Seed Plants

The three main organs in a plant are roots , stems, and leaves. Roots absorb water and dissolved nutrients from soil. They anchor plants to the ground. Roots are able to do all of these jobs because they grow , they develop complex branching networks that penetrate the soil and grow between soil particles. Stems hold a plants leaves up to the sun. Leaves are the organ in which plants capture the suns energy. These tissues must be protected against water loss to dry air. That’s why most plants are covered in waxy coating called cuticle.Plants have a well developed two way plumbing system consisting of xylem and phloem Xylem is primary responsible for carrying water and dissolved nutrients from the roots to stems and leaves. Phloem carries product of photosynthesis and certain other substances from one part of the plant to another. Seed plants do have alternation of generation. However life cycles of seed plants are well adapted to the rigors of life on land. Flowers and cones a re specialized reproductive structures of seed plants.Because they developed within the sporophyte plant, neither the gametophyte nor the gametes need standing water to function The entire gametophye of seed plants is contained in a tiny structure called a pollen grain. The entire pollen grain is carried to the female gametophyte by wind, insects, birds, small animals, and sometimes even bats. The carrying of pollen to the female gamtophyte is called pollination. Seeds are structures that protect the zygote of seed plants. After fertilization the zygote grows into a tiny plant called an embryo. A seed coat surround the embryo and protects it and the food supply from drying out.The first seed bearing plants appeared during the Devonian period. The most ancient surviving seed plants belong to the three classes: the Ginkgoae, the Coniferae, and the cicadae. In these plants leaves evolved into specialized male and female gametophyte called scales. Scales then are grouped into larger str uctures called male and female cones. Male cones produce pollen and female produce eggs. Each seed is protected by a seed coat bu the seed is not covered by the cones. Because their seeds sit naked on the scales cycads, ginkoes and conifers are called naked seed plants or gymnosperm.Cycads are palmlike plants that first appeared in the fossil record during the Triassic period, 225 million years ago. They can be found growing in tropical and subtropical places. The living ginkoe species looks almost exactly like its fossil ancestor. It might be the oldest plant seed alive today. Conifers are commonly called evergreens are the most abundant gymnosperm today. Pines, spruce, fir, cedars , sequoias, redwoods, and yews are all conifers. Some conifers live more than 4000 years and can grow more than 100 meters tall. The leaves of conifers are long and thin and are often called needles.Both male and female gametophyte are very small. Males cones, called pollen cones, produce male gametophyt e in the form of pollen grains. Female cones called seed cones. Some species of conifers produces male and female cones on the same plant. Angiosperm are all the flowering plants. All angiosperm reproduce sexually through their flowers in a process that involves pollination. Angiosperm seeds are contained within a protective wall that develops into a structure called a fruit. Angiosperm can be separated into two sublclasses the monocot and dicots. The monocots include corn, wheat, lilies, dafflodils, orchids, and palms.The dicots include plants such as roses, clover, tomatoes, oaks, and daisies. The leaves of the embryo are called cotyledon. In some species of cotyledon are filled with food for the first leaves to carry on photosynthesis for the germinating plant. In monocots stems, xylem, and phloem tissues are gathered into vascular bundles that are scattered throughtout the stem. In dicots they are arranged in a ring near the outside of the stem. The process by which two organism s evolve structures and behaviors in response to changes in each other over time is called co-evolution.Flowers pollinate by wind. Wind pollinated plants usually have a small plain simple flowers with little or no fragrance. Most angiosperm are not pollinated by the wind. They are pollinated by insects, birds or mammals . In return the flowers provide pollinators with food. Vector pollination or pollination by the actions of animals is a very efficient way of getting the male gametophyte to the female gamete. It is more efficient than wind pollination because it does not waste enormous amount of pollen. The process of distributing seeds away from parent plants is called seed dispersal.

A universal language Essay

According to a biblical account found in the book of Genesis, people once spoke the same language. Then, because those people banded together to build a tower in Babylon that glorified their own achievements, rather than those of their deity, God punished them. He ensured that mankind spoke different languages so that they’d never be able to work together to dishonor God again. Was there once just a single language that all people could understand? Linguists don’t know; there’s just not enough information about the origins of language, and there are only theories about how our early ancestors formed their first words and sentences. Did early people imitate sounds they heard in the environment? Did they babble until certain sounds took on meaning? We’ll probably never know, though linguists still study babies’ brains to determine if language or grammar comes hardwired in our heads. One prominent theory about the development of the first languages rel ates to tools and resources. Teaching another person how to use tools requires a certain, agreed-upon vocabulary, as does the process of sharing  and protecting resources like food and shelter. Small groups of people living in close quarters would therefore need to develop a way to understand each other, so they came up with a vocabulary and syntax that meant something to them. A group of people across the world from them, though, would probably need an entirely different vocabulary of words, so the languages would have developed differently in isolation. Think of the oft-quoted (but erroneous) example that Eskimos have 100 different words for snow because they have so much of it. While that common statement is wrong, there are cultures that have far more words for rice and camels than, say, English does. So these small groups of people, living in isolation from one another, agreed on names for their tools and food, and they came up with ways to describe how resources would be divided. But when another group migrated into the area, or came with different resources to trade, the groups had to find a way to merge their different lexicons and communicate. Over time, that’s how languages have developed, and as some groups conquered others, that’s how some languages died out. Travel among groups who speak different languages has been difficult over history; now, we live in a world where we can board a plane in New York City and land in China hours later. In a global world, wouldn’t there be a benefit to speaking the same language? Some groups have advocated that a universal language be adopted, but it would be difficult to find any group willing to give up their own language if only because so much culture and history becomes embedded within it over time. After all, the English would no sooner give up the language of Shakespeare than the Spanish would forsake the tongue of Cervantes. Attempts to create a universal second language have failed as well, but even if we could agree on a common language, it’s unlikely it would resemble itself 100 years from now. After all, thanks to the Internet’s influence, language has become a mix of emoticons and abbreviations like LOL. Languages simply evolve too rapidly to ever speak just one.

Literary Analysis of The Lottery by Shirley Jackson

Although several themes exist in the Lottery, only a few remain significant. Mrs. Hutchinson, who apparently arrived just moments after 10 A. M. , ended up as the not so lucky person that received the black dot on her ticket. â€Å"Clean forgot what day it was†¦Ã¢â‚¬ ¦.. and then I looked out the window and the kids was gone, and then I remembered it was the twenty-seventh and came a-running† (Jackson 3). She simply forgot the special event that took place that day and did nothing wrong. Never in the story did Shirley Jackson hint that Mrs. Hutchinson reeked of evil; however, she was punished brutally for no just picking a slip of paper out of some old, black box. Anyone in this small town, even the children, have the same chance of becoming the one murder victim. â€Å"Nancy was twelve, and her school friends breathed heavily as she went forward switching her skirt, and took a slip daintily from the box† (5). This goes for America’s society where any random person can be jailed or accused of something they were wrongly accused for. Society punishes innocent citizens based on faulty accusations or just because they resemble an estranged serial killer. As soon as the news goes public, friends and even family members disown the â€Å"criminal† just like in the lottery where all of Mrs. Hutchinson’s friends turned on her. Mr. Summers, who interacted with Mrs. Hutchinson earlier, in a friendly manner, â€Å"†¦. and Mr. Summers, who had been waiting, said cheerfully. ‘Thought we were going to have to get on without you, Tessie† (2) completely turned on Mrs. Hutchinson by the end of the story â€Å"All right, folks. Let’s finish quickly. † Even Mrs. Hutchinson’s own family turned on her. â€Å"The children had stones already. And someone gave little Davy Hutchinson few pebbles† (6). To the whole population of the village, the lottery was a ritual that had became a huge aspect of the villagers lives and thought nothing of it. Just like American’s accept football as the countries favorite sport and Spainards accept bullfighting as a ritual, the villagers accepted the lottery. The author describes the black box, in which the slips rest in. The black box grew shabbier each year by now it was no longer completely black but splintered badly along one side to show the original wood color, and in some places faded or stained† (1). However, the villagers refused to accept change and kept the same black box because it was a ritual for as long as they recall. The line from the story â€Å"The people had done it so many times that they only have listened to the direc tions† (3), illustrates how the lottery really filled out the word â€Å"ritual†. The villagers claim the black box was made from pieces of an older black box from many years ago. Using stones and making family lists has been around for so long that they are part of a tradition, and no one ever wants to break a tradition. The actual lottery symbolizes irony. A lottery usually happens when a ticket is selected at random and whoever has the ticket receives a nice or in some cases, an extremely wonderful sum of money. In the Lottery, however, everyone dooms the day when they â€Å"win† this lottery because their own people murder them. Although not so obvious, foreshadowing is used in the Lottery by Shirley Jackson. At the beginning of the story, the seemingly innocent children play with stones â€Å"Bobby Martin had already stuffed his pockets full of stones, and the other boys soon followed his example, selecting the smoothes and roundest stones†¦Ã¢â‚¬  (1). Shirley Jackson presented the stones early in the story, but stones acted like a method of play until the end of the story where Mrs. Hutchinson was attacked by stones â€Å" ‘It isn’t fair’ she said. A stone hit her on the side of the head† (6). Shirley Jackson keeps the audience intrigued by dragging out the results of the lottery until the very end where the real use of the stones are mentioned.

