Why is early-stage tech innovation projects difficult to fund? National People's Congress Deputy Tian Xuan: There is a structural mismatch in capital supply

This article is from Times Weekly, authored by Zhu Chengcheng.

“Currently, the venture capital market appears to have ample total funds, but the difficulty in financing early-stage science and technology projects remains prominent. This is not simply a matter of a shortage of funds,” said Tian Xuan, a representative of the National People’s Congress and a distinguished professor at Peking University Boya, in an exclusive interview with Times Weekly.

As the National Two Sessions convene, topics like artificial intelligence and other technological advances have sparked lively discussions. The emergence of cutting-edge technologies has fueled countless imaginations. Hard tech industries such as artificial intelligence, semiconductors, robotics, and commercial spaceflight are increasingly favored by various capital sources. These industries have high technical barriers and long R&D cycles, directly impacting industry chain security and national strategy.

A new contradiction has arisen—hard tech requires long-term investment, yet the capital market still tends to prioritize short-term returns. As a result, some early-stage tech projects still face financing difficulties, while a few popular sectors attract quick capital inflows that rapidly cool down.

How to break the cycle of “hot and cold” in tech investment has become a shared challenge for industry and capital markets.

In Tian Xuan’s view, only by relaxing institutional fault tolerance, providing positive incentives, optimizing supply, and improving the ecosystem can the cyclical speculation characteristic of tech investment be gradually weakened, fostering a stable, sustainable, and rational flow of capital into technological innovation.

                    Representative of the National People's Congress, Distinguished Professor at Peking University Boya, Tian Xuan

Structural Mismatch Causes Financing Difficulties

Recently, regulators announced plans to deepen comprehensive reforms in the STAR Market and ChiNext Board, using these as leverage to further reform investment and financing. This move is seen as an important step to better serve technological innovation.

Tian Xuan believes that the difficulty in financing early-stage tech projects stems from a deep structural mismatch between capital supply and the risk characteristics, growth cycles, and valuation logic of early-stage tech projects. This is the core bottleneck restricting early-stage investments.

“In China’s venture capital market, state-owned capital accounts for a high proportion, over 80%. Under the rigid assessment of preserving and increasing the value of state assets, the overall fault tolerance mechanism is insufficient. Institutions tend to avoid risks and prefer to invest in more mature projects in the mid-to-late stages with lower risks and shorter cycles, making it difficult to match the high risk and trial-and-error nature of early-stage projects,” he explained.

Beyond fault tolerance mechanisms, the mismatch between capital cycles and innovation cycles also significantly affects the financing of early-stage tech companies.

Currently, domestic venture funds generally have short durations, mostly 5+2 years, while hard tech from R&D to commercialization typically takes at least 8-10 years. The mismatch between capital cycles and innovation cycles, along with a lack of long-term patient capital, prevents institutions from supporting early projects over the long term.

From an enterprise perspective, early-stage tech companies also differ from traditional financial valuation logic.

“Early-stage tech companies are asset-light, unprofitable, and R&D-heavy, unlike mature companies that rely more on cash flow and collateral for valuation,” Tian Xuan said. “The market has yet to develop a mature valuation system centered on technological barriers and R&D value, making capital ‘unable to understand, unable to estimate accurately, and unwilling to invest’ in early projects. Additionally, the exit channels in the primary market still heavily depend on IPOs, and fluctuations in issuance pace further reduce capital willingness to invest early.”

He suggested that only by optimizing the assessment and fault tolerance mechanisms for state-owned venture capital, extending fund durations, developing tools suitable for long-term investment, improving diversified exit channels under the registration system, and establishing a valuation system aligned with tech attributes can abundant market funds be precisely directed to the forefront of technological innovation.

Abandon Short-term Arbitrage

During this year’s Two Sessions, Li Lecheng, Minister of Industry and Information Technology, mentioned in an interview on the “Minister’s Channel” that manufacturing industries should embrace artificial intelligence and attract patient capital and risk capital to gather in manufacturing.

