“A major benefit to the industry”
There was an interesting news in the venture capital market last week. It did not cause much discussion, but it is actually a big benefit.
In order to support the development of venture capital companies, the four departments jointly issued a document on August 22 to extend the preferential tax policy for individual partners of venture capital companies introduced in 2019 until December 31, 2027.
Compared with government state-owned assets and industrial capital that pursue investment promotion and business synergy, individual LPs usually care more about investment returns. Since the beginning of this year, many family offices have been very cautious in making moves, mostly because they are not satisfied with the expected return figures.
The most direct impact of tax incentives is the return figure.
In order to reduce the tax burden and support and encourage the development of the venture capital industry, the country issued Finance and Taxation Document No. 8 in 2019, stipulating that venture capital funds can be accounted for as a single fund, and individual partners pay personal income tax at a tax rate of 20%.
This week’s policy is a continuation of the 2019 Fiscal and Taxation Document No. 8. In short, at present, venture capital companies can flexibly choose from two parallel accounting methods: First, based on single fund accounting, individual partners pay individual taxes at a rate of 20%; second, based on overall accounting of venture capital companies, individual partners pay individual taxes at an excess progressive tax rate of 5%-35% based on the tax on "income from production and operations."
Of course, there are still many detailed rules and regulations at the practical level. For example, if a venture capital company chooses one of the accounting methods, it cannot be changed within three years; if it is calculated according to a single fund, the expenses and losses incurred (such as management fees and investment losses, etc.) cannot be carried forward across fiscal years, etc. I don’t need to explain it in detail here. GPs and LPs know it well.
In short, the introduction of this policy will continue to reduce the tax burden of individual LPs, release a lot of room for returns, and also release a positive signal that the country encourages the venture capital market to continue to move forward, increasing the confidence of the venture capital industry in going through the cycle.
The stability of policies plays a vital impact on the healthy development of the market and the confidence of participants. Venture capital funds have been developing in the Chinese market for less than 30 years, but they have gained momentum. Especially in the past two years, venture capital funds have developed rapidly as a powerful tool to support technological development.
Whether it is the extension of the preferential tax policy or the "Regulations on the Supervision and Administration of Private Equity Investment Funds" issued some time ago, the sustainability of the favorable policies is improving. What is left for the market to do is to maintain and restore confidence.
Indeed, the venture capital market is very mixed. The 2022 VC/PE report of the China Venture Research Institute shows that on the one hand, policy-based and industrial-based investments have become the main investment in the venture capital market, and tens of billions and hundreds of billions of guidance funds have emerged in an endless stream; on the other hand, in the past year, both investment and fundraising in the domestic VC/PE market have declined, market industry variables have continued to increase, LPs lack confidence due to caution, and market-oriented GP fundraising pressure continues to increase.
Financing is the lifeline of venture capital funds. The difficulty in raising funds has caused industry reshuffles to an extent beyond imagination. Most directly, we have observed a mass loss of talent in the industry.
The first unsolved mystery of the venture capital industry in 2023 is where the "disappeared investors" have gone.
Recently, we have been hearing that many investors who have lacked bullets in their institutions and are in a sluggish track have sadly changed careers and left the industry. Some of them choose to go to corporate development, such as working as CFO or COO in start-up companies. Some choose to start a business, open a store, do self-media, become an Internet celebrity, study abroad...
What is even more surprising is that a group of former star partners have also quietly quit the poker table and left the venture capital industry. This is especially regrettable to me.
The VC market is very cruel. The "validity period" of primary investors' achievements is getting shorter and shorter, and their fate is closely tied to the ups and downs of the capital market. Once the track is in recession, institutions have no funds, and projects perform poorly on the market, investors' careers may face the end.
Obviously, in such a market environment, none of the above solutions is a better place for this group of outstanding minds, including the "optimization" actions of investment institutions for cost reduction and efficiency improvement, nor is it a long-term solution to the pressure. The vigorous development of the market requires the joint creation of many parties, and this industry also needs outstanding people to stay and continue to work.
I sincerely suggest that all investors with experience, achievements, works, and influence should have more patience, more optimistic confidence, and longer-term plans and assumptions about this profession at the moment. When investing in the market, you may have to continuously screen projects, make value judgments, and invest capital.
But when facing a career, don't be misled by the inertial "investment thinking" and make long-term choices based on temporary judgments. A career is different from a sum of money. It carries different responsibilities, potentials, and cycles. Stay patient, and opportunities will always appear at unexpected times.