Annotated Bibliography Essay Example | Topics and Well Written Essays - 500 words - 3

Annotated Bibliography - Essay Example sults from their surveys that show lower levels of diabetes in some of the candidates that have taken up some of the healthier habits of the West, such as exercising and working out at the gym. It is an interesting source as it shows opinions, based on sound research and evidence to support both the benefits as well as the losses of Western cultures and more specifically the Western health and dietary regimes, even if the research is portrayed in a basic format. Here is a slightly different source. Being a blog it will not be sound fact, evidence or academic opinion on the subject of Arabic and American food. However, it does demonstrate the effects that alternative cultures are having on Western culture. It also shows us the difference between the Arab’s attitude to food and the America’s attitude to food. The American shows ignorance and sees food as a pleasure – he’s greedy without realising it. The â€Å"born-again-Arab† sees food as the fuel for your body. It is sacred and treated with respect. It is acknowledged as being from somewhere in the planet and as such deserves the respect they give it. They are careful with their foods and in so doing careful with themselves. As said, it also demonstrates the ignorance of the Western mind who hasn’t taken the time to fully understand what connotations food has for Arabs. Though this source does not provide us with characteristics on the foods of each culture, their nutritional value or any solid facts about either culture whatsoever, it does demonstrate another side to the arguments surrounding the different cultures and their native diets. The third website offers a more logical layout and provides the basic information and understanding behind Arab and Arab-American foods. Providing a glossary of terms and a variety of recipes the site offers readers literal descriptions, methods and pictures of actual Arabic foods and in so doing showing us its physical attributes. It also explains that Arab food

Fixing Responsibility for Economic Blunders Essay - 1

Fixing Responsibility for Economic Blunders - Essay Example Economics was defined as â€Å"Science of Wealth Creation† by Adam Smith, the father of economics as well as the economics of early days like J.E. Cairnes, J. B. Say, and F. A. Walker (http://www.newagepublishers.com/samplechapter/001283.pdf). According to these economists, economics was science that dealt with the ways in which a nation acquires wealth. This definition placed economics as a stream of knowledge devoid of any human face. To provide a social and moral face to this stream of knowledge the next generation of economists like Marshall, Robbins, and Samuelson gave a more comprehensive and humane definition of economics. They defined economics as a branch of knowledge which is â€Å"on the one side a study of wealth; and on the other, and more important side, a part of the study of man.† (http://www.newagepublishers.com/samplechapter/001283.pdf). Another very famous definition of economics comes from a very popular economist of the modern age – Robbins. He defined economics as the science of optimum allocation of scarce resources to satisfy infinite needs. His definition of economics tried to distance it from the moral or ethical issues to make it a scientific discipline. Today, his definition is the most acceptable definition of economics and modern-day economists do not consider it anything but a scientific subject. They have learned and applied much exotic mathematics, be it differential equations in many variables or abstract concepts of set theory and linear algebra into different problems and situations of economic sense.  

History According to Neo-Conservative Historians Essay

History According to Neo-Conservative Historians - Essay Example Strauss believed liberal government policies were providing the masses with rights, power, and leisure that their simple minds neither deserved, nor were capable of responsibly wielding. Invariably, according to Strauss and Neo-Cons, the devolved masses give rise to Hitler-like evil. Strauss firmly and fully believed that the inherent weakness and ignorance of the masses, social-liberal policies, and the "excess" freedom of leisure coupled with the right to choose their own leaders provided the ingredients for humanitys demise. For Strauss, these devolved masses required strong authoritarian leadership comprised of those intellectually and socially superior (Ray, 1993). In nearly every aspect of todays American political life and foreign policy we see Strauss theory of constant struggle and conflict being employed and carried out. The media has often decried the obvious combative, angry, and mean-spirited nature of Americas contemporary political discourse. FOX News, which is the propaganda and disinformation outlet for the Neo-Conservative movement, has, by design, ensured Strauss theory of conflict plays out in the American political life. It certainly isnt by accident that prominent Neo-Conservatives like Bill Kristol are often featured on FOXs programs (Ray, 1993). Furthermore, the only purpose for the network to employ the bellicose and outrageous OReilly, and venomous and angry Sean Hannity is to divide American against American and instill a degree of political nastiness never before witnessed. A quick trip around the AM Radio dial will make apparent an entire legion of Republican and Neo-Conservative propagandists doing their part to foment all-out political warfare in the United States. Finally, few propagandists are loved and cherished more deeply by the Neo-Cons than the hate-spewing and liberal demonizing Ann Coulter (Halper & Clarke, 2005). The

Public policy Essay Example | Topics and Well Written Essays - 3000 words

Public policy - Essay Example It is a tool that is normally used for the creation of policy items and it is through it that governments have been able to develop desired results. The use of this tool involves a process where potential problems with policies are identified by policymakers and attempts are made to ensure that the latter are corrected in such a way that they become more effective. This paper will attempt to show institutional reform as a tool for the institution of policy changes and this will be according to the theory developed by Peter John. Each stage of policy change or development will be followed by an evaluation of examples of the use of this tool in the contemporary world. One of the most significant aspects of the institutional reform is that it helps in the identification of needs that allow for the development of necessary changes to make policies more effective. Identifying needs is a process where policymakers conduct research in society and this is conducted both through research on the field as well as the study of different literature concerning problems or needs that are required in society (Heckathorn and Maser, 1990). The ability to conduct such research is essential in making sure that there is a political priority concerning the best way to handle matters so that they do not end up being too difficult to handle. Identifying needs helps in ensuring whether there has been similar research in the areas that need adjustments to policies and this helps in making it possible for policymakers not to develop policies that might in the end turn out to be irrelevant. Through the use of effective research methods, policymakers have an easier time fo llowing up on previous research in the area of concern and, through the identification of both positive and negative outcomes, make changes to policy decisions that have a greater possibility of being more effective. When finding out the needs that necessitate policy changes,

Reading response Essay Example | Topics and Well Written Essays - 750 words - 6

Reading response - Essay Example In my opinion, the text reveals a number interesting religious notions that were commonplace at that time in the society. The text reveals that the established religious norms of the society were close or similar to the protestant faith. It was for this reason that Mrs. Hutchinson was repeatedly asked about this aspect. As was common in most of the older societies, opposing or questioning religious beliefs was not an option for the ordinary people. The religion appears to be the property of Church or the ruling class and it was molded as and when needed. I strongly feel that Mrs. Hutchinson’s stand against the status quo was itself sufficient to stand apart; since no one in the society was willing to accept or talk about the reality. Mrs. Hutchinson’s ideology can be equated to antinomianism – an idea that was unacceptable for the ruling class. The primary reason for unacceptability appears to be the control that this class intended to exert on the other classes of the society. I feel that religion and justice have always been used as tools to control the masses; religion acted by manipulating the people emotionally and by taking control of their belief system, whereas judicial system provided the authority that was required to control those who failed to align with the religious teachings or controls. I am forced to think critically about the role of judicial system that was functioning at the time of Mrs. Hutchinson. At various points in the text, it appears that there is a single person in the court who is defending her case; there is no attorney to assist her about the legalities of her case or to assist her in taking a solid defense. Instead, it appears that a couple of men, who are inclined towards taking punitive action against the lady are surrounding her from all sides and as soon as she leaves one of them ‘answerless’, the other jumps in, to divert her attention or to

Analyze an article Example | Topics and Well Written Essays - 250 words - 1

Analyze an - Article Example It is evident even when it comes to sourcing of finance. Manufacturing companies in Egypt are expected to give more collateral when seeking cash to finance import of raw materials. On the other hand, the Egyptian pound has dropped by 6.6% making exports low-priced. On the opposite, the price of fuel has increased. Therefore, companies incur higher cost of manufacturing. In the long run, the manufacturers end up getting minimal profits. Companies can reduce the risk of losing their customers by refraining from increasing the price of their commodities. When manufacturers pass the added cost incurred to the buyers, they stretch the ability of the consumers. Therefore, the customers will consider buying cheaper alternative goods. Manufacturers can also opt to seek to produce cheaper affordable goods. Customers will tend to spend the cash they had put aside as saving. Therefore, more money will be in circulation making the rate of inflation to go

Engineering Materials Characterization of PM Stainless Steels Essay

Engineering Materials Characterization of PM Stainless Steels - Essay Example Also the effect of temperature and the hardness effect on the steel produced from the mixture will be described with essential research material read over the course of the experiment ad its description (German, 1990) EFFECTS OF BORON IN STEEL Boron is a very useful element when used for alloying purposes in many materials but in the experiment it will be illustrated along with researched facts as an alloying element in steel because of its effect on harden-ability enhancement. Boron is added to unalloyed or low level alloyed steels to enhance the level of hardness of the alloy. Boron steels are used as high-quality, heat-treatable construction steels, steels for carburization and forming cold steels such as steels for screws. The property change with the amount of boron added and the temperature affect will be discussed in detail in the paper (Adam, 2000) Boron also is known to activate liquid phase sintering and to reduce the sintering temperature that is needed a achieve a highly dense alloy metals (Raymond, 1994). The liquid phase arises from the existence of a low melting-point eutectic reaction that is produced by the reaction between the boron and the alloying element in the steel with the alloy is being constructed. ... These small amounts may be sufficient enough to hardened the alloy with the correct heat treatment. For understanding purpose the terms sintering or hardenability should be explained. Sintering or hardenabilty is a measure of how much martensite is formed at a given cooling rate in steel. The hardenabilty of steel is defined as the maximum diameter of a cylinder that has a microstructure that is 50% at its centre after quenching from the austinizing temperature (Reed, pp. 35). Effect of Temperature on the Mixture For the particular purpose of finding out the effect of the addition on boron in them mixture to form PM we need to go through some previous research work which has been done in this particular field. The effects will be described as well proven graphically, which will be extracted from previous researches. Generally it is thought that the PM alloy of boron will have a finer finish and a better sintering value. For pressing on the previous fact we will see the effect of boro n addition into the mixture ranging from Low levels of boron (0.1-0.15%) along with the increase in temperature. ANALYSIS As described above, pictorial reference will be used to explain the description to go along with it. The figure will be color coded and self explanatory but for the purpose of understanding, extended elaboration has been provided. The figure shows the sintered density when the amount of boron is added from being non-existent to a level of 0.15. it is clearly visible that when the concentration of boron increases the sintered density increases. The sintered density is the factor that increases the hardenablity of the steel alloy. At 0% induction of boron in the alloy the sintered density

