Abstract: The effect of venture capital on industrial upgrading was discussed theoretically from the risk-return matching perspective, and the different effects of private sources and government-leading venture capital on industrial upgrading were compared. In addition, the internal mechanism between non-performing loans and industrial upgrading was also explained. Subsequently, the industrial upgrading index of 29 provinces in China from 2005 to 2014 was measured by entropy weight method, then the proposed theoretical hypothesis was tested by panel data model. It was found that government-leading venture capital will generate a series of horrible problems, such as soft budget constraint, multi-level principal-agent problem, performance evaluation difficulty, decision-making mistake, which is detrimental to industrial upgrading. Besides, it was also found that non-performing loans will lead to inefficient allocation of financial resources and hinder Schumpeterian dynamics of creative destruction, so it is not conducive to China’s industrial upgrading. Finally, some policy?suggestions are proposed considering related theory and Chinese economic reality.