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Venture capital bypasses Slovakia

Despite hard efforts to the contrary from one of the country's few venture capital funds, the corporate sector's reluctance to change its ways is seeing vital investment cash ploughed into Hungary and Poland rather than Slovakia.
The Slovak American Enterprise Fund (SAEF) said April 28 that last year it extended $1.96 million in loans and investment programmes to domestic firms. However, the nine firms which benefited from the SAEF help are, according to the fund's president, Iveta Griačová, the exception in this country.
"Demand among Slovak companies for own capital and strengthening their capital structure is not as significant as we would expect in an undercapitalised corporate sector," Griačová said.

Despite hard efforts to the contrary from one of the country's few venture capital funds, the corporate sector's reluctance to change its ways is seeing vital investment cash ploughed into Hungary and Poland rather than Slovakia.

The Slovak American Enterprise Fund (SAEF) said April 28 that last year it extended $1.96 million in loans and investment programmes to domestic firms. However, the nine firms which benefited from the SAEF help are, according to the fund's president, Iveta Griačová, the exception in this country.

"Demand among Slovak companies for own capital and strengthening their capital structure is not as significant as we would expect in an undercapitalised corporate sector," Griačová said.

The problem, she explained, lay in the mindsets of domestic companies and their attitude to venture capital. "It's difficult with people here. They want to own everything, they don't want to share. This is a problem," she said.

"People here want to own 100% of a company because that is their way of controlling it and feeling that they are the owners. They don't want you to see what is in their kitchen," she continued. "They also just don't want to share because they want to have this company as their own - they have not had a chance in the last 50 years to really own something."

The fund president said that there is a lack of quality management to actually execute plans for a company, with a general presentation of company facts being readily provided, but few hard numbers actually revealed when the plans are laid on the boardroom table for the venture capitalists to make an assessment.

Echoing a view held by many investors, both actual and potential, into post-communist states, Griačová said that Slovak firms often greet would-be shareholders in their firm with suspicion.

"They become concerned with what you are doing and why you would want to become a shareholder. They sometimes lose the point about creating partnerships and the value of having a new investor in the company," she said.

The SAEF was the first established of what Griačová said are four funds that now operate in Slovakia along with the EBRD's Post-Privatisation Fund, the Phare-funded SEED company and Genesis Capital that operates for Advent International.

While all four are still trying to pull capital into Slovakia, the country's problems in attracting venture capital have meant that funds from abroad have diverted their attention to neighbouring countries where venture projects have the opportunity to flourish.

"Hungary benefits from the incentives for all kinds of investment that the government there offers and also from what is a very different mindset," said Griačová. "Unfortunately here we don't have enough incentives."

Governments are unable to influence the flow of venture capital into a country in the same way that they can with direct foreign investments. There are not the same tax holidays or breaks that can be offered to funds with ready-cash to put into existing firms that cannot get loans to start-up or keep running.

According to Griačová, the government's lacklustre approach to actual legislation changes and improving the opportunities for entrepreneurs has held back venture capital.

"The governmnent has to change its attitude to entrepreneurs. It is very difficult for entrepreneurs to manage their businesses because there are so many bureaucratic obstacles and the taxes for companies are very high. When you look at the real taxes, with everything an employer has to pay included, it amounts to as much as 50%," the SAEF president said.

"It is difficult here, but Hungary and even Poland have very nice tax incentives so it is very easy for them to operate in those countires. Why would people come here to a country that is not very friendly to investors?"

The relationship between the governmnent, corporate sector and venture capitalists in Poland is an example of what needs to be done in encouraging venture capital inflows, according to both Griačová and analysts. In stark contrast to the situation in Slovakia, the Polish government has moved forward to embrace, rather than shy away from, venture capital.

"Generally the outlook in the government towards venture capital is positive," explained Urban Gorský, analyst for Poland at Commerzbank Capital Markets in Prague. He added that while there was still a slight perception of venture capital as a risk, the government and the corporate sector had made no resistance to businesses taking capital from venture funds.

Often held up as the entrepreneurial flag-bearer for the region as a whole, the attitude of the Polish businessman to venture capital is indicative of the failings of his or her counterpart in Slovakia.

"People there are much more business oriented. They would much rather have a smaller piece of something that is growing and they welcome the idea of a financial investor coming to a company and bringing new, fresh money," explained Griačová. "They understand that when you come and put a million dollars into a company and it becomes worth five million in five years, they are part of this, part of a real situation."

Many of the venture capital funds that could be interested in Slovakia are remitted to cover the whole of central Europe generally and because of this, Griačová said, Slovakia will often lose out.

Funds operating with headquarters in Warsaw and Prague often find it easy to invest in either Poland or Hungary with, Griačová said, Budapest providing some of the best incentives for venture capital investment.

"Slovakia is the smallest market [of the central European countries] and the political and economic situation is more fragile," said Griačova, adding that this often means that Slovakia is passed over in favour of the more developed markets of its southern and northern regional neighbours.

Despite the problems that the country faces in securing much-needed capital for its companies, venture capital in Slovakia, as in central Europe as a whole, is on the rise.

Following the fall of the Iron Curtain in central Europe in late 1989 venture capitalists, some analysts argued, saw the region as a risk but one worth taking with huge rewards possible for those who dared. Now, however, that interest has tailed off.

"Venture capitalists perceived central Europe as an interesting place in the early 90s," explained Miloš Božek, analyst at J & T Securities in Bratislava. "But now the region is a bit more stable and less adventurous," he added.

Griačová rejected the claim, pointing out that in Europe as a whole, including countries regarded as most stable such as Germany, France and the UK, the volume of venture capital investments grew 50% in 1998 from the previous year to 14.5 billion euros.

"There is still an increase in the amount of venture capital [in Slovakia] year by year," she added.

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