Globalization Essay Example | Topics and Well Written Essays - 1500 words - 1

Globalization - Essay Example Armed Forces. He took part in the hostilities in Vietnam. In the 70-ies Al Gore worked as a manager of the company Tangle-wood Note Builders Co. in the state of Tennessee, and was a columnist for The Tennessean. In 1977 he was elected to the House of Representatives of the 95th Congress convocation, and was re-elected in 1979, 1981 and 1983. In 1985 he was elected to the U.S. Senate from the state of Tennessee, and reelected in 1991. In 1991 he announced his candidacy for a U.S. presidential candidate of the Democratic Party. At the Democratic National Convention he became a candidate for vice president. In November 1992 he was elected vice president of the United States and re-elected to that position in 1996. Al Gore is married and has one son and three daughters. He lives in Washington, DC. The book â€Å"Earth on the Balance† (1992) was written at a time when Al Gore was the chairman of the Senate committee on ecology and environmental protection. In it in an accessible an d vivid form the problems of maintaining global ecological balance in the current situation are considered. According to many critics, it is one of the most professional researches on environmental problems, ever issued from the pen of political activist. This certainly gives the book a special flavor and keen reader's interest, especially in the third part, where the author offers a number of specific practical measures to improve environmental law and keeping the natural balance in third world countries. The book consists of three parts. In the first part called â€Å"Balance at Risk† the specific examples of ecological imbalance in the different regions of the planet are viewed. In the second part â€Å"The Search for Balance† which, from my point of view, is the most conceptually rich, the author analyses the social, economic and ideological reasons that have made a destructive attitude to the environment possible, which was until recently characteristic of the ind ustrialized world and which even today distinguishes the policy of most developing countries. The third part â€Å"Striking the Balance† is devoted to assessing the ways out of this situation. The book combines a deep analysis of economic and social causes of the current ecological crisis and the great factual material with, in my view, idealistic notions about the possibility of consolidating the efforts of developed countries in the fight against the impending danger. In particular, considerable attention is given to the propaganda of â€Å"a new Marshall Plan† as the author names it, i.e. the reallocation of national product of developed countries (amounting to 100 billion dollars per year) in favor of environment-oriented programs in third world countries. I can’t help noting that even much more modest financial measures approved by the World Summit in Rio de Janeiro in 1992, have not been implemented up to now as well as the fact that the volume of U.S. aid to developing countries in this area was significantly reduced during Bill Clinton and George Bush’s presidency. Meanwhile, a book by A. Gore remains highly relevant as an example of a deep analysis of the origins of the ecological crisis and reflection of the concerns of political circles in the West. â€Å"Earth on the balance† over its four hundred pages undoubtedly gives us a lot of hard-to-dispute empirical facts about the Earth on which we live, about the environment.

Normal Essay Example for Free

Normal Essay In the movie, the normal people of the population of Earth viewed the mutant population as a harmful and negative source of species. The different species of humans had powers that amassed more than the average humans could do or possibly wish to posses and use. In historical reality amongst our real timeline people didnt like colored people within their social settings or gatherings/properties because they believed they had the right to own what they viewed as lesser or different amongst their superior race or species, slavery came into effect. Following the use of slavery led to the abuse of power amongst humans: returning to the cinematic world of X-Men, Nightcrawler, a teleporting mutant, who tries to assassinate the President of the United States if first viewed to have his own personal agenda against the normal human race. The attempt of assassination is later revealed to be a manipulated plot by a normal human, Stryker, a military official with a background of abuse and owner of humans, a master in a sort of manner, with the use of his mutant sons brain excretions to control other mutants he places mutant humans as slaves around him and shows off the great accomplishments he can achieve by modifying or attempting to destroy them to better please other parties, be it even if these parties are mental anguishes and respite in Strykers mind. Government manipulation of general public views and media is shown here, as well as systematic abuse on human rights. Governments have been know to implement their ideals or views of grandeur upon the general population. Be it secret labs, experiments, mind control methods, banning of contrabands, or even assassination plots; many of these have been revealed over the years through efforts under the judicial system and free radicals (hackers and such). Within the movie a military official, Stryker, uses the weakness of certain different species of human to manipulate the power of the government on his side, first in the means of assassination, then the use of information through interrogation on inhumane matters, finally the right to authority and abuse of power to implement his own views. Even the lower tier party of the movie (the mutants) begin to show a basic Master/Slave dialect by means of the mutants not applying much effort to portray their innocence while the humans side constantly places efforts and strains to only show their beliefs of a correct world and system without the second party members, mutants.

Changes to Bone Density Throughout the Lifespan

Changes to Bone Density Throughout the Lifespan Bone age is defines as maturity of children’s bone. It is the average age at which the child bones matures, after the birth in the long bones only metaphyses is there (eg: radius and ulna, Humerus, tibia, femur, fibula, phalanges). In long bones initially there is elongation of epiphysis. As the age progress the calcification of epiphyses occurs and it is evident on the x-ray. During puberty the bone development progress due to various hormones. The adult height is achieved after the puberty and the shape of adult bones appears during this period. The cartilaginous part of epiphyses become thinner and these areas become obliterated, during this time epiphyses are closed and no further growth of bones occurs. X-ray of wrist is taken because it depicts multiple bones and it can be compared with standard atlas of bones by using Greulich and Pyle method. The bones which occurs common changes as the age progress from infant age is seen maximum in pelvis and shoulder, the least changes are seen in wrist of infants. During infancy if the assessment of bone is required the wrist or hand x-ray can be done. The height possibility can be calculated with the help of height of the child and bone age. Various graphs and statistics are prepared to depict the % if height growth remaining as per the bone age. Various tables for girls and boys are available (bayley pinneau tables, Greulich pyle atlas). Constitution growth delay: Normal development variation with delayed bone maturation. It is due to growth hormone deficiency, hypothyroidism. Measurement of bone age is used for reliability in diagnosis of endocrine diseases and hereditary disease Bone age evaluation is usually done by radiological examination of the skeletal development of the left-hand, and then it is compared with the chronological age. Any abnormality in between these two values indicates abnormalities. This examination is used due 1) simplicity, 2) a minimum radiation exposure; 3) ossification centres are easily available. There is no standard clinical procedure in bone age assessment, even if the most used methods are: 1) the Greulich and Pyle (GP) method and 2) the Tanner and Whitehouse (TW2 or TW3) methods. Both methods rely on X-Ray images taken from the left hand, but both methods have differences. The Greulich and Pyle method is the most often used approach (by 76% of radiologists), because it is faster and easier to use with respect to the TW2 or TW3 methods, since it involves only the comparison of the whole hand with a reference atlas. TW3 method is a commonly accepted procedure in which the guidelines to analyze each bone are de-scribed using words (natural language descriptions), sometimes in a vague way. In addition, one particular bone may show features belonging to different stages or a particular bone shape could be classifiable into two possible predefined labels of the same feature. Bone age assessment automatic process. Image source: S. Aja-Ferna_ndez et al. / Journal of Biomedical Informatics 37 (2004) 99–107 TW3 methodology for bone age assessment consists of a set of rules, expressed in natural language, to describe the prototypical characteristics of the bones of a hand radiograph as they evolve in time. Natural solution is to use the method itself, i.e., to build one classifier for each bone, with 9 outputs (the possible classification stages for each bone—A,B,. . .,I—), except for the ulna, which only has 8 stages. In TW3 method there are two possible analytic schemes, 1) RUS, uses 13 bones (the phalanges, radius, and ulna). The other one uses 20 bones (the 13 bones previously defined and the 7 bones of the carpal region). Maturity stage for each bone in TW3 is calculated from linguistic statements. Stage D. The maximum diameter is half or more the width of the metaphysis. The epiphysis has broadened chiefly at its lateral side, so that this portion is thicker and more rounded the medial portion more tapering. The center third of the proximal surface is flat and slightl y thickened and the gap between it and the radial metaphysis has narrowed to about a millimeter. Stage G. The dorsal surface now has distinct scaphoid lunate articular edges. The medial border of the epiphysis has developed pal-mar and dorsal surfaces for articulation with the ulnar epiphysis; either the palmar or the dorsal surface may be the one that projects medially, depending on the position of the wrist. Overall, six features can be defined that capture all the text information, so they are sufficient to define each possible state. Epiphysis is absent or present. If it is absent, the output stage is A. If it is present but is small and hardly visible, the output stage is B. If it is present and well-visible, the output stages are from C to I. Separation. Relative position of epiphysis and me-taphysis: separated (stages B, C, D, E, F, and G), cap-ping (stage H), or fusion has begun (stage I). Shape of epiphysis I. Oval (stage C) or sharp (stages D–I). Diameters. Ratio between diameters of metaphysis and epiphysis. Shape II. A ‘‘sharp’’ epiphysis can have a regular outline (stages D and E), can be adapted to the metaphysis shape (stage F), or can have the articulations form (stages G, H, and I).Surfaces. Representation of inner surfaces. They can be absent (stages B, C, and D) or present as a white line (stage E), two white lines (stage F) or a c-shaped surface (stages G, H, and I). The feature values for each stage are shown in the table: Stage Presence Separ. Shape I Diam. Shape IISurf. No B Small (Yes) (oval) > 2 (no) C Yes Yes oval > 2 no D Yes Yes sharp 6 2 regular no E Yes Yes sharp 6 2 regular 1 line F Yes Yes sharp 6 2 adapted 2 lines G Yes Yes sharp 6 2 articulation c-shape H Yes capping sharp 6 2 articulation c-shape I Yes fusion sharp 6 2 articulation c-shape However, these features are not independent. As a matter of fact, some of the features are self-excluding: Shape II only takes on values when Shape I is sharp and Separation is only defined for a present epiphysis. Consequently, these features can be merged, a fact which contributes to simplify the classifier. After the fusion process, the resulting feature set is: Epiphysis. Absent or small and, otherwise, what matters is its relative position with respect to the metaphysis (separated, capping, fusion).Shape. Outline shape of the epiphysis (oval, regular-sharp, adapted-sharp, articulated-sharp).Diameters. Ratio between metaphysis and epiphysis diameters. Surfaces. Inner surfaces (absent, 1-line, 2-lines, c-shape). The new features values for each stage are now: Stage Epiphysis Diameters Shape Surfaces A Absent 1 (oval) (absent) B Small 2 (oval) (absent) C Separated > 2 oval absent D Separated 6 2 regular sharp absent E Separated regular sharp 1 line F Separated adapted sharp 2 lines G Separated _ 1 articulation-sharp c-shape H Capping _ 1 articulation-sharp c-shape I Fusion _ 1 articulation-sharp c-shape Advance bone age: Prolonged increased in sex steroids production levels: CAH (congenital adrenal hyperplasia) Precocious puberty Genetic overgrowth syndromes: Beckwith Wiedemann syndrome Marshall Smith syndrome Sotos syndrome

