China is a developing economy that is also in transition from state-owned enterprises to free-market capitalism. While such dramatic change on such a grand scale has given rise to many new opportunities, it also presents new challenges and risks, especially for outside investors. As a developing economy, China has underdeveloped institutions (Ahlstrom & Bruton, 2006; Scheela, 2006). As an economy in transition, China is experiencing the destruction and transformation of existing institutions with high uncertainty and instability.

Kambil, Long, & Kwan (2006) proposed seven disciplines critical to successful investment in China, such as knowledge of the legal structure and an ability to navigate complex regulatory environments. Institutional theorists add social and cultural elements by suggesting that networks and social capital (Guanxi) substitute for key formal institutions such as the rule of law (Ahlstrom & Bruton, 2006). Agency theory explanations of the role of venture capital seem to encounter some new twists in the emerging and transitioning institutional setting of China (Zeng, 2004). However, there are few empirical studies of venture capital in China based on these frameworks.

In this study we look at whether and how VC’s have modified their approach from the “Silicon Valley” model (Cannice & Daniels, 1999) in order to deal with the situation in China. In particular, we are interested in whether the VC strategies in China can be explained from an institutional or agency theory framework.