Shanghai will start compensating VCs for their financial losses

Photo by hans-johnson

If you’re planning to invest venture capital in China, Shanghai has just made a strong argument that it’s where you need to be. A group of city authorities – the Shanghai Finance Department, the Shanghai Technology Committee, and the Shanghai Development and Reform Committee – have announced a plan to compensate local investors for their financial losses beginning on February 1.

To be eligible for compensation, your investment has to be in a seed stage startup that has been in operation less than three years, employs fewer than 50 people, and has total assets and yearly sales that don’t exceed RMB 5 million (US$760,000). The program is also applicable for early stage startups with fewer than 200 people, and assets and sales of less than RMB 20 million (US$3 million). You can get compensation for up to 60 percent of your losses in a seed stage startup, and up to 30 percent of your losses in an early-stage startup.

There are conditions, though: no single compensation amount will exceed RMB 3 million (US$455,000) and no single VC or investment organization can receive more than RMB 6 million (US$900,000) in total compensation over the course of a year. And of course, interested VCs will need to document their losses and get them approved by authorities before any cash actually gets handed over. And at least for now, the program is only confirmed for the next two years, meaning that if you invest in a startup today but it goes under three years from now, you won’t get any kind of compensation unless the program is renewed. Interested VCs will probably want to have their lawyers take a peek at this.

Shanghai authorities aren’t just looking to throw cash away, of course. They’re hoping that this move will help strengthen the city’s influence as a global hub for innovation, and (indirectly) encourage more people to get involved in startups. Whether giving cash back to investors will be an effective means of doing that remains to be seen, but the move certainly could encourage much more early-stage investing in the city since the compensation will take some of the sting out for VCs who put their money down on a losing horse.