Analysis on Current Venture Capital Market in China

Analysis on Current Venture Capital Market in China Introduction The huge consumer market potential and booming economy in China attract enormous foreign direct investments to capitalize this unprecedented opportunity. Foreign venture capital is not exceptional from this trend. They, however, still have to face constant challenges from regulations, market practices and business cultures in China. To be successful in this marketplace totally different from their origin, foreign venture capitals need to adapt their previous strategies and experiences and test it through trial and error. This report is to get overall picture about current venture capital market in China. Then it will focus on the market position of foreign venture capitals. The report is followed by the analyses and summary on investment and exit strategies used by foreign venture capitals. Finally, the report will discuss the potential trend in China venture capital market. Key Objectives To get in-depth analysis on current venture capital market in China and foreign venture capitals market position in China. To analyze and summarize the investment strategies and exit strategies used by foreign venture capital in China. To make prediction on future market trend, especially foreign venture capital. Key Chapters General introduction on venture capital Historical development and current venture capital market in China Detail market position analysis on foreign venture capital in China Investment strategies of foreign venture capital in China Exit strategies of foreign venture capital in China Future trends in China venture capital market Introduction on Venture Capital Venture capital is source of funds to small firms that cannot establish credit relationships with bank or other financial institutions. As Gompers (2001) states: Companies that lack substantial tangible assets and have uncertain prospects are unlikely to receive significant bank loans. These firms face many years of negative earnings and are unable to make interest payments on debt obligations. Start-up high tech firms are exactly the type of firms that banks are least likely to lend to because of poor information availability and lack of tangible assets or assets that can be readily evaluated. Firms developing software or new technology for the communications or biotech industries are largely investing in human capital. In a nutshell, the VC firm is a relative small financial services professional organization that functions primarily to: (a) assess business opportunities; (b) provide capital; and (c) monitor, advise and assist the firms in its portfolio. By investing, the venture capitalists accept substantial tranche of illiquid equity that converts their status to something like partners to the entrepreneur. The goal of the venture capitalist is not only to increase the value of that equity but also to eventually monetize the investment through a liquidity event such as an initial public offering or sale to other investors. The other way of reaping the reward is liquidation due to the firm failure and bankruptcy. In all of these scenarios, the venture capitalist exits their investment to complete the VC process. The venture capital cycle is briefly visualized in below chart. Chart 1 Fund flow of Venture Capital Cycle Source: National Venture Capital Association Yearbook 2008 The National Venture Capital Association in the United States defines venture capital as money provided by professionals who invest alongside management in young, rapidly growing companies that have potential to develop into significant economic contributors. There are a number of key attributes associated with VC that distinguish it from other equity capital investments. Venture capital normally focuses on small firms that have great growth potential. These firms usually are not mature enough to be traded in public equity markets. Compared with public equity investment, venture capital investment has poorer liquidity with more severe information asymmetry and higher investment risks. Venture capital investment is also different from angel capital. Managers of angel capital use their personal money to invest. In contrast, investments professionals who raise money from other investors manage venture capital. Angle capital invests more often in the seed stage of the start up firms than venture capital does. Finally, venture capital is different from non-venture private equity investments (such as buyouts, restructure, and mezzanine funds). Firms backed by venture capital usually have considerable growth potential. For these firms, the cash flow generated from operations is usually insufficient to support finance growth and debt financing is usually not available. In contrast, private equity funds target more mature firms that have stable cash flows and limited growth potential. The Table 1 below summarizes the investment stages and types of funding for different investment styles. Table 1. Types of Funding and Investment Stage Source: A Guild To Venture Capital (3rd edition) by Irish Venture Capital Association There are five stages (BVCAPWC, 1998) in the development of venture-backed companies, which can be defined as: 1. Seed 2. Start-up 3. Other early stages (exploration) 4. Expansion 5. Maturity (exit). The definition of the company stage is different with the definition of the financing round. The negotiation of a VC investment is a time-consuming and economically costly process for all parties. Neither the VCs nor the portfolio firms want to repeat the process very often. Therefore VCs have to balance the cost of negotiation and potential risks from one time investment. Typically, a VC will try to provide sufficient financing for a company to reach some natural milestone, such as the development of a prototype product, the acquisition of a major customer, or a cash flow breakeven. Each financing event is known as a round. So the first time a company receives financing is known as the first round (or Series A), the next time the second round (or Series B), and so on and so forth. With each well-defined milestone, the parties can return to the negotiating table with some new information. These milestones differ across industries and depend on market conditions. A company might receive several rounds of investment at any stage, or it might receive sufficient investment in one round to bypass multiple stages. One special situation is the down round. It is when the company does not meet milestones and the VC still needs to invest but at a lower valuation than prior round of financing. Venture Capital in China Why invest in China? There are four major popular arguments behind for the investment rush to east. Reason 1: High Rate of Economic Growth Chinas impressive economic growth for the past 30 years, averaging between 8% to 10% real growth per year, has been the envy of the developing world. The size of Chinese economy by the end of 2006 reached US$2.62 trillion, 13 times larger than that in 1978 when measured in constant RMB (MasterCard Worldwide Insight, 2007). According to Goldman Sachs China economic research (2003), per capita GDP expect to grow from less than $5,000 at that time to more than $30,000 in 2050 (refer to Chart 2). China will have a middle class of more than 500 million by 2025 larger than the entire population of the United States. It represents a huge emerging demand for everything from integrated circuits to cars. 500M mobile users, 130M Internet users, 104M broadband users and 4.5M college graduates every year could all transfer into huge business opportunity (represented in Chart 3). Based on the estimation (Chart 4) from Mckinsey, there will be sustainable market growth to 2025 in every business that related with peoples life and daily consumption. Huge opportunities for venture capital are Internet (B2B, B2C, C2C, online gaming, website portal and web 2.0), semiconductors, technologies (clean energy, medical, biotech and traditional manufacturing), and consumer businesses (food, clothes, shopping and other entertainments). Chart 2 China GDP Growth Forecast (2000-2050) Source: Goldman Sachs 2003 Chart 3 China Energy/Material supply imbalance (2010) Source: Goldman Sachs 2003 Chart 4 Urban Chinese Consumers Demand Forecast (2004-2025) Source: National Bureau of Statistics of China; Mckinsey Global Institute Analysis Reason 2: Inefficient Capital Market In the United States and Europe, private and public capital markets compete as sources of capital. However, China does not yet have an equity culture despite the adoption of market-oriented policies. In China, the public equity market lists inefficient and unappealing state owned enterprises (SOE) most of the times. And government holds roughly 60-70% of share capital of most listed companies. Few private firms are listed in the stock market due to legal and policy hurdle. Chinas bond market is similarly underdeveloped. Chinese corporate bonds account for less than 2% of corporate financing. Thin trading between banks and investors makes issuing bonds unattractive for fundraising or investing. Insurers and fund managers therefore have few fixed-income securities to hedge against mid- and long-term risks. The corporate bond market just started to function in late 2007 by allowing public listed firms to issue corporate debts. Around 95% of financing for Chinese companies now is still provided by bank loans. The domestic banks, however, have tendency to provide loans to stated owned company rather than private firms, especially small and medium businesses (SMB). With the poor functioning financial markets and policy discrimination, venture capital and private equity become important sources of growth capital for private firms. It is one of the key reasons that venture capital is so popular among private firms in China across different industries even including traditional industries like food, hotel and travel etc. Reason 3: Creative Solutions/Early Adopting Consumers One of the most unexpected attributes of the emerging Chinese market economy is how consumer-savvy its entrepreneurs are. Even after decades of centralized economic planning, the Chinese remain consummate creators and marketers of interesting products. Definitely the creativity and innovations are only limited in certain business for talents availability and their professional capabilities. Online gaming, wireless instant messaging, and wireless value added services are just three markets that the Chinese more or less created out of thin air. Each of these businesses has growing customer bases (and have spawned successful public companies like Shanda, Netease, Tencent, and Linktone). But none of them has significant participants yet in the United States. Different consumer behaviors contribute to this phenomenon as well. In below case study on Tencent, it provides a great example on how to innovate the Internet product offerings to cater the needs of online generation. Case study: QQ of Tencent (Adapted from www.tencent.com) Tencent (listed in HK stock exchange) is the #1 Instant Messaging (IM) service provider in China. Tencents IM community counts over 270 million active accounts and is said to be covering 95% of Chinese Internet users and 70% of Chinas IM market (MSN/Yahoo account for the rest market). QQ is the brand for its IM. Same as other IMs, QQ is a free tool to use. Tencent, however, came up the idea to generate revenue stream by allowing users to buy and exchange virtual items (clothes and background image) online to decorate his or her QQ head icon. Tencent even created its own cyber currency called Q Bi and 1 Q Bi = 1RMB (0.14 USD) to facilitate the transaction and reduce barrier of online purchasing. The estimated revenue generated from those Internet value added services in 2007 is around USD$360M. Reason 4: Risk-taking, Innovative Culture In the last fifteen years, the privatization reform is one of the critical forces in stimulating China economy growth. This privatization wave also generated tens of thousands entrepreneurs. The business culture is naturally comfortable with risks and with developing innovative ways to solve problems and create wealth both for individuals and for society at large. The successful stories of VC backed entrepreneurs further promote the risk taking culture in China and the awareness and popularity of venture capital. The Focus Media case below illustrates the power of business model innovation by its unprecedented expansion speed ever in Chinas business