According to a World Bank paper, the volume of venture capital finance in developing countries has followed a steeply rising trend in recent years. The distribution is weighted towards expansion and mezzanine financing in developing countries in Asia, unlike in Central and Eastern Europe which is dominated by start-up and turn-around finance. The same paper cited that venture capital finance has a longer history in Asia, at over $6 billion.
This finding is quite surprising considering that the Philippines is very much a part of Asia. What the paper implies for our country is that we are very much behind our regional neighbors. This was verified in a previous study by this writer which showed that indeed the Philippines is a poor 13th in rank within Asia.
What can be done to improve the flow of venture capital fund in the Philippines? It must be remembered that venture capital financing operates in a high risk setting and expects to be rewarded by being exposed to such risks.
First, the business environment must be seen as at least neutral if not outrightly favorable in terms of features such as: competition policy, licensing and registration requirements, administrative fees, transaction law, intellectual and commercial property rights, tax and labor legislation, prudential regulation and supervision and free flow of information. The overall environment, political, social and economic, must be perceived to provide a fair chance that a successful enterprise will be richly rewarded.
But more important is that there must be an appropriate exit mechanism for the venture capitalist. In industrialized countries, this is typically provided by the prospect of a public offering via the capital market. Other exit mechanisms are management buy-outs, mergers and acquisitions, and its variations.
There are also cultural factors that must be considered. Filipino entrepreneurs, especially of the traditional SME variety, are often family enterprises very jealous of their control prerogatives. These entrepreneurs must start to adopt a broader perspective that will open up their eyes to the need to innovate rather than stagnate. In the medium term, there will be a scale beyond which all the family fortunes (with some notable exceptions, of course) will never be enough to sustain a reasonable growth momentum. After all, a venture capitalist does not only provide finance, but often sweetens this through professional management assistance.
Beyond macroeconomic growth and structural adjustments, however, government can accelerate the development of the venture capital business specifically for SMEs by promoting venture capital innovation and building institutional capability. This is not to say that government must do it alone. In fact, what seems needed is to determine how government can closely collaborate with the private sector to accelerate venture capital formation.
Venture capital finance is intermediated external investment in SMEs that offer potential above earnings growth coupled with above average investment risk. The investment process consists of raising a fund, then screening, selecting and monitoring investment. SB Corporation is presently studying this system and shall soon embark on a venture capital program in partnership with private venture capitalists willing to leverage their money through an equal risk/reward sharing arrangement. We believe this is the only way to do it – a public-private sector collaboration that will make available equity finance to deserving but finance strapped entrepreneurs.
The institutional desire of SB Corporation is to build on structures and networks already in place. We are looking for partners willing to share the risks as well as the returns on an equal footing basis. With more sets of professional eyes doing the investment screening and the multiplier effects of financial co-mingling, a public-private sector fusion can afford to be more innovative, bold and forward looking in venture capital deals.
(Mr. Benel Lagua is the President of the new Small Business Guarantee
and Finance Corporation. He is likewise active in the FINEX led Foundation
for Filipino Entrepreneurs. Feedback and comments are welcome
at benellagua@alumni.ksg.harvard.edu)
