Financial injection from venture capital fund - New way to finance small and medium-sized enterprises in Serbia

Namely, funds would be placed through regional fund which should start operating mid this year, Ana Trbovic, former consultant to the Minister of Economy, said in late November last year.

As it was said at the regional conference of the Enterprise Europe Network at the Serbian Chamber of Commerce, the Fund will provide additional favorable funding sources, which is currently one of the main obstacles to the development of domestic economy and the greater competiveness of SMEs in particular.

As Trbojevic explained, the European Bank for Reconstruction and Development, the European Investment Bank and the European Investment Fund will participate in the fund while the countries in the region will set aside smaller portions of funds from their budgets.

- Serbia has already earmarked some EUR 300,000 in the budget for the Fund – Trbovic said and pointed out that the benefits from the Fund would be much more valuable than the budget investment in its activities.

She specified that it was not a classic way of funding as it did not involve bank loans but investments of an investment fund in shares, i.e., stake in the company, as well as the provision of consultants for companies.

Money in exchange for ownership stake

Vladimir Vuckovic

What is, in fact, venture capital? Venture capital is an alternative funding source for a company for which venture capital fund estimates it has a good chance, innovative and entrepreneurial potential and business prospects to develop, grow and become competitive as a significant entity which can generate high rates of return on invested capital. When the Fund provides funds to a company, it acquires a stake, i.e., shares, and thus the ownership and managerial rights and profit on that basis. On the other hand, the venture capital fund bears all the business risk.

When, after a few years, a business develops and achieves certain business success, overcomes crisis or reorganizes itself, the Fund usually opts for “stepping out of” the company’s ownership structure . Where is the profit of the Fund? Namely, through successful disinvesting, the venture capital fund generates profit through price difference (capital profit).

Waiting for elections

Vladimir Vuckovic, a member of the Fiscal Council and an editor of the magazine Makroekonomske analize i trendovi (Macroeconomic analysis and trends) - MAT, believes that the setup of a venture capital fund in Serbia was a good idea of the previous Economy Ministry.

- When it comes to risk capital funds, such as venture capital funds, we cannot expect to move the entire economy, but they could be an important factor in the investment milieu – Vuckovic says to eKapija.

He adds that, however, it is a question what will happen with all the initiatives of the Ministry of Economy.

Vladimir Vuckovic

- It would be good to keep the idea and that planned amount for this fund stays in the revised budget.

On the other hand, Vuckovic does not believe that the topic of setting up the Venture Capital Fund will be on the agenda before the elections “because even some more important things than this one are stopped”.

Chance for SMEs

As it was said late last year at the conference of the Enterprise Europe Network, money from the fund can be provided for venture capital, guarantees and technical assistance but it was not defined how much money each country form the region will get.

- First of all funds will be available to SMEs but partly to large companies as well – Trbovic said and added that manager of the fund will be private company which will soon be selected and which will choose projects which will get funds on commercial basis.

The ex Ministry of Economy, headed by Sasa Radulovic, expected a huge interest in this kind of funding and invited clusters and business associations to inform companies about the funding in order to prepare projects on time.

Setting up venture capital funds will generate terms for the execution of new activities of the current Agency for Export Insurance and Funding (future Agency for Economy Funding and Rehabilitation) supervised by the Ministry of Economy, which are included in the Draft of the Law on Amendments and Supplements to the Law which governs this agency, Milan Stefanovic wrote in an article for the latest issue of MAT. He adds in the same text that the Draft Law stipulates that the Agency invests in venture capital funds in line with the law.

Experience from the world

Venture capital is very developed in the world (USA, Great Britain, the Netherlands, Germany, etc.) where a large number of venture capital funds operate and where there is a developed economic-financial and legal practice as well as theory. International development institutions such as the European Bank for Reconstruction and Development (EBRD), European Investment Fund (EIF) and International Finance Corporation (IFC), as part of the World Bank Group, play an important role in the field of venture capital investments.

The most important venture capital association is the European Private Equity and Venture Capital Association (EVCA) which has a very rich experience.

Jelena Djelic