This study examines how government-initiated programs affect venture capital development and entrepreneurial activities in China. Using provincial data from 1995 to 2012, I examine the impact of government funds via the Government Guiding Fund Program (GGF program) on VC firms’ fundraising, investment decision, return and entrepreneurial activity with the consideration of the transition economy nature of China. In this way, I try to answer: (1) whether the supportive policy has achieved a positive impact on VC and entrepreneurship? (2) How and why such effect is achieved? (3) Has China’s characteristics of a transitional economy caused any difference in terms of the policy implementation and actual effect? In this way, I hope to provide insights to the role of policy instruments in fostering VC development and entrepreneurship.