CHINA’S next billion-dollar startup could have backing from an investor with more money than Warren Buffett and a knack for promoting spicy duck-neck delicacies.

    Hubei’s provincial government is armed with 547 billion yuan (US$81 billion) earmarked for investments that can diversify a job base dependent on steel, mining and cars. And the bureaucrats in the heartland region along the Yangtze River are letting professionals do the work — allocating the money to investment houses Sequoia Capital LLP, TCL Capital and CBC Capital.

    Local governments across China are getting into the venture capital business, deploying a combined 3 trillion yuan as the country resolves to modernize the economy and reduce debt-fueled spending on infrastructure. The money is meant to spur development of biotechnology, Internet and high-end manufacturing companies that can replace the stumbling heavy industries sapping economic growth.

    “Our focus is more on the sector than the return,” said Wang Hanbing, who oversees US$6 billion as chairman of the Yangtze River Industry Fund, one of several using Hubei government money. “We encourage people to bring real jobs back to Hubei.”

    China is grappling with a profusion of economic difficulties such as declining exports, surging home prices and skyrocketing corporate debt. Gross domestic product grew 6.7 percent in the third quarter from a year earlier, maintaining the slowest expansion since 2009.

    The State Council signaled last month it had a bigger appetite for venture capital, urging local administrations to play a leading role and promising to level the playing field for foreign VC funds.

    Policymakers want to curb the proliferation of borrowing by regional authorities to pay for infrastructure projects that prop up growth. Local government financing vehicles borrow on behalf of governments, which often are barred from doing so.

    Through September, the debt issued by more than 1,600 such vehicles soared 47 percent from a year ago to 1.5 trillion yuan, according to Bloomberg Intelligence.

    Incubating startups also can create more landing spots for the 7.7 million college graduates expected to join the workforce this year.

    “You want the government to have some skin in the game so they will promote more progress and disruption,” said Hans Tung, general partner at GGV Capital in Menlo Park, California, and an early investor in smartphone maker Xiaomi Corp. “If the government doesn’t benefit from disruption, it’s not going to be good for innovation.”

    More than 780 local government funds are vying to seed the next multibillion-dollar startup like Xiaomi, online emporium Alibaba Group Holding or drone maker SZ DJI Technology. China is pushing to build at least one Silicon Valley in most of its 30-plus provinces.

    The Yangtze River organization chose to be a fund of funds. By using investors with a track record of hit-making, it wants to avert the pitfalls of nepotism and state-directed spending, Wang said. To minimize risk, the fund is banning investments in real-estate or infrastructure projects.

    “The government will not interfere with the investments of the teams, and the government will not recommend any projects to us,” Wang said. “Our fund needs to play by the rules of the market.”

    Putting public money into venture capital can be risky. More than 75 percent of 2,000 private startups studied by Shikhar Ghosh, who teaches management practice at Harvard Business School, never returned cash to their investors, he said. And the infusion of government money often distorts markets.

    (SD-Agencies)