Invest in a project; if it succeeds, you get a share of the profits; if it fails, you are exempt from liability.

Unprecedented! With this new model—investment first, equity later—the Baoshan District Government in Shanghai has taken on the role of an “angel investor.”

Initially, support is provided in the form of technology projects to facilitate the technical maturation of laboratory research outcomes; later, depending on circumstances, this support is converted into equity investment funds as agreed.

In short, “Invest First, Equity Later” essentially means becoming a business partner.

The government provides the capital, the team contributes the effort, and together they incubate scientific and technological achievements; in the event of failure, both parties are exempt from liability, and in the event of success, the investment is converted into equity.

01 Unveiling the Mystery of the “New Model”

Not long ago, the Baoshan District Government in Shanghai became a partner in a startup, sparking heated discussion in the tech innovation community...

“With the government as our partner, we no longer have to worry about funding.” This local Shanghai company finally breathed a sigh of relief.

The project has developed a disruptive solution for large-scale semiconductor equipment chambers, effectively enhancing self-reliance in core semiconductor components and breaking free from the constraints of relying on others for key devices and equipment.

However, since this type of cutting-edge technology has no precedents and cannot be benchmarked against the market, it naturally struggles to attract investors.

The Baoshan District Government has stepped in to help resolve this “market failure,” providing support to help the company navigate the “Valley of Death” during its early startup phase.

This innovative model of fiscal support directly accelerates the transformation of scientific and technological achievements into real productive capacity.

By investing public funds into technology projects, when the funded enterprises secure market-based equity financing or demonstrate strong growth, the public investment is directly converted into equity, with the government gradually exiting according to the principle of “appropriate returns.”

Undoubtedly, this is not merely “adding flowers to brocade,” but rather “delivering coal in the snow.”

This model differs from previous approaches. It no longer relies on a “scattergun” approach to support—one that attempts to cover all bases but lacks impact and fails to create an effective closed-loop system.

In essence, the subsidy funds are transformed into a form of “option.”

The profit-sharing nature of these “options” will directly influence current decision-making, making it easier for outstanding enterprises to secure government support while enabling them to provide greater returns to the government in the future.

This is easy to understand: initial capital investment is converted into equity in the company at a later stage.

Not only does this allow for market-oriented management and exit strategies—reducing the burden on the government—but it also encourages innovation teams to boldly take that first step, accelerating the transformation of technological innovation into productive capacity.

Therefore, it is neither equity nor debt, and certainly not a grant—it is a corporate partnership.

02: Caution Is Required When Becoming a “Partner”

We often hear the saying: “The stock market carries risks; invest with caution.”

The same applies to investment promotion. When assessing project risks, pitfalls are often encountered in the early stages of investment promotion. Even some “star projects” fail to live up to their hype, plagued by frequent problems, and ultimately end in a complete mess.

First, the industry position and sector in which a company operates are, to a certain extent, indicative of a project’s growth potential. Second, the project team’s core technology, market competitiveness, as well as the construction timeline and output per acre are all within the scope of consideration.

However, local governments are gradually transitioning from the “old trio” of investment promotion—land, factory space, and tax policies—to a “new model” that involves introducing industrial funds and launching capital-driven investment promotion. This undoubtedly represents an upgrade in investment promotion philosophy—an “investment banking mindset.”

In the realm of industrial fund-based investment promotion, the government has pioneered the “Hefei Model,” the “Suzhou Model,” and the “Shenzhen Model,” all of which have achieved notable success.

On the surface, companies mired in difficulties and struggling to survive have undergone a chemical reaction under the catalysis of these “innovative models,” achieving an “epic rise.”

In reality, while innovative investment promotion based on “investment banking thinking” allows for bold hypotheses, it requires careful verification.

Take local state-owned enterprises (SOEs) as an example: beyond mere willingness, they require both professionalism and financial strength. Given the high-stakes nature of many local investment agreements, both the government and SOEs must establish mechanisms that allow for failure.

In 2022, government-guided funds not only saw an increase in overall scale but also showed a trend of expanding to district and county levels.

Data shows that the scale of newly established provincial government-guided funds reached 134.3 billion yuan, a 19.81% increase compared to the same period in 2021. Meanwhile, the scale of municipal government-guided funds decreased by 12.62%, while newly established district and county-level government-guided funds surged by 53.87%.

Government-guided funds invest in projects through two primary methods:

First, direct investment in enterprises after establishing a fund, known as “direct investment.” A well-known example of direct investment is Hefei City’s investment in NIO.

Second, through “fund-of-funds” (FOF) structures. Local government-guided funds act as parent funds, channeling capital into subsidiary funds. These subsidiary funds are typically established through joint contributions from private capital and the parent fund.

In previous years, the ratio of direct government investment to parent-subsidiary funds was 3:7, but the proportion of direct investment has now increased.

There are two main drivers behind local governments’ participation in direct investment:

First, direct investment allows for direct engagement with investment projects, facilitating management.

Second, high-quality projects enhance the returns on the government’s investment.

Taking a 10-billion-yuan guiding fund as an example, if the funds are invested directly into enterprises, the fund receives the full agreed-upon return upon successful investment.

However, if local governments choose the FOF model to spread investments evenly across five sub-funds, indirectly investing 2 billion yuan in enterprises, they would only receive returns corresponding to their share in the FOF fund—which is one-fifth of what they would have received through direct investment.

Local governments adopt the FOF approach to diversify investment risks, but its more critical role lies in leveraging capital. By injecting real capital into sub-funds, the government’s parent fund attracts substantial social capital to co-invest, thereby leveraging investment in more projects.

When local governments engage in venture capital, they prioritize “optimal selection” and “maximized output” far more than private capital does. In particular, regarding equity management, they should maintain direct control, adhere to the principle of “promoting the capable and removing the incompetent,” and appoint qualified industry fund managers for each project.

In this arena, it is essential to strike a balance between “delegation” and “oversight,” while maintaining full control over the decision-making chain.

03 “Venture Capital” Considerations: Evaluate by Forecasting

Evaluate government spending and actions against actual objectives and public needs.

The assessment should not only focus on the effectiveness of government fiscal spending but also on the allocation of fiscal funds. This involves predictive capabilities before implementation, close monitoring during the process, and quantifying results afterward.

Take the “invest-first, equity-later” model as an example: the greater the initial government investment, the higher the equity stake upon future conversion, which prevents companies from making unreasonable valuation demands. Regardless of where the company eventually relocates after growing and strengthening, the local government that made the initial investment will still receive returns from its equity stake.

In traditional investment models, funds are often "one-way" and do not return, which is not conducive to sustained support; the "cash-first, equity-later" model can create a virtuous cycle for funding.

The original intent of this model is to cultivate an industrial foundation, boost economic vitality, and develop leading enterprises; whereas the goal of angel investors is to “make a profit.”

In reality, this is not a form of displacement but rather an incentive.

The success of a startup project cannot rely solely on early government investment; it also requires greater participation from angel investors. The “invest first, equity later” approach does not crowd out market-driven angel investors; rather, it serves as a catalyst, using “small amounts of public funds” to leverage “large amounts of market capital.”

Regardless of the model, the benefits extend beyond local fiscal revenue; more importantly, it fosters the interaction between industry and finance in the local economy, which will become a new engine in the next round of regional economic competition.