The impact of venture capital on Chinese SMEs' sustainable development: a focus on early-stage and professional characteristics

Small and medium-sized enterprises (SMEs) are crucial for China's economic growth, but they often face financing challenges. Venture capital (VC) offers a crucial alternative financing source, especially for high-tech SMEs. While much research focuses on the short-term effects of VC, this paper examines its long-term impact on the sustainable development of Chinese SMEs. The sustainable development of an enterprise is defined as its ability to remain active, competitive, and recognized in the market after its initial public offering (IPO). This research addresses the gap in understanding the long-term effects of VC, particularly concerning the timing of VC involvement and the specialization of VC firms. The authors hypothesize that early-stage VC investments will positively impact sustainable development, while the level of VC firm specialization (professionalism) will have a less clear effect. The study uses survival analysis methods to account for the dynamic nature of enterprise survival and the presence of censored data.

Existing literature shows that VC investments positively influence SME success, providing not only capital but also valuable non-capital services such as networking, management expertise, and market information. However, findings on the long-term impact of VC are mixed. Some studies show positive long-term effects on post-IPO performance and innovation, while others suggest that VC's focus on short-term returns may lead to negative impacts after the exit of the VC. The authors note that existing studies often lack the methodologies necessary to capture the long-term, dynamic effects of VC on sustainable development. This study seeks to address this methodological gap using survival analysis techniques.

The study uses data from the Wind database, a comprehensive source of Chinese financial data, covering venture capital events from 2002 to 2022. The sample includes Chinese-listed companies that received VC funding. The dependent variables are listing survival time (time from IPO to delisting or the end of the observation period) and survival status (active or delisted). The independent variables are 'professionalism' (whether the VC firm focuses on a limited number of industries) and 'early stage' (whether the VC invested before Round A). Control variables include company age at listing, IPO issue scale, industry performance, and lead underwriter reputation. Survival analysis techniques, including the Kaplan-Meier method, the life table method, and Cox proportional hazards regression, are used to analyze the data. The Kaplan-Meier and life table methods provide non-parametric assessments of survival curves, while the Cox proportional hazards model allows for the simultaneous analysis of multiple variables influencing survival time, accounting for censored data.

The results show that early-stage venture capital investments significantly enhance the sustainable development of Chinese SMEs. This positive effect is consistently observed across the Kaplan-Meier, life table, and Cox proportional hazards regression analyses. In contrast, the impact of venture capital firm specialization (professionalism) is not statistically significant in the short term. However, a more detailed analysis reveals a negative impact of professionalism on long-term performance, becoming apparent about four years after the IPO. Specifically, the Cox proportional hazards regression indicated that the early-stage variable had a positive and significant coefficient (p<0.05), while professionalism had a negative, though insignificant (p=0.06), coefficient. The Kaplan-Meier and life table methods visually supported these findings, showing a clear distinction between survival curves for early-stage and non-early-stage VC-backed companies, but less of a distinction for professionally focused and broadly focused VC-backed firms. The control variables—company age at listing, IPO issue scale, and lead underwriter reputation—were all significantly related to survival time, with company age at listing having a negative correlation while the others had positive correlations.

The findings suggest that the value-added services and oversight provided by venture capitalists are particularly beneficial when provided early in a company's lifecycle. Early intervention allows VCs to help establish sound management practices, financial systems, and networks, leading to greater resilience and long-term success. The negative long-term effect of professional VC firms might be attributed to over-specialization, potentially hindering the investee's ability to adapt and diversify its operations as it grows. While professional expertise is essential during initial stages, excessive focus on a narrow industry segment can hinder the broader strategic development needed for sustainable growth in the long run. These results highlight the importance of aligning the scope of the venture capitalist’s resources with the development needs of the SMEs.

This study demonstrates the significant positive impact of early-stage VC investment on the long-term survival and success of Chinese SMEs. The findings emphasize the importance of early intervention and the potential negative consequences of excessive professional guidance in later stages of development. Future research could expand the scope of the study by including more international data, incorporating data on unlisted firms, and exploring the optimal balance between VC specialization and breadth of expertise. Policy implications include encouraging early-stage VC investment and fostering collaboration between SMEs and VCs to achieve mutual success.

The study is limited to data from Chinese-listed companies, potentially limiting the generalizability of the findings to other contexts. The focus on listed companies might exclude insights from unlisted SMEs, which constitute a larger portion of the SME sector. The definition of ‘long-term’ could also be refined in future studies. Data accuracy related to VC investments should also be carefully considered in future research.