Download Activity 2:

Proposal for the creation of risk bearing capital in the Slovak republic
BIC Bratislava is performing the ESTER project in the Slovak republic. The aim of
the ESTER project is to develop venture capital funds in the Slovak republic as they
are lacking and their absence is an obstacle for entrepreneurship development as the
access to the capital is especially for the SMEs rather limited and thus the dynamics
of their creation is below the potential and the social needs as the job creation in some
regions and the exploitation of the developed technologies is rather limited.
The general situation
Slovakia is one of the following states of the Czechoslovak republic and was for more
than 40 years negatively affected by the communist system, which has deeply
destroyed the economic and social system. The country became a NATO and an EU
member state last year but is still in a middle of the transformation process. The
industry restructuralisation is still ongoing; the former armament industry is being
replaced by the automotive industry. The country depends strong on foreign
investments, the GDP is reaches about a half of the EU average but is growing by 5 %
a year. The problem is however low investment into the R&D sector, just 0.6 % of the
GDP. The number of population is 5.4 million. The present competitive advantage is
skilled and low cost labour force and a favourable tax system with the flat tax – the
corporate tax, the income tax and the VAT is a flat tax of 19 %. The dividend tax is
0%. As Slovakia has joint the EU it is a gateway to another 24 EU member states.
The most aggressive developing sector is the automotive industry. There are 3 OEMs
in Slovakia- VW, PSA and Hyundai, manufacturing cars and Ford which will
manufacture the transmissions systems, 12 system suppliers and a lot of tier two and
three suppliers. The automotive sector will manufacture about 1 million cars a year
creating about one third of the GDP and Slovakia will have the largest car per capita
production in the world. The other important sectors are electrotechnics, ICT,
energetic and food processing.
The combination of skilled and low cost labour force is a temporary phenomenon
which has to be replaced by technology driven society and that is why Slovakia is
developing its National Innovation System both on counties and state level. All
counties are performing the Regional Innovation Strategies projects, co-ordinated by
the European Commission and the state government is developing the National
implementation of the Lisbon process, e.g. the increase of the competitiveness and
developing of the National Innovation System which transfer the current economic
system into a technology and knowledge based economy comparable with the original
EU member states. One part of this strategy is creation of risk bearing funds investing
in new and in expanding enterprises.
The stimulation of VC development through public co-investment proposal
BIC Bratislava negotiated the possibility of the risk bearing funds creation with the
local banks, with the regional government, with the Ministry of Finance and with the
Ministry of Economy. The Ministry of Finance agreed the participation of the public
sector based however on using the structural funds of the European Union. The
Ministry of Economy has asked BIC Bratislava to advice the Ministry of Economy in
elaborating the strategy for the venture capital funds creation. BIC Bratislava has
presented the Israeli experience of the Venture capital industry creation, the
experience of the Latvian Ministry of Economy with the VC funds creation and the
own results coming out of the ESTER project, e.g. the demand of Slovak SMEs for
equity financing. Parallel BIC Bratislava pointed the situation in Slovakia in the field
of equity financing as “market failure”.
The Slovak Ministry of Economy has overtaken the Latvian VC scheme. However,
influenced by Israeli VC funds creation, the proposal is to provide public money in
amount of € 100 million.
The main features of the Slovak VC funds creation are follows:
1. Creation of a public “Fund of funds”
A public “Fund of funds” will be created. This fund will be financed from public
resources between the years 2007 to 2013 (incl.) where € 30 million will come from
the Slovak state budget and € 70 million will come from the structural funds of the
European Union, e.g. the European regional development fund, based on NDP,
objective Regional competitiveness and employment . The funding should be linearly
divided in the seven following years (2007 – 2013). The amount of the public Fund of
funds should be € 100 million.
2. Investment of the Fund of funds in VC funds
The Fund of funds should be invested in planned 4 funds, where the maximum amount
of the public investment would be € 25 million per one VC fund. The contribution of
private investment according the fund categories should be as follows:
a) Minimal 50 % of the capital paid into new created VC funds
b) Minimal 70% of the capital paid of the existing VC funds, (e.g. max. 30% public
investment)
c) Minimal 30% in the biotech and hi – tech risk bearing fund
The share of public and private financing should be approximately equal, e.g. the
whole financial amount of the four planned VC funds should be around € 200 million.
The private investors will normally have the majority in the new created or in existing
VC funds but even if this would not be the case, the VC funds will be managed by
private investors. Similarly the profit would be preferably shared by private investors.
The “Fund of funds” would be invested into the private VC funds in a form of the
“state aid”. The program will last from 2007 to 2013 the financial means have to be
invested into the VC funds until the end of 2015. The VC fund will be active for
another 7 to 10 years.
The first investment of the VC funds should be maximum € 300 000, the total amount
of the investments should be maximum € 1 million.
After the investment exit the profit would be paid first to the private investors, the
private capital would be paid back to private investors while the public capital would
be paid back to the Fund of funds which would act as revolving funds.
There is a demand from the technology based SMEs is increasing and is far above the
proposed € 200 millions. On the other side there are more tasks to do in order to
develop the equity financing system in Slovakia. Following measures are to do:
3. The measures to be done
Planning the structural funds in 2007 – 2013 period
Planning the state budget for the respective period
More intensive support of R&D activities in Slovakia
Innovation support system development
Legislation adaptation (for banks, insurances and private pension funds and for VC
funds)
Risk sharing (e.g. the via the guarantee bank)
Support to technology based SMEs
Incubators for technology based start ups develpment