Title: Research in Entrepreneurship and Government Policy: Making the Connection Vlerick Leuven Gent Management School Leuven, 30 September 2002 IS PRIVATE EQUITY CAPITAL REALLY THE SOLUTION?
1Research in Entrepreneurship and Government
PolicyMaking the ConnectionVlerick Leuven
Gent Management SchoolLeuven, 30 September
2002IS PRIVATE EQUITY CAPITAL REALLY THE
SOLUTION?
- Miroslav Glas, Mateja Drnovsek
- University of Ljubljana - Faculty of Economics
- Centre for Entrepreneurship Development
- Viljem Psenicny
- GEA College of Entrepreneurship, Piran
2CONTENTS
- Propositions
- Market for venture capital in Slovenia the
supply side - Slovenian SMEs attitudes to equity investments,
barriers, non-financial benefits expected - 5 case studies reviewed
- Conclusions and recommendations
3ISSUE SOURCES OF CAPITAL
CAPITAL
DEBT CAPITAL
EQUITY CAPITAL
OTHER LENDERS
BANKS
FOUN- DERS
BUSINESS ANGELS
VENTURE CAPITAL
European tradition the most important source
Is it the solution in a transition country?
4TRANSITION COUNTRIES
- Lack of the access to capital is a key barrier to
SME creation and growth - Banks are less used to handle SMEs
- There are but a few wealthy individuals ready to
share risks with SMEs - Entrepreneurial culture Be your own boss -
against share of ownership and control
WHAT ABOUT PRIVATE EQUITY CAPITAL THEN?
5SLOVENIA PROPOSITIONS
1 SME owner-managers mistrust venture
capital (VC) 2 In the past, VC played a minor
role and this is expected to be the case in
future 3 SMEs would appreciate non-financial
assistance from private investors 4 Legal and
financial (taxation) regulation does not
encourage VC investment
6MARKET FOR VENTURE CAPITAL DEVELOPMENT
SUPPLY SIDE
- 1990-94 the great wave of entrepreneurship in
Slovenia majority micro-businesses - 1989 equity investment ambition at Abanka
commercial bank 1991 Ljubljanska banka - both
divested into debt instruments - 1992 Slovenian Venture Capital Association
- 1994 govt Technology Development Fund
- 1994 Horizonte Venture Capital Fund
- After 2000 new venture capital funds
7VENTURE CAPITAL FUNDS EARLY 2002
Fund Horizonte Slovenian Fund Management
(SFM) Aktiva Ventures Prophetes Kmecka Druzba
Created 1994 1995 2000 2000 2001
Capital EUR Mill. 8,2(20) 20,5(?) 66,5
0,6(18) 15,5
Deals 11 11 1 n.a. 1
Venture stage Early Later Seed Seed Later
8SLOVENIA VENTURE CAPITAL - SUPPLY SIDE
- Few funds, only Horizonte VCF as a textbook VC
fund, no track record available for newest fund
to assess - Sources international invetsors, banks,
government, few private investors - Opportunity paths (a) dynamic SMEs with a global
strategy, (b) restructuring of existing firms
(spin-offs, MBOs)
9BARRIERS TO EXPANSION
- Lack of enterprising culture, few role models
- Small economy, few dynamic SMEs, closed capital
markets - Low efficiency in equity capital management
- Still large state ownership (banks, insurance)
- Lack of exit options
- Unclear ownership structure of capital
- Lack of institutional investors (pension funds)
- Non-transparent VC market, lack of information
- Inappropriate tax system and legal regulation
10METHODOLOGY
A. SURVEY OF SMEs 222 SMEs (mostly micro
and small) - national coverage, strong
share of manufacturing
B. CASE STUDIES (BEST PRACTICES) 5 case
studies from different sectors and 3
different VC funds involved -
entrepreneurs and investors inter- viewed
11SMEs SEARCHING FOR EQUITY INVESTORS
12WOULD AN OUTSIDE OWNER BOTHER THE ENTREPRENEUR?