history. There is no doubt that foreign VCs played an important role in this story to make Focus Media successful. Case study: Focus Media China (Adapted from www.focus.com) Founded in 2003, Focus Media is Chinas largest Digital Media Group in China now. The founder, Mr. Jiang Nanchun, came up with an innovative approach in operating out-of-home advertising network using audiovisual digital displays. Basically, the idea was to display the LCD near or in the elevators in commercial centers (like office buildings and shopping malls). While waiting for or in the elevators, people would watch the contents advertised in those LCDs. By selecting and contracting with high quality commercial buildings, Focus Media was able to quickly build up its network scale and attract many advertising contracts. Tow foreign VC firms, Soft Bank and UCI, invested in the first round. And another five VCs, CDH, TDF, DFJ, WI Harper and Milestone, invested in the second round. Two years after operation, Focus Media was listed on Nasdaq with USD$172M IPO and now it is part of Nasdaq 100 index. Historical development Infancy stage: 1984 1995 In 1984, the Research Center of Science and Technology Development of the State Science Technology Commission (SSTC) (now the Ministry of Science Technology or MOST) cooperated with British experts to study how to develop high-tech in China. The British experts proposed that venture capital should be developed if China wanted to foster high technology. In 1985, the Central Commission of the Chinese Communist Party and the State Council pointed out in the Decision of Science-Technology System Reform that venture capital could be set up to support the work of developing high-tech with quick change and high risk. It was the first time that the concept of venture capital appeared in an official Chinese Government document. With the government decision to develop high technology industries, the Central Government and some local governments financed and set-up series of investment institutions that intended to pursue the venture capital business from 1985 to 1995. Examples are China New Technology Venture Capital Company, Shenyang Science-Technology Venture Development Risk Center, Shanxi Head Office of Science-Technology Fund Development, Guangdong Science-Technology Venture Capital Company, Shanghai Science-Technology Venture Capital Company, and the Science-Technology Venture Capita Company of Zhejiang Province. Moreover, venture centers (i.e., high tech incubators) were set-up in the majority of national high-tech parks. Simultaneously, some overseas investment banks, funds and venture capital institutions also started to expand their business into China. For example, the Pacific Technology Venture Capital Fund subordinate to IDG entered China in 1992. It cooperated with science-technology commissions in Beijing, Shanghai and Guangdong, and set-up a number of venture capital companies focused on investing in technology companies. Also, some foreign capital or joint stock investment institutions established venture capital businesses. Asia Venture Capital Journal (AVCJ, 2001) shows that $16 million was raised for venture capital investments in 1991. In 1992, the total funds raised jumped to $583million, a thirty-fold increase compared with the $16 million in 1991. The first wave reached its peak in 1995, with $678 million in investment (AVCJ, 2001).The first wave of venture capital investments was brought by international venture capitalists. The international venture capital firms accounted for more than 95% of the total fund raised in the early and mid 1990s. The absolute dominance of international venture capital funds in China in the early and mid 1990s was mainly due to Chinas strict regulations against fund-raising and the general lack of awareness of venture capital in China. Private fund-raising by individuals or private firms without government approval was strictly prohibited in China. This strict regulation essentially removed the possibility for venture capitalists to raise funds within China. It meant that only international venture capital funds and state owned enterprises (SOE) venture capital funds could operate. International venture capital funds could bypass the regulation because they were incorporated and they raised funds outside of China. SOE funds relied on government appropriation as funding sources and did not have this fund raising problem either. Early Growth: 1996 2001 From the mid-1990s, the perception of venture capital shifted from being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. As there were still no laws or regulations about setting up foreign venture capital institutions in China, many overseas investment institutions established their branches in Hong Kong, aiming to invest in the mainland. They had also located representative offices in some major cities, primarily Beijing and Shanghai. Most of the VCs active in China in the early 90s were American firms. The VC industry in the U.S. had matured and attracted a significant amount of funds. Shortly after 1995 a sharp increase from US$5 billion to US$110 billion in funds raised created the phenomenon of money chases deals (Gompers Lerner, 1999). A cadre of experienced American VCs started searching the world for investment opportunities, attempting to replicate the Silicon Valley model. Since 1998, there had been a discernible recognition of the critical success factors necessary to create an environment in which venture capital could operate smoothly and flourish. Specifically, the Governments official decision to support the development of venture capital was the key factor that had allowed Chinas venture capital industry to come into being in a new and more positive environment. In Beijing, alone, there were about 30 independent venture capital institutions, whose capital amounted to an estimated $450 million. In Shenzhen, there were at least 20 independent venture capital institutions with capital amounted to over $500 million. After 2000, China also experienced hard landing in its young VC industry due to dotcom bubble burst and came with huge casualties. It took the VC community 3 years to recover. Fast Growth: 2002 present Although initial government-backed investment operations generally failed, there has been resurgence in venture capital activity since Chinas admission to the WTO (Kenny, Han and Tanaka 2002). Capital available for investment in Mainland China keeps a steady growth trend from 2002. The capital size was increased to US$21.32B by 2007 from US$10.50B in 2002. The average compound annual growth rate (CAGR) reaches 15.2%. Venture capital investment grew rapidly from $480 million in 2002 to more than $3,247 million in 2007, invested in 440 China mainland or mainland-related enterprises (Zero2IPO 2007). According to Zero2IPO report, USD$4B VC funds were raised each year in 2005 and 2006 for China investment. But Chinas annual consumption was no more than $2B. The money chasing deal phenomenon started to emerge in China. Many foreign VC funds, especially first-time funds raised after 2005, had the pressure to pour out investment quickly to avoid US dollar depreciation against RMB and to get better deals under fierce competition. While the funding supply multiplied, quality deal flows did not increase at the same pace. Under the simple supply and demand mechanism, valuations of the China deal kept at relative high level. However, considering the fact that a big portion of funding was focusing on local value-add service segments (i.e. internet, web2.0 and broadband etc.), the issue of funds over-supply was sector specific. To get higher return under the competition, VC firms started to invest in traditional business models such as hotels, travels and fast food chains beyond their core activities such as TMT (Technology, Media and Telecom) or Internet related businesses. It was the special phenomenon happened in China now that VCs were more like PE. Legal and Regulations According to Megginson (2004), the differences in the design and the degree of development of the PE/VC industry are due to institutional factors, with the countrys legal system being paramount. Two major factors are paramount in evaluating legal system: contract law enforcement and protection of shareholder rights through effective corporate governance. Cumming and Macintosh (2002) observed that PE/VC managers in high enforcement countries had a greater tendency to invest in high-tech SMBs, exit through IPOs rather than buybacks and obtain higher returns. Cumming et al. (2004) further examined legal system effects on governance structure. Under better legal systems: the faster the origination and screening of deals; the higher the probability of syndication; less frequently funds of the same organization used to invest in a given company; the easier the board representation of investors; the lower the probability that investors required periodic cash flows prior to exit; and the higher the probability of investment in high-tech companies. Lerner and Schoar (2005) show that in a bad legal environment, PE/VC managers tend to buy controlling stakes, leaving the entrepreneurial team with weaker incentives. Interestingly, valuations tend be positively correlated with the quality of the legal environment. Kaplan et al. (2003) go deeper into the contractual aspects and found that rights over cash flows, liquidation and control, as well as board participation vary according to the quality of the legal system, the accounting standards and investor protection across countries. However, more sophisticated PE/VC managers tend to operate in the U.S. style irrespective of local institutional concerns. The authors show that managers operating with convertible preferred stocks are less prone to failure (as measured by survivorship rate). The results suggest that the U.S. contractual style can be efficient in different institutional environments. Bottazzi et al. (2005) corroborate some of the previous results and obtain further evidence on the home-country effect (PE/VC managers operating abroad tend to maintain the investment style used at home). This is observed in managers based in both good and bad legal environments. The Chinese regulations governing foreign venture capital investment are chaotic and rapidly changing. In 2005, Chinese authorities issued new guidelines (effective in 2006) intending to foster domestic venture capital firms. There is no specific regulation to monitor and stimulate the VC activities in China. The new guidelines recommended that local governments provide financing assistance, favorable tax treatment, and direct investment in Chinese venture capital firms. They also provide less stringent capitalization, investment amount, investor qualification and regulatory requirements than those applicable to FICVEs (Guerrera, Yee and Yeh, 2005). FIVCEs instead are governed by 2003 regulations that include high investment and qualification thresholds, government approval requirements, and strict foreign exchange limitations on the ability to remit profits and dividends back to the investor (Hoo, et al 2005a). Substantial legal and de facto restraints on the ability of FIVCEs to access the stock markets in China and overseas for IPO listings make exit strategies extremely difficult. For these reasons, foreign venture capital firms investing in China usually do not use FIVCEs but rely on offshore holding companies created to receive their investments. Foreign venture capital firms (most of which are U.S. based) investing in China generally have done so through the restructuring of Chinese companies into offshore investment vehicles. These enable an easier exit from investments either by selling shares on international stock markets or through a trade sale to another foreign buyer. In January of 2005, Chinese authorities brought these transactions to a virtual standstill, however, with the issuance of new regulations preventing any onshore resident from establishing, controlling or owning shares in an offshore company without the approval of the Government, either directly or indirectly. The regulations were intended to stop managers of SOEs receiving venture capital investments from stripping state assets and selling them cheaply to overseas companies, and to preclude domestic companies from using the overseas vehicles to gain foreign investor tax exemption status. However, they choked off legitimate transactions as well. There were no government approvals of offshore investment transactions in 2005. With