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• 2024-05-06

Tech Finance "Shenzhen Model": Unlocking the Transition from "Valley of Death" to "Darwin Sea"

Shenzhen is one of the cities with the highest density of innovation in China.

In September 2024, the Ministry of Science and Technology and the Ministry of Industry and Information Technology respectively released the list of technology-based small and medium-sized enterprises and the list of national-level specialized and innovative "little giant" enterprises, showing that Shenzhen ranks first among all cities in the country with 29,000 technology-based small and medium-sized enterprises and 1,028 national-level specialized and innovative "little giant" enterprises.

The Houhai area in Yuehai Street, Nanshan District, Shenzhen, is one of the regions with the highest technology density in China and is also one of the concentrated areas for this survey of technology companies.

Shenzhen is also the birthplace of the term "technology finance." As early as 1993, the Shenzhen Municipal Science and Technology Department was the first to "invent" and use the term "technology finance" in the information it released, to refer to financial activities related to scientific and technological innovation. This indicates that the Shenzhen Municipal Science and Technology Department was the earliest among its peers to be aware of, focus on, and study the relationship between scientific and technological innovation and financial support.

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Thirty years later, on October 8, 2023, Shenzhen issued the "Implementation Opinions on Financial Support for Scientific and Technological Innovation" (hereinafter referred to as "Technology Finance 20 Articles"), which has pressed the "upgrade button" for the development of technology finance in Shenzhen over the next five years and the financial support system for scientific and technological innovation, ushering in a new stage of development for technology finance in Shenzhen.

It has been exactly one year since the "Technology Finance 20 Articles" was implemented, has Shenzhen made breakthroughs in technology finance products and services? Have they come out of the laboratory and become popular?

To explore the answers to the above questions, from July to September 2024, the research team of the New Finance Research Center of Southern Weekend conducted in-depth research on technology finance: they visited and researched regulatory authorities such as the Shenzhen Branch of the People's Bank of China, the Shenzhen Supervision Bureau of the State Financial Supervision Administration, and the Shenzhen Municipal Financial Management Bureau to explore the policy support system for technology finance in Shenzhen; they conducted special thematic discussions and research with heads and heads of technology finance business of Shenzhen branches of major commercial banks such as Bank of China, Postal Savings Bank, Minsheng Bank, Beijing Bank, and Ping An Bank, to deeply understand the latest progress of financial institutions' technology finance "big article"; they visited technology companies in various administrative districts such as Nanshan, Futian, Bao'an, and Longgang to listen to the personal feelings of technology entrepreneurs.

The research team found that in the past year, Shenzhen has focused more on the quality and efficiency of financial services for technology companies in the early stage and high growth period, and has pioneered two exclusive technology finance innovation models, "Technology Startup Pass" and "Take-off Loan". Among them, under the guidance of the Shenzhen Branch of the People's Bank of China (hereinafter referred to as "Shenzhen People's Bank") and the Shenzhen Municipal Market Supervision Administration (Municipal Intellectual Property Bureau), the Shenzhen local credit platform pioneered the credit product "Technology Startup Pass" for "portrait" of start-up technology companies; for technology companies in the high growth period that are about to take off, the Shenzhen People's Bank led financial institutions under its jurisdiction to specially develop an innovative credit business model - "Take-off Loan".

The two innovative products are rapidly becoming popular in Shenzhen, and the number of lending banks and loan-granting companies is growing rapidly. As of the end of September 2024, the "Technology Startup Pass" has served 14 start-up technology companies, with credit loans of 53.98 million yuan; as of the end of September, 21 banks have signed "Take-off Loan" with 51 companies, with a total loan amount of 1.53 billion yuan, which increased by 50%, 54.5%, and 112.5% respectively compared to the end of June.Compared to equity investment, technology credit remains an important item in need of innovation in technology finance.

The first article of the "Science and Technology Finance 20 Articles" is "Optimize the system and mechanism of technology credit," which clearly requires "to build a credit approval process and credit evaluation model suitable for the characteristics of technology-based companies, and to use information technologies such as artificial intelligence and big data to improve credit risk assessment capabilities."

