The design of the risk capital market in Slovakia

							  The design of the risk
capital market in Slovakia

       ESTER meeting,Tel Aviv
          January 12, 2005
                     Outline
• Current situation
• Lisbon strategy
• Business environment
• The design of the risk capital market in
  Slovakia
• Critical factors
• Effective Policy Design
                 National Agency For Development   2
                 of Small and Medium Enterprises
                 Supply side

• There is a very difficult access to finance for SMEs,
  particularly for innovative activities.
• Currently only one venture capital fund is active. It is
  based on public financial resources.
• There is no specific legislation concerning VC funds




                  National Agency For Development        3
                  of Small and Medium Enterprises
                     Demand side
•   Generally, the capacity and performance of R&D has decreased.
•   There is no communication between R&D institutions and producing
    companies.
•   Results of R&D are not transferred to firms. There is no system or
    market for knowledge products.
•   Less then 5% of innovating companies use research results from the
    Academy or universities.
•   firms are using for their innovation activities mainly their own financial
    resources
•   the amount invested is for the majority of companies less then 10% of
    their turnover.
•   Currently, there are no investors and financial resources willing to
    invest in this type of activities.

                         National Agency For Development                     4
                         of Small and Medium Enterprises
                Lisbon strategy
• The Government’s Lisbon Strategy focuses on enhancing
  capital market access for innovative SMEs
   – creating favourable conditions for the development of venture
     capital

   – to support venture capital for early-stage innovative companies

   – business environment and capital market reform
       • integration of the Slovak market into larger regional capital markets,
       • lifting of legislative and institutional barriers to commercial conditions
         and cross-border transactions
       • promoting of investments by institutional investors, e.g., banks, pension
         funds and insurance companies


                        National Agency For Development                           5
                        of Small and Medium Enterprises
        Business environment
•   All tax rates are 19% including corporate and individual income tax
    rates.

•   Transfers of tangible assets are tax-free.

•   No fiscal incentives.

•   Private limited company (s.r.o):
     – Minimum issued capital is 200 000 Sk (5 000 €)

     – Registering in the business register lasts 5 working days and costs are
       about 20 000 Sk (500 €).

•   Public limited company (a.s.):
     – Minimum issued capital is 1 000 000 Sk (25 000 €)

                            National Agency For Development                      6
                            of Small and Medium Enterprises
        Business environment
•   Bankruptcy and insolvency:
     – Slovakia provides mechanisms for the restructuring of companies facing
       financial difficulties.

     – Managers and directors of a bankrupt company will not face any limitations
       when getting involved in the management of another company.

     – It takes 2-4 years between the declaration of bankruptcy and the closure
       proceedings.

•   Court cases last 1-2 years.

•   Because of their long-term perspectives, pension funds and insurance
    companies should be free to invest in the asset class.



                          National Agency For Development                           7
                          of Small and Medium Enterprises
  The design of the risk
capital market in Slovakia
• institutional capacity building in Slovakia to introduce high
  quality services which supports Slovakian SME’s to access
  private funds
• to design and implement such a service so that it is
  embedded as an integrated part of Slovak SME support
  infrastructure
• the service simultaneously develops both the demand and
  the supply of private investment



                 National Agency For Development              8
                 of Small and Medium Enterprises
                              Outputs
•   Design of measures for creating risk capital market in Slovakia for supporting
    innovative firms, start-ups and fast growing companies by access to equity
    capital and related financial products. Measures should cover the supply side
    (i.e. design of private investment funds including incentives for private investors)
    as well as demand side (i.e. support measures for prospective companies).

•   Needs Assessment of the training needs to enable private investment in SME’s.

•   Design of tools and processes, which educates Slovakian SME’s to become
    investment ready.

•   Highly trained and accredited advisers to enable local delivery of tools.

•   A role out programme, which promotes and embeds this service in three sub
    regions of Slovakia.

•   Strategic guidelines for nation wide development providing                  long-term
    sustainability of the SME Investment service into all sub regions.



                           National Agency For Development                             9
                           of Small and Medium Enterprises
                     Activities
• To research detailed framework conditions of business
  environment with the focus on private investments.
• Surveys of SMEs about their opportunities to innovate and
  financial needs including equity capital investments.
• Analysis of conditions for investors in Slovakia and expected
  deal flow.
• To initiate risk capital market and to support and prepare
  companies for accepting successfully equity investments.
• Consultations with an experienced partner institution about the
  best design and completeness of financial schemes and support
  measures.