“Tech investment inherently has strong cyclical and thematic characteristics, which can easily lead to hot spots attracting a rush of capital, followed by rapid declines when expectations shift,” Tian Xuan said. “Such speculative behavior not only hampers long-term support for hard tech but also amplifies market risks. It is crucial to fundamentally address this structure of over-enthusiasm and quick retreat.”

In terms of optimizing investor incentives and mechanisms for long-term capital entry, measures such as tax incentives, assessment constraints, capital supply, exit guarantees, and market ecology could work together.

“Establish a differentiated tax incentive system directly linked to investment periods, offering tiered tax reductions for venture capital institutions and individual investors holding early-stage tech projects long-term,” he suggested. “Allow venture funds to calculate profits and losses over their entire lifecycle and deduct losses reasonably, using tax leverage to guide capital away from short-term arbitrage and towards long-term holding.”

For core long-term capital sources like state-owned venture capital, insurance funds, and social security funds, Tian Xuan recommended extending assessment cycles, reducing short-term performance and annual ranking pressures, and establishing a portfolio-based assessment system centered on long-term returns and innovation contributions. He also called for improving fault tolerance and exemption systems for state-owned venture capital, clarifying standards for reasonable investment risks.

Furthermore, relaxing restrictions on the proportion of rights-based investments and unlisted equity allocations for social security, pension, and enterprise annuities, simplifying access procedures, expanding investment scope, and encouraging the development of secondary markets for S funds and private equity can activate existing long-term investments.

Objectively, early-stage tech investments have higher failure rates and uncertainties. It is especially important to move beyond traditional risk control thinking while maintaining systemic risk bottom lines.

“Optimize the evaluation system for state-owned venture capital by significantly extending assessment periods, abandoning short-term profit and loss evaluations based on single projects or single years, and instead adopting a bundled investment portfolio approach,” Tian Xuan said. “This can eliminate concerns about early-stage and hard tech investments from a systemic perspective.”

Governance Challenges for Tech IPOs

At this year’s Two Sessions, Tian Xuan reiterated the need to establish a national independent director association, creating a dual system of “regulation + self-discipline” to correct some drawbacks of the current independent director system and strengthen corporate governance for listed companies.

Currently, many early-stage tech startups are rushing to the capital markets, which will inevitably face governance challenges at the listed company level.

Compared to traditional industries, where governance focuses on operational compliance and balancing interests through supervisory boards and independent directors, tech-listed companies operate in fast-paced technological cycles and short market windows. Decision-making on breakthroughs and market deployment directly impacts survival and growth, requiring governance that balances compliance with flexible and efficient innovation decision-making.

Tian Xuan further pointed out that traditional companies’ core assets are tangible, like factories and equipment, with governance systems designed around asset operation and financial control. In contrast, the core value of tech-listed companies lies in intangible assets such as core R&D teams and patents. Talent and technology are fundamental to their development, so corporate governance must prioritize talent incentives and retention of key resources.

“Use partnership systems, equity incentives, and other methods to give core R&D teams and management higher decision-making power, while designing governance rules around R&D investment, patent protection, and talent stability,” he suggested.

Regarding independent directors, Tian Xuan also noted that tech companies face multiple risks, including R&D failures and disruptive technological iterations. Their supervision systems need to shift toward a “technology + compliance + industry” multi-dimensional oversight, requiring independent directors to include professionals from industry technology and tech finance fields. This differs from traditional companies, where oversight mainly relies on financial and legal expertise.

Additionally, since the value of tech-listed companies depends on R&D progress and patent portfolios—information that is both specialized and confidential—there is a need to balance professional information disclosure with core technology protection, while clearly highlighting tech-related risks. Their governance systems should also establish specialized information disclosure mechanisms tailored to the attributes of tech innovation.