As Zhou Ningren, a global senior director and partner of McKinsey & Company, and the head of financial institution consulting business in China, said in an interview with the New Finance Research Center of Southern Weekend, it is definitely difficult to break through within the existing framework, and innovation ability and mechanism are needed to drive.

What kind of approval process and credit evaluation model can release the technology finance capabilities of commercial banks? During the field research in Shenzhen by the Southern Weekend research team, almost all the commercial banks interviewed frequently mentioned "Technology Startup Pass" and "Take-off Loan". These are technology finance innovative products launched under the guidance of the Shenzhen People's Bank in the past year.

The person in charge of the Shenzhen People's Bank told the New Finance Research Center of Southern Weekend that the "Technology Startup Pass" launched on a pilot basis in March 2024 is a credit product for "portrait" of startup technology companies; the "Take-off Loan" was launched on a pilot basis at the end of 2023 and gradually promoted and upgraded. This is a credit business model to solve the problem of insufficient financing for technology companies in the rapid growth period. Both innovative services are credit loan business for technology companies in the entrepreneurial period, and both are unsecured and unsecured credit loan business. However, the service objects are different: "Technology Startup Pass" and "Take-off Loan" focus on startup small and micro enterprises and high growth period technology companies, respectively, to meet the financing needs of technology companies in different life cycles.

Dependence on the "list system"

From the perspective of product service objects, the service object of "Technology Startup Pass" is startup technology companies. Why do such companies become the focus? They are in the "first kilometer" stage of scientific and technological achievements coming out of the laboratory, and they are also the "vast majority" of technology companies. Only in Shenzhen, behind the existing 1028 national specialized and new "little giant" companies, there are more than 10,000 startup companies entering the Shenzhen specialized and new small and medium-sized enterprise list and 200,000 small enterprises of all kinds with intellectual property rights.

Although they have intellectual property rights or new products developed from them, technology startups are generally weak in strength, have not been verified business models, and are basically in the "burning money" stage. At this stage, technology companies are called the "valley of death" because of the high mortality rate.

In reality, whether a fund of several million or even tens of millions of yuan can be in place in time often determines the life and death of technology companies in the startup period. Under the traditional credit approval model, commercial banks that attach great importance to risk management and principal safety have a great risk in issuing loans to these startup technology companies, and lending is almost impossible. The problem of "difficulty and high cost of financing" for startup technology companies arises.

How to provide appropriate financial services for such technology companies is a global problem. The New Finance Research Center of Southern Weekend found that various lists of technology companies led by the government are the "honors list" of small and medium-sized technology companies in the eyes of commercial banks. Providing financial services according to the "list" greatly reduces the credit risk of commercial banks. This is also the mainstream business model of China's technology finance at present. The latest data from the central bank shows that as of the end of August, the loan balance of national technology-based small and medium-sized enterprises was 3.09 trillion yuan, a year-on-year increase of 21.2%.However, the issue of "financing difficulty and high cost" for a large number of smaller and micro technology companies outside the "list" remains severe. The dependence of commercial banks on the "list" also creates new obstacles for these small and micro technology companies when applying for credit from banks.

How to break through the "first mile"?

The New Financial Research Center of Southern Weekend previously investigated the "Suzhou Model" of technology finance and found that Suzhou uses the financial technology special funds as a conductor, "bundling" different types of large, medium, and small technology companies on the same industrial chain through the industrial cluster loan method. It requires commercial banks to treat them equally, "unveil the list and lend," "the same list, the same interest rate," forcing banks to reform their internal credit approval models. Under the premise of controllable risks, they achieve significant results in supporting credit for start-up technology companies, solving the "financing difficulty and high cost" problem. (For details, see "Technology Finance 'Suzhou Model': A Conductor Forces the Financial Industry")

Shenzhen has explored a new solution, namely "Technology Start-up Pass". The relevant person in charge of the People's Bank of Shenzhen introduced that starting from March 2024, the Shenzhen local credit platform and Beijing Bank Shenzhen Branch, Agricultural Bank Shenzhen Branch, and Shenzhen Rural Commercial Bank, etc., launched the "Technology Start-up Pass" business pilot. The Shenzhen local credit platform integrates and applies public and commercial data to generate a "Technology Start-up Pass Credit Comprehensive Interpretation Report" for the required companies, and commercial banks provide more accurate credit credit for companies based on this.