only limited exceptions for transactions in process, foreign venture capital financing through offshore investment vehicles screeched to a halt in 2005 (Borrell and Jerry, 2005). Then, in November of 2005, the Chinese authorities issued superseding regulations. These require registration of offshore investment vehicles with the State Administration of Foreign Exchange (SAFE), but do not require the agencys approval of the transaction. They also require repatriation of all distributions of income from the investment within a fixed time frame. Like the previous regulations, the new ones do not describe specifically the registration process, the procedures involved, the scope of review nor the time required for completion, creating substantial uncertainty for foreign venture capital investors (Hoo, et al 2005b). Despite this changing regulatory landscape, many U.S. based venture capital firms have active plans for substantial investments in 2006 spurred by Chinas high growth potential, the success of recent venture-backed startups on the NASDAQ including Baidu.com and China Medical Technologies and by pent up demand after the 2005 halt in new investments (Borrell, Jerry and Aragon 2005). Hidden risk and solutions Lagging legislation and inexplicit policies in China created many uncertainties and entry barriers for foreign VCs. Below are summary of the critical problems: Chinas lawmaking on VC investment remains stagnant Existing laws such as Corporation Law, Joint Venture Law, Patent Law, etc., in many aspects even contradict VC investment. Does VC investment count as foreign investment? What status and treatment should it enjoy? The concerned authorities cannot provide clear answers to these questions. Its not clear that the amount of shares that foreign venture capital is allowed to hold when partnering with Chinese enterprises, and the way foreigners to remit in/out of foreign exchange are poorly defined. There are three available approaches for foreign venture capital firms to enter China venture capital market legally. Establishing offshore venture capital fund focusing on China Establishing a foreign invested VC firm in China (Joint VC with local player/Wholly Owned Foreign firm) as a legal person entity Establishing a foreign invested VC firm in China (Joint VC with local player/Wholly Owned Foreign firm) as a non-legal person entity To avoid the legal and regulation barriers, foreign venture capital funds usually takes the offshore investment route. Foreign VCs will use offshore USD fund to invest into China deals offshore holding entities with all equity activities happening outside of Chinese jurisdiction. The distinction of USD offshore holding investment and RMB local entity investment is a particular phenomenon in China. Offshore holding arrangement is a preferred structure for Chinese entrepreneurs and VCs as it provides a feasible and practical route for funding, divestment and all equity events. Its advantage and attractiveness to Chinese entrepreneurs and VC communities: Go away from laws and regulations in China. Many of them are not friendly to venture activities, such as lack of preferred shares, stock options limitation, double tax etc. Bypassing capital account control on foreign exchange. More flexible and usually profitable divestment options by overseas IPO, MA or trade sales. Offshore route investment involves the following steps: The Chinese founders set up an offshore holding company in Cayman Island or BVI with the shareholding structure and management control mirroring those of their local company in China. With kind of swap scheme, transferring the equity they hold in the Chinese local company to the offshore holding. This will typically convert the local company into a WFOE (Wholly Foreign Owned Enterprise). The offshore holding company will then be the vehicle seeking VC investment, future funding as well as for listing or be merged. All equity events happen in offshore. Companies funding and IPO proceeds will be kept offshore, and remit into China as and when operation required. Chinese founders assets, rights and proceeds stay offshore. The whole exercise is carried out essentially with an IPO at an overseas stock exchange, such as NASTAQ or Hong Kong Stock Exchange in vision. (The concept and process is visualized in chart 5.) Chart 5 Foreign VC Offshore Investment Process Source: A legal perspective on Chinas venture capital rush, Mar 2006 Restrictions in Chinas corporate regulations and limitations at the domestic capital markets explain foreign VCs preference in taking offshore route to organize their China investment. VC investors rely normally on preferred stocks or convertible preferred stock to secure a preferential return. Chinese corporate regulations allow only one class of common stock for a FIVCE with investment in a Chinese portfolio company. Notably, local VC firms would have the possibility to arrange preferred stock scheme with their investee company according to a newly issued charter regulation applicable to domestic VC firms. This gives rise to concern on the principle of national treatment under WTO law. Moreover, China domestic stock market does not provide a ready access for venture-backed companies. The conditions for listing at Shanghai or Shenzhen main-board market are too stringent for high-tech start-up companies. Even if listing conditions could be met, the queue in the pipeline waiting for a listing window is at the moment frustrating. In fact, the two domestic stock exchanges have halted the IPO since two years in the call for addressing the notorious overhang of nontransferable legal person shares. The undergoing endeavor is focusing on floating all stock legal person shares. Since the value of stock legal person shares is roughly twice of those trading in the stock exchange, full floating of legal person shares at stock is imposing acute challenge on the market place. This would mean that the suspension on IPO of new shares would be expected for a rather extended term. By leveraging on an offshore holding structure, foreign VCs could take advantage of the corporate governance in a jurisdiction where they feel most comfortable and bypass the restrictions under Chinese corporate law. VCs could take the Analysis on Current Venture Capital Market in China Analysis on Current Venture Capital Market in China Introduction The huge consumer market potential and booming economy in China attract enormous foreign direct investments to capitalize this unprecedented opportunity. Foreign venture capital is not exceptional from this trend. They, however, still have to face constant challenges from regulations, market practices and business cultures in China. To be successful in this marketplace totally different from their origin, foreign venture capitals need to adapt their previous strategies and experiences and test it through trial and error. This report is to get overall picture about current venture capital market in China. Then it will focus on the market position of foreign venture capitals. The report is followed by the analyses and summary on investment and exit strategies used by foreign venture capitals. Finally, the report will discuss the potential trend in China venture capital market. Key Objectives To get in-depth analysis on current venture capital market in China and foreign venture capitals market position in China. To analyze and summarize the investment strategies and exit strategies used by foreign venture capital in China. To make prediction on future market trend, especially foreign venture capital. Key Chapters General introduction on venture capital Historical development and current venture capital market in China Detail market position analysis on foreign venture capital in China Investment strategies of foreign venture capital in China Exit strategies of foreign venture capital in China Future trends in China venture capital market Introduction on Venture Capital Venture capital is source of funds to small firms that cannot establish credit relationships with bank or other financial institutions. As Gompers (2001) states: Companies that lack substantial tangible assets and have uncertain prospects are unlikely to receive significant bank loans. These firms face many years of negative earnings and are unable to make interest payments on debt obligations. Start-up high tech firms are exactly the type of firms that banks are least likely to lend to because of poor information availability and lack of tangible assets or assets that can be readily evaluated. Firms developing software or new technology for the communications or biotech industries are largely investing in human capital. In a nutshell, the VC firm is a relative small financial services professional organization that functions primarily to: (a) assess business opportunities; (b) provide capital; and (c) monitor, advise and assist the firms in its portfolio. By investing, the venture capitalists accept substantial tranche of illiquid equity that converts their status to something like partners to the entrepreneur. The goal of the venture capitalist is not only to increase the value of that equity but also to eventually monetize the investment through a liquidity event such as an initial public offering or sale to other investors. The other way of reaping the reward is liquidation due to the firm failure and bankruptcy. In all of these scenarios, the venture capitalist exits their investment to complete the VC process. The venture capital cycle is briefly visualized in below chart. Chart 1 Fund flow of Venture Capital Cycle Source: National Venture Capital Association Yearbook 2008 The National Venture Capital Association in the United States defines venture capital as money provided by professionals who invest alongside management in young, rapidly growing companies that have potential to develop into significant economic contributors. There are a number of key attributes associated with VC that distinguish it from other equity capital investments. Venture capital normally focuses on small firms that have great growth potential. These firms usually are not mature enough to be traded in public equity markets. Compared with public equity investment, venture capital investment has poorer liquidity with more severe information asymmetry and higher investment risks. Venture capital investment is also different from angel capital. Managers of angel capital use their personal money to invest. In contrast, investments professionals who raise money from other investors manage venture capital. Angle capital invests more often in the seed stage of the start up firms than venture capital does. Finally, venture capital is different from non-venture private equity investments (such as buyouts, restructure, and mezzanine funds). Firms backed by venture capital usually have considerable growth potential. For these firms, the cash flow generated from operations is usually insufficient to support finance growth and debt financing is usually not available. In contrast, private equity funds target more mature firms that have stable cash flows and limited growth potential. The Table 1 below summarizes the investment stages and types of funding for different investment styles. Table 1. Types of Funding and Investment Stage Source: A Guild To Venture Capital (3rd edition) by Irish Venture Capital Association There are five stages (BVCAPWC, 1998) in the development of venture-backed companies, which can be defined as: 1. Seed 2. Start-up 3. Other early stages (exploration) 4. Expansion 5. Maturity (exit). The definition of the company stage is different with the definition of the financing round. The negotiation of a VC investment is a time-consuming and economically costly process for all parties. Neither the VCs nor the portfolio firms want to repeat the process very often. Therefore VCs have to balance the cost of negotiation and potential risks from one time investment. Typically, a VC will try to provide sufficient financing for a company to reach some natural milestone, such as the development of a prototype product, the acquisition of a major customer, or a cash flow breakeven. Each financing event is known as a round. So the first time a company receives financing is known as the first round (or Series A), the next time the second round (or Series B), and so on and so forth. With each well-defined milestone, the parties can return to the negotiating table with some new information. These milestones differ across industries and depend on market conditions. A company might