fund is responsible for daily operation Local governments recommend qualified VC firms

Current Achievements and next plan 95 qualified VC firms applied for VC guiding fund in 2007 50 VC firms got guiding fund subsidy，with amount of 71M 52 early-stage tech-based SMEs got Pre-investment subsidy with amount of 29M On-going allocation of subsidy to VC and Pre & Post investment subsidy Pilot the fund of funds and parallel investment

Thank You!