Specifically, various commercial banks in Shenzhen, through the local credit platform, fully explore the value of characteristic data such as enterprise business, social security, tax, and intellectual property rights, and use machine learning technology to construct a potential scientific and technological innovation company evaluation model, covering 3 major scoring systems and 12 dimensional indicators of enterprise fundamentals, talent competitiveness, and future growth.

Through algorithms, commercial banks can identify high-quality enterprises with similar characteristics to those within the "list", break the dependence on the "list", and serve a broader range of technology start-up companies. The platform can also learn from the development characteristics of more than two hundred dimensions of enterprises that have grown into "specialized, refined, and innovative" in the past few years, and use quantitative methods to mine the early scientific and technological innovation companies with the most growth potential in the future.

The relevant parties generally believe that this credit product dynamically, in real-time, and comprehensively assesses the scientific and technological innovation potential of enterprises from the perspective of "looking at the past, looking at the present, and looking at the future", fully explores the "stars of the future" in key areas and weak links, helps banks break the dependence on the "cultivation list", uncovers the mystery of "early, small" scientific and technological innovation companies, and breaks through the "first mile" of technology companies.

"The power of big data and algorithms"

"Unveiling the mystery of 'early, small' scientific and technological innovation companies, allowing banks to see the future of enterprises." The statement of the person in charge of the technology finance business of Beijing Bank Shenzhen Branch is typical. With the help of "Technology Start-up Pass", Beijing Bank Shenzhen Branch has changed the credit model for technology-based small and micro enterprises from offline to online, and the credit limit for a single enterprise has been increased to 10 million yuan. "Banks are more willing to lend to technology-based start-up companies, and are more willing to give higher limits. This is the power of big data and algorithms."At the very beginning of the pilot launch of "Tech Startup Pass," the Shenzhen branch of Bank of Beijing immediately granted a credit loan of 5 million yuan to a tech small and micro enterprise, Kechengda, in Bao'an District, Shenzhen, helping the company to accelerate its overseas trade procurement and "go global" in a timely manner. The person in charge of the company, He Weike, expressed to the New Finance Research Center of Southern Weekend that compared with traditional financing methods such as leasing, the "Tech Startup Pass" has a faster capital availability rate and lower interest rates, effectively reducing the company's financing costs.

Statistical data from the People's Bank of Shenzhen shows that as of the end of September, the "Tech Startup Pass" has served 14 startup tech companies, with credit loans amounting to 53.98 million yuan, with an average credit loan of approximately 3.8555 million yuan per company.

Researchers from the New Finance Research Center of Southern Weekend believe that compared with the "Suzhou Model" of tech finance, Shenzhen's "Tech Startup Pass" model, although starting late, has a smaller average loan scale (about half of the average loan amount of Suzhou's "Tech Loan Pass"), and is more directed towards "lending early and lending small."

Why is traditional credit "not enough to quench the thirst"?

Compared to the "Tech Startup Pass," another innovative model of tech finance in Shenzhen, "Take-off Loan," aims at tech companies that have passed the startup phase and achieved the "from 0 to 1" milestone, and are about to take off into a high-growth phase. Although companies at this stage have crossed the "valley of death," their products and business models must face the harsh test of the market and undergo the transformation from "1 to 100" under the law of survival of the fittest. This stage is known in the industry as the "Darwin Sea."

In the leap from "1 to 100" for tech companies, continuous financial support is indispensable. However, the People's Bank of Shenzhen found in its 2023 survey and research that the financing needs of tech companies at this stage are strong, but traditional bank credit models cannot keep up with the companies' "take-off" needs, with the most prominent issue being financing that is "insufficient and not enough to quench the thirst."