13DYNAMIC ENTERPRISES
(in )
SLO 42 20 1 3 5
Europe 27 43 9 11 33
Start-up financing - entrepreneurs, teams -
family and private investors - formal equity
investors Recent growth financing - formal
investors Future investments - formal equity
investors
14SMEs IMPACT OF LEGAL AND TAX ENVIRONMENT
Encou- raging
Neutral
Deter- ring
(In )
Lack of tax incentives for investors High
income tax on capital earnings Complicated
legal ownership transfer
5 6 4
26 28 32
68 67 64
15SMEs IMPACT OF SUPPOSED BEHAVIOR OF INVESTORS
Encou- raging
Neutral
Deter- ring
(In )
Want to cream off high profit, threat to
growth Not willing to wait long for proper
returns Want excessive control for little
money
7 5 6
21 24 30
72 71 64
16SMEs IMPACT OF BEHAVIOR OF ENTREPRENEURS - 1
Encou- raging
Neutral
Deter- ring
(In )
Want luxury cars, mobiles at the firms
expenses Do not feel confident - lack of
financial, legal knowhow Lone-wolf
management style Fear of information leaks Do not
want to grow
5 5 13 5 8
35 29 28 36 36
60 66 59 59 56
17SMEs IMPACT OF BEHAVIOR OF ENTREPRENEURS - 2
Encou- raging
Neutral
Deter- ring
(In )
Want to hide profits through accounting
tricks Want to preserve existing (comfortable)
life-style Want total control over the
firm Negative general attitude of SMEs to
equity investment
9 17 29 48
42 37 21 39
49 46 50 13
18SMEs BARRIERS IN THE FINANCIAL MARKET
Encou- raging
Neutral
Deter- ring
(In )
Lack of options to sell investors
share Higher returs on other financial
investments Level of trust between
entrepreneurs and investors
4 18 60
48 41 23
48 41 17
19DIFFERENCES AMONG ENTREPRENEURS
- No difference for years of experience of
entrepreneurs - Entrepreneurs with higher
education are more critical in assessment of
these factors for all groups (significant for
7 factors) - Most critical are entrepreneurs in
firms with 7-12 years of existence, least
critical are younger firms (significant for
6 factors)
20SMEs FORM OF NON-FINANCIAL BENEFITS EXPECTED
FROM VC
Less imp.
Impor- tant
Very imp.
(In )
Assistance for entering new markets Access to
key market information New product/service
ideas Managerial know-how Business relationship,
networking
2 4 5 3 4
16 22 22 30 30
82 74 72 67 66
21SMEs FORM OF NON-FINANCIAL BENEFITS EXPECTED
FROM VC
Less imp.
Impor- tant
Very imp.
(In )
Search for skilled professionals Consulting
support Psychological support in case of hard
times Protectors with their expe- rience and
coolness Assistance in the internationa-
lisation of business
13 15 19 18 16
29 31 29 28 34
58 64 52 54 51
22SMEs FORM OF NON-FINANCIAL BENEFITS EXPECTED
FROM VC
Less imp.
Impor- tant
Very imp.
(In )
Informal promotion of the firm Negotiating with
suppliers Support in acquiring bank
loans Assistance to attract other private
investors
12 23 27 41
43 33 35 36
45 45 38 23
23CASE STUDIES SME PROFILES
Firm ALFA BETA GAMMA DELTA ETA
Year 1998 1992 1999 1997 1983
No. of founders 6 2 6 4 2
Business Biotechnology Trade in cons.
electronics Internet tech Biotechnology Nautical
devt and design
Sales 2001 0,77 56,50 1,10 0,50
9,00 Mill
Empl. 2001 15 238 35 12 80
24CASE STUDIES INVESTMENT
Firm ALFA BETA GAMMA DELTA ETA
Year 1998 1995 2000 1997 2001
Capi- tal 1,9 0,3 1,5 1,0 6,0 EUR Mill
VC Fund Horizonte Horizonte IMP
(intl) Horizonte Kmecka druzba
VC share 50 25 76 75 50
Venture stage start-up growth early start-up l
ater
25CASE STUDIES EXPERIENCE
Firm ALFA BETA GAMMA DELTA ETA
Exit year - 1998 2002 - -
Eval. SME/VC / / /- / -?/-? (early)
Reason to attract VC Only possibility (bank
negative) Investment in mega shop No
specific reason (opport.) Only start-up possibilit
y Key technology investment
Financial option None Bank Bank None Bank, fou
nders
26SOME FINDINGS FROM CASE STUDIES
- All cases different, some atypical early entry,
majority VC stake, quick exits - VENTURE CAPITAL KEY FOR EXPLOITING BUSINESS
OPPORTUNITY AS START-UP OR GROWTH - Young firms entrepreneurs appreciated financial
and other assistance - training in real
business mature firm clash in culture between
entrepreneurs and VC
27GENERAL CONCLUSIONS - 1
1. VC market is in the nascent phase - few VC
funds, managers need experience, entre-
preneurs reluctant - some high-tech start-
ups or fast-growing firms recognise VC as
the only real options due to high risks
2. For growth oriented, dynamic SMEs venture
capital is a viable option. However - it
is time consuming (due diligence,
negotiations) - a useful exercise both in
financial aspect and for other benefits
28GENERAL CONCLUSIONS - 2
3. VC contributed to building (global)
legitima- cy of businesses and to fast
development of business philosophy and
focus, positively influencing organizational
structure and culture.
4. Slovenian start-ups have identified several
excellent business opportunities - however
without dedicated growth focus and global
reach they could not attract VC.
5. Tasks business legislation / tax incentives
/ management reward systems / exit options
/ matching govt (public) fund