NOTHING VENTURED, LITTLE GAINED

 

IN T&T BUSINESS CULTURE

THAT FEARS RISK,

MAGIC TOUCH SCHEME SEES SLOW START

 

By Sherry Ann Singh

Business Guardian

September 14, 2000

Page 1

 

In the United States, it was the magic formula that transformed smart ideas into global technology giants such as Microsoft and Compaq.

 

But at home, venture capital financing is having a less than expected impact on business activity.

 

Though it has proven to be a marvelous financing option for a handful of entrepreneurs in other places, Trinidadians have been slow to respond to the venture capital concept.

 

"That's because of the risk aversive nature of the culture," says Judith Mark, administrator of the Venture Capital Incentive Programme (VCIP).

 

Mark, the 42-year-old single mother of one who succeeded Charles Maynard as administrator about a year ago, says few local entrepreneurs are enterprising enough to engage in that type of high-risk capital financing.

 

Venture capital is a form of long-term investment also known as patient or equity capital that is typically invested in businesses with potential for high growth and profitability.  In addition to capital, the venture capital investor also brings hands-on managerial expertise to the companies invested in.

 

The focus is on non-traditional sectors of the T&T economy.

 

"Businesses that have the potential for growth, but which for some reason or the other could not tap into traditional sources of finance either because of the risk of the project or lack of collateral to support debt financing, are targeted," said Mark.

 

The programme was launched four years ago in 1996, but to date there are just three venture capital companies in existence.

 

These newly formed companies are set up expressly for making investments under the Venture Capital Act of 1994, through funds, which they set up.  The three funds in existence are Add venture Capital (formed by CL Financial), Prudent Venture Capital (formed by a group of private individuals) and the most recent, First National Venture Capital Company, which was set up by the First National Credit Union.

 

From these funds, money is invested in "qualifying investee companies" (QICs), which are small or medium-size companies that are eligible for venture capital investments under the Act.  In return for their investments, venture capitalists get dividends from the net income of the "investee" companies; from capital gains through the sale of shares that have appreciated in value; and through a tax credit offered of up to 35 percent of the investment.

 

Still, of the $7 million in funds under management, only $2.6 million or 37 percent has been invested in QICs.

 

Again, it’s the high risk factor that deters investment. 

 

"It's like playing mas and fraiding powder," Mark said. "They (investors) want calculated risks."

 

The result is a wide gap between the numbers seeking out venture capital and those who are beneficiaries of the programme.

 

To date, 460 applications for financing have been reviewed by the VCIP, of which just five have been successful.

 

Mark added that some applications may have also gone directly to the venture capital companies, which would make the number of applicants even higher.

 

"There are a number of intelligent people here, software developers and so with great ideas, but no financing, who are not benefiting from the programme.

 

"In the Budget the minister spoke of credits for investment in sports, arts, culture.  He should have included technology and investing in a venture capital fund.  We have a responsibility to create the appropriate environment."

 

A management studies graduate with over 14 years experience in finance and management, Mark held key positions in several organisations before coming to the VCIP.  However, she sees her present job as her most challenging.  She said the role of the VCIP, an arm of the state, is to regulate the operations of the players under the programme and facilitate the process.  It has been tackling the lack of participation through education and awareness.

 

The emphasis is on changing cultural attitudes.  A school's essay competition has been launched with this in mind.  Additionally, regular presentations are made to schools and chambers of commerce, and training sessions provided for entrepreneurs and intermediaries.

 

Mark said the youth in particular have to be targeted.  Prime Minister, Basdeo Panday, she thinks, perhaps had the right idea when he spoke of bringing successful entrepreneurs into the classroom.

 

"We need to get people thinking about entrepreneurship and that is not being taught at all in schools."

 

In spite of that, there is a perception, too, that the onus is on entrepreneurs to make themselves ready for financing.

 

But many companies fail to qualify for financing because they simply do not meet the requirements, Mark noted.

 

Venture capitalists look for companies with significant potential for growth and profitability, good management and the necessary management systems.  "Some of the companies making requests may not qualify because they may not be structured to receive venture capital companies, they have poor record keeping or their ideas cannot sell."

 

Mark added that intellectual property rights need to be addressed since a number of people are fearful of putting forward their ideas an entering into partnerships, having been previously burnt.

 

"It's very expensive to patent an idea…and people don't know how to do it," she said.

 

A further challenge is ownership, which is closely guarded in societies like ours.  But though venture capitalists provide finance for a stake in the business (up to 50 percent of voting shares), she said there is a measure of comfort because their investment is restricted to a 10-year period.

 

As for the performance of QICs, Mark said they are doing "quite well".  She said though it is unlikely that they will pay dividends for about four years, "The focus cannot be short term.  We look at growth."

 

With just 10 employees at the government-funded office (administrator, four professionals, and five support staff), Mark believes much has been accomplished in creating venture capital awareness.  But there is much more to achieve.  "I will not be satisfied until I see more business activity," she said.

 

There are already positive signs.

 

She says there has been a marked increase in activity, and entrepreneurs are more willing to relinquish part ownership of their businesses.

 

And the local programme has had greater success than similar ones in Barbados and Jamaica.

 

At the same time, Mark warns that in no part of the world can venture capital develop solely through a venture capital programme.

 

"What is required is a holistic approach.  We need to develop entrepreneurship and innovation," she stressed.

 

TIED DOWN BY LEGAL ROPES

Though the cultural environment influences behaviour toward venture capital participation, the law also operates as a restricting factor.   Indeed, VCIP administrator Judith Mark blames the legislative confines within which the programme operates for its only moderate take-off.   To remove flaws, which have been detected, the venture capital legislation is at present being reviewed by a Cabinet-appointed task force chaired by Vishnu Ramlogan.   "The Act tends to be restrictive in terms of how wide the net in terms of investee companies," Mark said.   With the traditional over-dependence on energy-based industries, the Act has excluded investments in natural resources extraction, manufacture of petro-chemicals, financial services, non-value added retail, speculative property management and customs brokerage.   "There's a view that, instead of excluding all energy-sector type activity, we may want to include some energy-related companies, but put a cap in terms of ceiling."   Hence amendments are being pursued for expanding the types of businesses that qualify, as well as raising the ceiling on the capital base of the investee company from $3 million to $50 million.   "Our thinking is that Venture Capital, by nature, is for companies that have the potential for tremendous growth.  If you keep that ceiling so small, to the venture capitalist the project will not be attractive and will not be viable and will not generate significant returns synonymous with venture capital financing."   Similarly, the $20 million cap on the size of a venture capital fund is also being reconsidered.   "One hundred million would be more acceptable.  It would allow the investor to spread his portfolio and reduce the element of risk."   The task force is also looking at enhancing the type of instruments used in financing projects to include preferred stock and quasi-equity instruments with the common shares now used, so as to give the venture capitalist greater investment leverage.   Mark said further that the Act should have requirements for a fit and proper test for fund managers so as to attract people with the necessary skills.   It did not help, she said, that the Act required the director of a venture Capital Fund to reside in T&T for the first six months after it has been launched - a stipulation that should be removed from the legislation she argued.   Objection has also been made to the restriction on the number of employees of a QIC to 75 persons.   "While we have an act that speaks of employment creation, on the same hand it almost restricts further employment.  We want to change that," the Administrator said. (SAS)

                    

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