Why is it "insufficient and not enough to quench the thirst"? A manufacturing single-champion enterprise located in Longgang District, Shenzhen, is a private enterprise that has been focusing on the "headphone track" for 27 years, with independent research and development and production. "In recent years, we have been vigorously developing our own brand products, and their revenue and revenue share have been steadily increasing," the person in charge of the company introduced, "After the new product launch in 2024, market demand surged, and the company urgently needs to expand production capacity to cope with the additional orders. At the same time, in order to expand the brand promotion on online channels and build new production lines, the company is seeking larger-scale financial support."

Wings to Help "Take Off"

In June 2024, after learning about the company's situation, the Shenzhen branch of Minsheng Bank granted the company a loan quota of 50 million yuan through the "Take-off Loan," with a term of 1 year. After the loan credit was approved, the company quickly used 30 million yuan of this credit to timely solve the company's capital needs when developing new products.

Compared to the past, the credit quota and term obtained by the company this time have been greatly improved, while the loan interest rate has actually decreased compared to 2023.Why does the same company receive significantly different credit treatments in a short period of time? Li Jingxin, the president of the Shenzhen branch of Minsheng Bank, told the New Financial Research Center of Southern Weekend that the main reason is the launch of the innovative technology finance business model called "Tengfei Loan" in Shenzhen.

What is the "Tengfei Loan"? The person in charge of the Monetary Credit Management Office of the People's Bank of Shenzhen explained to the New Financial Research Center of Southern Weekend that this is a credit service model innovatively introduced by guiding financial institutions under its jurisdiction to solve the problem of insufficient financing for high-growth technology companies during their growth period. "The name 'Tengfei Loan' is chosen to provide strong and effective credit support for the takeoff of enterprises, making financial innovation the wings to help technology companies take off."

Where is the innovation reflected? Li Jingxin said that the first is the innovation of credit thinking. The bank's credit evaluation for technology companies has shifted from the traditional "looking at mortgages, looking at guarantees" to "looking at the future, looking at growth, looking at technology", paying more attention to indicators such as the company's core technology, intellectual property rights, and scientific research personnel, providing enterprises with higher amounts and longer-term credit services.

The second is the innovation of interest payment plans. In response to the unique financing needs of high-growth technology companies, the bank provides enterprises with a basic preferential interest rate at the beginning of the loan, allowing the bank to "give benefits" to enterprises first, supporting the rapid development of enterprises; after the enterprise's profitability improves, the bank appropriately raises the interest rate, meeting the financing needs of enterprises during the rapid growth period, while also sharing part of the benefits brought by the rapid growth of enterprises during a longer financial service period.

The third is greater credit support. Banks have broken through the constraints of the traditional credit system for small and medium-sized enterprises, and the credit limit for high-growth technology companies can reach more than 10 million yuan, with the loan period up to 2 years or more.

The pilot has expanded rapidly

Which commercial banks have participated in the "Tengfei Loan" pilot? The People's Bank of Shenzhen revealed that since the pilot started in December 2023, many commercial banks such as the Industrial and Commercial Bank of China, the Bank of China, Guangfa Bank, Ping An Bank, Shanghai Pudong Development Bank, Beijing Bank, and Hangzhou Bank's Shenzhen branches, as well as Shenzhen Rural Commercial Bank, have participated in the pilot.

Since 2024, more commercial banks have actively joined the pilot, and the pilot scope of the "Tengfei Loan" has expanded rapidly. By June 2024, 14 banks in Shenzhen had signed "Tengfei Loan" contracts with 33 enterprises, with a total contract amount of 810 million yuan, and a cumulative loan amount of 720 million yuan; by the end of September, 21 banks in Shenzhen had signed "Tengfei Loan" contracts with 51 enterprises, with a cumulative loan amount of 1.53 billion yuan. Compared with the end of June, in just three months, the number of participating banks, loan-receiving enterprises, and loan issuance scale have increased by 50%, 54.5%, and 112.5%, respectively.