                     National Agency For Development           10
                     of Small and Medium Enterprises
         Critical factors

• Private Management of Venture Capital
  Funds.
• Leveraging of Private Capital.
• Attention to Deal Flow
• Legislation


                National Agency For Development   11
                of Small and Medium Enterprises
      Private Management of
      Venture Capital Funds
• government should consider directly increasing the pool of
  venture capital,
• any government-supported venture capital should be managed
  by private fund managers,
• the funds should have appropriate governance structure and
  can be targeted toward specific types of investments,
• the private fund managers should be free from government
  influence with regards to specific investment decision-making
  and should have incentives to act on a purely commercial basis.


                     National Agency For Development           12
                     of Small and Medium Enterprises
        Leveraging of Private
              Capital
• A public instrument for venture capital should aim to encourage
  private capital, especially from local long-term investors, to
  support innovative companies.
• Having private capital involved will enhance the effectiveness of
  the governance structures, further encourage fund managers to
  act in commercial ways, and improve the sustainability of the
  venture capital industry.
• Therefore, the government should develop some sort of fund of
  funds structure with government capital leveraging private
  capital.

                     National Agency For Development             13
                     of Small and Medium Enterprises
       Attention to Deal Flow

• A public instrument supporting venture capital could be paired
  with specific technical assistance or grant funding to directly
  commercialise R&D projects from the Slovakian academic and
  research community.
• This approach could increase the attractiveness of early stage
  investments for the venture capital industry while also increasing
  the efficiency of the grants from assistance programs by getting
  the private sector involved in the grant selection process.




                      National Agency For Development             14
                      of Small and Medium Enterprises
             Legislation

• It is necessary to incorporate in
  legislation changes concerning
  establishing and functioning of risk
  capital funds. This can be made in
  analogy with share funds.



              National Agency For Development   15
              of Small and Medium Enterprises
    Effective Policy Design

• Policy Tools for Private R&D funding
• Direct Government Support for R&D
• Intervention in the Market for Risk
  Capital Finance



              National Agency For Development   16
              of Small and Medium Enterprises
Sequencing policy
   intervention
  Business Environment / Financial Framework



                Intellectual Property Rights
            • Establish incentives for private R&D through IPR framework
    • Enhance capacity for enforcement of IPR through judiciary, patent office etc.




                       Innovative Capacity
           • Increase Pool of Scientists and Engineers through Education
               • Implement Science and Communication Infrastructure
                       • Fund pre-commercial basic research




      Grants, Credit, Technical Assistance
                • Increase Access to funding for ESTD entrepreneurs
           •Incubators, Technology Centres, Investor–Scientists networks
                                   •cdslkajdlksjd




      National Agency For Development                                                 17
      of Small and Medium Enterprises
Policy Tools for Private R&D
          funding
• direct government support for R&D investment by firms,
  typically at the early stage of the R&D cycle to determine
  commercial viability, through procurement preferences, tax
  incentives, direct grants or loans,
• intervention in the market for financing of innovative/
  technology-oriented     firms    that   are    engaging    in
  commercialisation of R&D through direct government
  funding or incentives for private venture capital funding.




                    National Agency For Development          18
                    of Small and Medium Enterprises
    Direct Government Support
             for R&D
•   The low levels of private R&D funding and the lack of
    commercialisation of R&D from the academic and research institutions
    suggest the need for some form of direct government support for early
    stage R&D activity by firms.
•   Matching grants that provide direct funding by government for R&D
    projects by firms are likely to be the most effective mechanisms to
    target directly the critical early-stage private R&D activity.
    Requirements for 50%+ matching of the grants by the firm, semi-
    independent selection committees, and requirements for partial
    reimbursement of the grants can all create incentives for the firm and
    the selection committee to emphasize projects with commercial
    potential.
•   While the government should, in general, be dissuaded from “picking
    winners” at the industry level, R&D support could target particular
    weaknesses in the innovation system such as university-business
    collaborations.
                        National Agency For Development                 19
                        of Small and Medium Enterprises
    Intervention in the Market
     for Risk Capital Finance
•   Government Risk-Sharing in the Private VC Industry by participating in
    a privately managed VC fund,
•   the government should remove itself from the investment decision-
    making but providing “quality certification” and encouraging other
    investors to participate in the industry,
•   the government provides additional “leverage” for private investments
    by subordinating government capital and/or capping the return from the
    government investments in exchange for imposing certain requirements
    (e.g., that a portion of the fund be invested in early-stage technology
    companies),
•   where a venture capital support program is appropriate this type of risk-
    sharing model is likely to be most effective because it depends on
    private sector decision-making and encourages private investment to
    balance government intervention.

                         National Agency For Development                   20
                         of Small and Medium Enterprises