receive several rounds of investment at any stage, or it might receive sufficient investment in one round to bypass multiple stages. One special situation is the down round. It is when the company does not meet milestones and the VC still needs to invest but at a lower valuation than prior round of financing. Venture Capital in China Why invest in China? There are four major popular arguments behind for the investment rush to east. Reason 1: High Rate of Economic Growth Chinas impressive economic growth for the past 30 years, averaging between 8% to 10% real growth per year, has been the envy of the developing world. The size of Chinese economy by the end of 2006 reached US$2.62 trillion, 13 times larger than that in 1978 when measured in constant RMB (MasterCard Worldwide Insight, 2007). According to Goldman Sachs China economic research (2003), per capita GDP expect to grow from less than $5,000 at that time to more than $30,000 in 2050 (refer to Chart 2). China will have a middle class of more than 500 million by 2025 larger than the entire population of the United States. It represents a huge emerging demand for everything from integrated circuits to cars. 500M mobile users, 130M Internet users, 104M broadband users and 4.5M college graduates every year could all transfer into huge business opportunity (represented in Chart 3). Based on the estimation (Chart 4) from Mckinsey, there will be sustainable market growth to 2025 in every business that related with peoples life and daily consumption. Huge opportunities for venture capital are Internet (B2B, B2C, C2C, online gaming, website portal and web 2.0), semiconductors, technologies (clean energy, medical, biotech and traditional manufacturing), and consumer businesses (food, clothes, shopping and other entertainments). Chart 2 China GDP Growth Forecast (2000-2050) Source: Goldman Sachs 2003 Chart 3 China Energy/Material supply imbalance (2010) Source: Goldman Sachs 2003 Chart 4 Urban Chinese Consumers Demand Forecast (2004-2025) Source: National Bureau of Statistics of China; Mckinsey Global Institute Analysis Reason 2: Inefficient Capital Market In the United States and Europe, private and public capital markets compete as sources of capital. However, China does not yet have an equity culture despite the adoption of market-oriented policies. In China, the public equity market lists inefficient and unappealing state owned enterprises (SOE) most of the times. And government holds roughly 60-70% of share capital of most listed companies. Few private firms are listed in the stock market due to legal and policy hurdle. Chinas bond market is similarly underdeveloped. Chinese corporate bonds account for less than 2% of corporate financing. Thin trading between banks and investors makes issuing bonds unattractive for fundraising or investing. Insurers and fund managers therefore have few fixed-income securities to hedge against mid- and long-term risks. The corporate bond market just started to function in late 2007 by allowing public listed firms to issue corporate debts. Around 95% of financing for Chinese companies now is still provided by bank loans. The domestic banks, however, have tendency to provide loans to stated owned company rather than private firms, especially small and medium businesses (SMB). With the poor functioning financial markets and policy discrimination, venture capital and private equity become important sources of growth capital for private firms. It is one of the key reasons that venture capital is so popular among private firms in China across different industries even including traditional industries like food, hotel and travel etc. Reason 3: Creative Solutions/Early Adopting Consumers One of the most unexpected attributes of the emerging Chinese market economy is how consumer-savvy its entrepreneurs are. Even after decades of centralized economic planning, the Chinese remain consummate creators and marketers of interesting products. Definitely the creativity and innovations are only limited in certain business for talents availability and their professional capabilities. Online gaming, wireless instant messaging, and wireless value added services are just three markets that the Chinese more or less created out of thin air. Each of these businesses has growing customer bases (and have spawned successful public companies like Shanda, Netease, Tencent, and Linktone). But none of them has significant participants yet in the United States. Different consumer behaviors contribute to this phenomenon as well. In below case study on Tencent, it provides a great example on how to innovate the Internet product offerings to cater the needs of online generation. Case study: QQ of Tencent (Adapted from www.tencent.com) Tencent (listed in HK stock exchange) is the #1 Instant Messaging (IM) service provider in China. Tencents IM community counts over 270 million active accounts and is said to be covering 95% of Chinese Internet users and 70% of Chinas IM market (MSN/Yahoo account for the rest market). QQ is the brand for its IM. Same as other IMs, QQ is a free tool to use. Tencent, however, came up the idea to generate revenue stream by allowing users to buy and exchange virtual items (clothes and background image) online to decorate his or her QQ head icon. Tencent even created its own cyber currency called Q Bi and 1 Q Bi = 1RMB (0.14 USD) to facilitate the transaction and reduce barrier of online purchasing. The estimated revenue generated from those Internet value added services in 2007 is around USD$360M. Reason 4: Risk-taking, Innovative Culture In the last fifteen years, the privatization reform is one of the critical forces in stimulating China economy growth. This privatization wave also generated tens of thousands entrepreneurs. The business culture is naturally comfortable with risks and with developing innovative ways to solve problems and create wealth both for individuals and for society at large. The successful stories of VC backed entrepreneurs further promote the risk taking culture in China and the awareness and popularity of venture capital. The Focus Media case below illustrates the power of business model innovation by its unprecedented expansion speed ever in Chinas business history. There is no doubt that foreign VCs played an important role in this story to make Focus Media successful. Case study: Focus Media China (Adapted from www.focus.com) Founded in 2003, Focus Media is Chinas largest Digital Media Group in China now. The founder, Mr. Jiang Nanchun, came up with an innovative approach in operating out-of-home advertising network using audiovisual digital displays. Basically, the idea was to display the LCD near or in the elevators in commercial centers (like office buildings and shopping malls). While waiting for or in the elevators, people would watch the contents advertised in those LCDs. By selecting and contracting with high quality commercial buildings, Focus Media was able to quickly build up its network scale and attract many advertising contracts. Tow foreign VC firms, Soft Bank and UCI, invested in the first round. And another five VCs, CDH, TDF, DFJ, WI Harper and Milestone, invested in the second round. Two years after operation, Focus Media was listed on Nasdaq with USD$172M IPO and now it is part of Nasdaq 100 index. Historical development Infancy stage: 1984 1995 In 1984, the Research Center of Science and Technology Development of the State Science Technology Commission (SSTC) (now the Ministry of Science Technology or MOST) cooperated with British experts to study how to develop high-tech in China. The British experts proposed that venture capital should be developed if China wanted to foster high technology. In 1985, the Central Commission of the Chinese Communist Party and the State Council pointed out in the Decision of Science-Technology System Reform that venture capital could be set up to support the work of developing high-tech with quick change and high risk. It was the first time that the concept of venture capital appeared in an official Chinese Government document. With the government decision to develop high technology industries, the Central Government and some local governments financed and set-up series of investment institutions that intended to pursue the venture capital business from 1985 to 1995. Examples are China New Technology Venture Capital Company, Shenyang Science-Technology Venture Development Risk Center, Shanxi Head Office of Science-Technology Fund Development, Guangdong Science-Technology Venture Capital Company, Shanghai Science-Technology Venture Capital Company, and the Science-Technology Venture Capita Company of Zhejiang Province. Moreover, venture centers (i.e., high tech incubators) were set-up in the majority of national high-tech parks. Simultaneously, some overseas investment banks, funds and venture capital institutions also started to expand their business into China. For example, the Pacific Technology Venture Capital Fund subordinate to IDG entered China in 1992. It cooperated with science-technology commissions in Beijing, Shanghai and Guangdong, and set-up a number of venture capital companies focused on investing in technology companies. Also, some foreign capital or joint stock investment institutions established venture capital businesses. Asia Venture Capital Journal (AVCJ, 2001) shows that $16 million was raised for venture capital investments in 1991. In 1992, the total funds raised jumped to $583million, a thirty-fold increase compared with the $16 million in 1991. The first wave reached its peak in 1995, with $678 million in investment (AVCJ, 2001).The first wave of venture capital investments was brought by international venture capitalists. The international venture capital firms accounted for more than 95% of the total fund raised in the early and mid 1990s. The absolute dominance of international venture capital funds in China in the early and mid 1990s was mainly due to Chinas strict regulations against fund-raising and the general lack of awareness of venture capital in China. Private fund-raising by individuals or private firms without government approval was strictly prohibited in China. This strict regulation essentially removed the possibility for venture capitalists to raise funds within China. It meant that only international venture capital funds and state owned enterprises (SOE) venture capital funds could operate. International venture capital funds could bypass the regulation because they were incorporated and they raised funds outside of China. SOE funds relied on government appropriation as funding sources and did not have this fund raising problem either. Early Growth: 1996 2001 From the mid-1990s, the perception of venture capital shifted from being a type of government funding to being a commercial activity necessary to support the commercialization of new technology. As there were still no laws or regulations about setting up foreign venture capital institutions in China, many overseas investment institutions established their branches in Hong Kong, aiming to invest in the mainland. They had also located representative offices in some major cities, primarily Beijing and Shanghai. Most of the VCs active in China in the early 90s were American firms. The VC industry in the U.S. had matured and attracted a significant amount of funds. Shortly after 1995 a sharp increase from US$5 billion to US$110 billion in funds raised created the phenomenon of money chases deals (Gompers Lerner, 1999). A cadre of experienced American VCs started searching the world for investment opportunities, attempting to replicate the Silicon Valley model. Since 1998, there had been a discernible recognition of the critical success factors necessary to create an environment in which venture capital could operate smoothly and flourish. Specifically, the Governments official decision to support the development of venture capital was the key factor that had allowed Chinas venture capital industry to come into being in a new and more positive environment. In Beijing, alone, there were about 30 independent venture capital institutions, whose capital amounted to an estimated $450 million. In Shenzhen, there were at least 20 independent venture capital institutions with capital amounted to over $500 million. After 2000, China also experienced hard landing in its young VC industry due to dotcom bubble burst and came with huge casualties. It took the VC community 3 years to recover. Fast Growth: 2002 present Although initial government-backed