Ruijun Semiconductor is one of the technology companies in this in-depth research, and recently received the "Tengfei Loan" issued by the Shenzhen branch of the Postal Savings Bank of China.

Researchers at the New Financial Research Center of Southern Weekend believe that compared with the "Suzhou model" of technology finance, the "Shenzhen model" of technology finance represented by "Technology Startup Pass" and "Tengfei Loan" is based on the bank's perspective to examine the difficulties and blockages of technology credit, and then propose solutions for the financing needs of technology companies at different stages of their life cycle. For various commercial banks, the "Shenzhen model" has a higher compatibility with the existing credit approval system and is more easily accepted by commercial banks, thus it is conducive to rapid promotion in a short period of time.How to Crack the Ultimate Contradiction of Technology Credit?

Manipulating the principal, interest, and term is merely the 1.0 model of Shenzhen's "Take-off Loan". What upgrades does the 2.0 model offer?

On July 16, 2024, the People's Bank of China in Shenzhen, in conjunction with the Shenzhen Municipal Local Financial Administration and the Shenzhen Municipal Science and Technology Innovation Bureau, organized a "Take-off Loan" business promotion meeting, with 28 banks in the city attending. Following this meeting, the "Take-off Loan" business model was upgraded and iterated - on the basis of the original loan period's revenue-sharing model, a new "current preferential loan + future loan priority" model was added, namely the "Take-off Loan" version 2.0.

What is the "future loan priority"? The relevant person in charge of the People's Bank of China in Shenzhen explained that technology finance innovation should focus on resolving the inherent contradiction that bank credit can only obtain fixed returns while technology companies have higher risks. This allows banks to share the development achievements of truly "taking-off" good companies within the scope of credit business through commercial agreements, to offset some credit losses generated by companies, and to help banks achieve a comprehensive balance of risk and return at a higher level. It also encourages banks to increase the intensity of upgrading technology credit supply.

To accelerate the filling of the supply and demand gap in technology credit, the People's Bank of China in Shenzhen guided commercial banks to add "future loan priority" related content in the agreement based on the experience of the "Take-off Loan" 1.0 version. By establishing legal documents between both parties, it is stipulated that if high-growth technology companies have further loan needs in the future, they will choose to continue cooperation with the "Take-off Loan" bank under the same conditions.

"The introduction and upgrade of the 'Take-off Loan' model is mainly the development and innovation of the concept," said the person in charge of the People's Bank of China in Shenzhen, adding that this is a new mechanism constructed by Shenzhen's banking industry based on financial laws and commercial rules. Currently, the Take-off Loan 2.0 version has been fully rolled out in Shenzhen, and all commercial banks can independently carry out related businesses.

It is understood that in order to continue to do a good job in the exploration of technology finance innovation and to form replicable and promotable technology finance practice experience, the People's Bank of China in Shenzhen is further expanding the specific model of the "Take-off Loan". Currently, efforts are being organized to polish the "Take-off Loan" 3.0 version, which is to achieve a closed-loop linkage of stock and loan in the bank credit link through "current preferential loan + future excess equity appreciation income sharing", providing technology companies with more diversified and relay-style financial services.

Almost all interviewed commercial banks also mentioned the Shenzhen Innovation Investment Group (hereinafter referred to as "Shenzhen Venture Capital"). This state-owned investment company, which operates at a high level of marketization, has almost become the flagpole for commercial banks to follow loans to technology companies. As long as the enterprises invested by Shenzhen Venture Capital, they will become the quasi-loan customers tracked by commercial banks. "This is an ecosystem, and we often hold technology company financing or related activities with them." At the same time, the financial risk compensation funds supported by the Shenzhen Municipal Government and professional guarantee institutions are also a support for commercial banks to dare to lend and be willing to lend.

The researcher of the New Finance Research Center of Southern Weekend believes that the "Shenzhen model" adopts differentiated credit support for technology companies at different development stages, which is in line with financial laws and commercial rules. It is conducive to commercial banks to reasonably and effectively control risks while doing a good job in financial support for scientific and technological innovation, and to achieve the sustainable development of technology finance business.