investment operations generally failed, there has been resurgence in venture capital activity since Chinas admission to the WTO (Kenny, Han and Tanaka 2002). Capital available for investment in Mainland China keeps a steady growth trend from 2002. The capital size was increased to US$21.32B by 2007 from US$10.50B in 2002. The average compound annual growth rate (CAGR) reaches 15.2%. Venture capital investment grew rapidly from $480 million in 2002 to more than $3,247 million in 2007, invested in 440 China mainland or mainland-related enterprises (Zero2IPO 2007). According to Zero2IPO report, USD$4B VC funds were raised each year in 2005 and 2006 for China investment. But Chinas annual consumption was no more than $2B. The money chasing deal phenomenon started to emerge in China. Many foreign VC funds, especially first-time funds raised after 2005, had the pressure to pour out investment quickly to avoid US dollar depreciation against RMB and to get better deals under fierce competition. While the funding supply multiplied, quality deal flows did not increase at the same pace. Under the simple supply and demand mechanism, valuations of the China deal kept at relative high level. However, considering the fact that a big portion of funding was focusing on local value-add service segments (i.e. internet, web2.0 and broadband etc.), the issue of funds over-supply was sector specific. To get higher return under the competition, VC firms started to invest in traditional business models such as hotels, travels and fast food chains beyond their core activities such as TMT (Technology, Media and Telecom) or Internet related businesses. It was the special phenomenon happened in China now that VCs were more like PE. Legal and Regulations According to Megginson (2004), the differences in the design and the degree of development of the PE/VC industry are due to institutional factors, with the countrys legal system being paramount. Two major factors are paramount in evaluating legal system: contract law enforcement and protection of shareholder rights through effective corporate governance. Cumming and Macintosh (2002) observed that PE/VC managers in high enforcement countries had a greater tendency to invest in high-tech SMBs, exit through IPOs rather than buybacks and obtain higher returns. Cumming et al. (2004) further examined legal system effects on governance structure. Under better legal systems: the faster the origination and screening of deals; the higher the probability of syndication; less frequently funds of the same organization used to invest in a given company; the easier the board representation of investors; the lower the probability that investors required periodic cash flows prior to exit; and the higher the probability of investment in high-tech companies. Lerner and Schoar (2005) show that in a bad legal environment, PE/VC managers tend to buy controlling stakes, leaving the entrepreneurial team with weaker incentives. Interestingly, valuations tend be positively correlated with the quality of the legal environment. Kaplan et al. (2003) go deeper into the contractual aspects and found that rights over cash flows, liquidation and control, as well as board participation vary according to the quality of the legal system, the accounting standards and investor protection across countries. However, more sophisticated PE/VC managers tend to operate in the U.S. style irrespective of local institutional concerns. The authors show that managers operating with convertible preferred stocks are less prone to failure (as measured by survivorship rate). The results suggest that the U.S. contractual style can be efficient in different institutional environments. Bottazzi et al. (2005) corroborate some of the previous results and obtain further evidence on the home-country effect (PE/VC managers operating abroad tend to maintain the investment style used at home). This is observed in managers based in both good and bad legal environments. The Chinese regulations governing foreign venture capital investment are chaotic and rapidly changing. In 2005, Chinese authorities issued new guidelines (effective in 2006) intending to foster domestic venture capital firms. There is no specific regulation to monitor and stimulate the VC activities in China. The new guidelines recommended that local governments provide financing assistance, favorable tax treatment, and direct investment in Chinese venture capital firms. They also provide less stringent capitalization, investment amount, investor qualification and regulatory requirements than those applicable to FICVEs (Guerrera, Yee and Yeh, 2005). FIVCEs instead are governed by 2003 regulations that include high investment and qualification thresholds, government approval requirements, and strict foreign exchange limitations on the ability to remit profits and dividends back to the investor (Hoo, et al 2005a). Substantial legal and de facto restraints on the ability of FIVCEs to access the stock markets in China and overseas for IPO listings make exit strategies extremely difficult. For these reasons, foreign venture capital firms investing in China usually do not use FIVCEs but rely on offshore holding companies created to receive their investments. Foreign venture capital firms (most of which are U.S. based) investing in China generally have done so through the restructuring of Chinese companies into offshore investment vehicles. These enable an easier exit from investments either by selling shares on international stock markets or through a trade sale to another foreign buyer. In January of 2005, Chinese authorities brought these transactions to a virtual standstill, however, with the issuance of new regulations preventing any onshore resident from establishing, controlling or owning shares in an offshore company without the approval of the Government, either directly or indirectly. The regulations were intended to stop managers of SOEs receiving venture capital investments from stripping state assets and selling them cheaply to overseas companies, and to preclude domestic companies from using the overseas vehicles to gain foreign investor tax exemption status. However, they choked off legitimate transactions as well. There were no government approvals of offshore investment transactions in 2005. With only limited exceptions for transactions in process, foreign venture capital financing through offshore investment vehicles screeched to a halt in 2005 (Borrell and Jerry, 2005). Then, in November of 2005, the Chinese authorities issued superseding regulations. These require registration of offshore investment vehicles with the State Administration of Foreign Exchange (SAFE), but do not require the agencys approval of the transaction. They also require repatriation of all distributions of income from the investment within a fixed time frame. Like the previous regulations, the new ones do not describe specifically the registration process, the procedures involved, the scope of review nor the time required for completion, creating substantial uncertainty for foreign venture capital investors (Hoo, et al 2005b). Despite this changing regulatory landscape, many U.S. based venture capital firms have active plans for substantial investments in 2006 spurred by Chinas high growth potential, the success of recent venture-backed startups on the NASDAQ including Baidu.com and China Medical Technologies and by pent up demand after the 2005 halt in new investments (Borrell, Jerry and Aragon 2005). Hidden risk and solutions Lagging legislation and inexplicit policies in China created many uncertainties and entry barriers for foreign VCs. Below are summary of the critical problems: Chinas lawmaking on VC investment remains stagnant Existing laws such as Corporation Law, Joint Venture Law, Patent Law, etc., in many aspects even contradict VC investment. Does VC investment count as foreign investment? What status and treatment should it enjoy? The concerned authorities cannot provide clear answers to these questions. Its not clear that the amount of shares that foreign venture capital is allowed to hold when partnering with Chinese enterprises, and the way foreigners to remit in/out of foreign exchange are poorly defined. There are three available approaches for foreign venture capital firms to enter China venture capital market legally. Establishing offshore venture capital fund focusing on China Establishing a foreign invested VC firm in China (Joint VC with local player/Wholly Owned Foreign firm) as a legal person entity Establishing a foreign invested VC firm in China (Joint VC with local player/Wholly Owned Foreign firm) as a non-legal person entity To avoid the legal and regulation barriers, foreign venture capital funds usually takes the offshore investment route. Foreign VCs will use offshore USD fund to invest into China deals offshore holding entities with all equity activities happening outside of Chinese jurisdiction. The distinction of USD offshore holding investment and RMB local entity investment is a particular phenomenon in China. Offshore holding arrangement is a preferred structure for Chinese entrepreneurs and VCs as it provides a feasible and practical route for funding, divestment and all equity events. Its advantage and attractiveness to Chinese entrepreneurs and VC communities: Go away from laws and regulations in China. Many of them are not friendly to venture activities, such as lack of preferred shares, stock options limitation, double tax etc. Bypassing capital account control on foreign exchange. More flexible and usually profitable divestment options by overseas IPO, MA or trade sales. Offshore route investment involves the following steps: The Chinese founders set up an offshore holding company in Cayman Island or BVI with the shareholding structure and management control mirroring those of their local company in China. With kind of swap scheme, transferring the equity they hold in the Chinese local company to the offshore holding. This will typically convert the local company into a WFOE (Wholly Foreign Owned Enterprise). The offshore holding company will then be the vehicle seeking VC investment, future funding as well as for listing or be merged. All equity events happen in offshore. Companies funding and IPO proceeds will be kept offshore, and remit into China as and when operation required. Chinese founders assets, rights and proceeds stay offshore. The whole exercise is carried out essentially with an IPO at an overseas stock exchange, such as NASTAQ or Hong Kong Stock Exchange in vision. (The concept and process is visualized in chart 5.) Chart 5 Foreign VC Offshore Investment Process Source: A legal perspective on Chinas venture capital rush, Mar 2006 Restrictions in Chinas corporate regulations and limitations at the domestic capital markets explain foreign VCs preference in taking offshore route to organize their China investment. VC investors rely normally on preferred stocks or convertible preferred stock to secure a preferential return. Chinese corporate regulations allow only one class of common stock for a FIVCE with investment in a Chinese portfolio company. Notably, local VC firms would have the possibility to arrange preferred stock scheme with their investee company according to a newly issued charter regulation applicable to domestic VC firms. This gives rise to concern on the principle of national treatment under WTO law. Moreover, China domestic stock market does not provide a ready access for venture-backed companies. The conditions for listing at Shanghai or Shenzhen main-board market are too stringent for high-tech start-up companies. Even if listing conditions could be met, the queue in the pipeline waiting for a listing window is at the moment frustrating. In fact, the two domestic stock exchanges have halted the IPO since two years in the call for addressing the notorious overhang of nontransferable legal person shares. The undergoing endeavor is focusing on floating all stock legal person shares. Since the value of stock legal person shares is roughly twice of those trading in the stock exchange, full floating of legal person shares at stock is imposing acute challenge on the market place. This would mean that the suspension on IPO of new shares would be expected for a rather extended term. By leveraging on an offshore holding structure, foreign VCs could take advantage of the corporate governance in a jurisdiction where they feel most comfortable and bypass the restrictions under Chinese corporate law. VCs could take the