Imacs 2016 imecs 2016 Proceedings (Preliminary version) of the 4
THE STRUCTURE OF VENTURE CAPITAL RAISING BY COMPANIES IN POLAND AND CENTRAL AND EASTERN EUROPE: SELECTED ASPECTS
Download 2.73 Mb.
|
- Navigate this page:
- 220.Introduction
- 221.1 Criteria for selecting the capital structure of companies
- 222.2 Development of the private equity market in Poland and Central and Eastern Europe
- 223.3 Venture capital market in Poland and in Central and Eastern Europe
- 224.4 Company age as a possible determinant of financing source selection in light of the authors’ own research
- 225.Conclusion
THE STRUCTURE OF VENTURE CAPITAL RAISING BY COMPANIES IN POLAND AND CENTRAL AND EASTERN EUROPE: SELECTED ASPECTS219.Joanna Małecka, Teresa ŁuczkaAbstract The ability to identify needs and accurately define ideas, willingness to take risks and the capability of taking up financing options available in the market are the features of every modern entrepreneur. Although capital market instruments are becoming increasingly popular, company owners still prefer classical money market instruments offered by the banking sector. Venture capital funds such as seed, start-up or later-stage venture funds are not a widespread source of development capital for most entrepreneurs in Poland and Central and Eastern Europe. This article outlines research results addressing the volume and number of funds raised in the countries of Central and Eastern Europe as well as their popularity among companies of different sizes. The results presented are based on source data from annual reports and publications that have been produced and made available by capital market institutions and from the authors’ own research on Polish entrepreneurs. The scope and volume of venture capital used by companies for development are characterised, building on a linear regression analysis and comparisons. The article also attempts to determine the development trend of possible sources of financing through the capital market instruments (venture capital) and poses the research question about entrepreneurs’ current awareness of opportunities to diversify companies’ financial portfolios. Key words: private equity, venture capital, source of financing, start-up, later-stage venture JEL Code: L25, O12 220.IntroductionCapital has for many years been one of the most polysemic economic categories widely debated and disputed both from the theoretical and practical perspective, by, inter alia, A. Smith, J. Robinson, F Modigliani, M.H. Miller, F.J. Busse, R. Milewski in foreign literature, and by A. Duliniec, J. Grzywacz, J. Czekaj, Z. Dresler, A. Bielawska, T. Łuczka in the Polish literature on this topic. From the point of view of financial management, capital is a source of investment financing for companies. Therefore, capital ownership and opportunities to diversify investment portfolios of companies that wish to develop effectively in today’s market economy are becoming so significant (Modigliani & Miller, 1958, pp. 261–297; Muller et al., 2015; Myers, 1983, pp. 575–592; Acharya et al., 2015, pp. 551–552). Globalisation and internationalisation processes, which are affecting all macroeconomic indicators in individual European economies, are important, yet they after all influence the way companies choose their funding sources and their credit mentality much less than they affect GDP growth. Private equity solutions are relevant for all companies and their successive phases of development. For SMEs, venture capital is one of such riskier capital solutions. Investment is then made primarily in new companies having innovative projects that may achieve sustainable and dynamic growth thanks to the investment made by a fund (including the most advanced technologies in the high-tech group) (Gompers & Lerner, 2001, pp. 145–168; Małecka & Łuczka, 2016, pp. 93–110). The market value and growth of such companies depend on the funds so raised for the development of any young firm or a company just being formed. In the absence of collateral or credit history, such a company faces one of the fundamental barriers described by J.K. Galbraith, namely credit discrimination (Łuczka, 2013; Beck, 2006; Galbraith, 1957). The main goal of funds is to help developing businesses in the difficult start-up and growth stages. Venture capital is one of three major segments of the private equity investment alongside buyout and mezzanine capital. Buyout capital, however, concerns the acquisition by a fund of all or part of an existing business, usually together with its current or new management. Mezzanine capital is, in turn, defined as a high-risk debt provided to an enterprise for implementing its investment project and ensuring profit sharing if the project is successful. Given that, how valid are decisions on sources of financing entrepreneurship? Why are private equity funds still so rarely used by entrepreneurs? What is their structure like and which form is now the most popular, and is entrepreneurs’ awareness of opportunities to raise funds for development through the capital market sufficient enough to make rational business decisions? This article attempts to identify the development trend of possible sources of financing through the capital market tools such as venture capital that are still less frequently used by entrepreneurs, in particular SMEs. The data on Central and Eastern Europe0 has been supported by the outcomes of the authors’ own research on the selection of financing sources conducted among Polish entrepreneurs. 221.1 Criteria for selecting the capital structure of companiesDespite questions asked by F. Modigliani and M.H. Miller in 1958 and by S.C. Myers, the president of the American Finance Association, in 1984, and attempts made by R. Elsas and E. Florysiak in 2008, now, after almost 60 years, the question of how companies select financing sources still lacks a clear-cut answer. Generally, the relevant literature distinguishes two essential trends: (1) referring to the link between capital structure and the theory of finance and all processes within a company, which has attracted such supporters as S.A. Ross, R.W. Westerfield and B.D. Jordan, and (2) putting emphasis on the structure of the different financing sources, which can be found in the research by F.J. Busse, J. Grzywacz, T. Łuczka. Nevertheless, in all cases, regardless of whether capital determines the structure of a company’s finance or external factors condition its capital form, the criteria for classifying the decision on financing source selection are usually very similar (Figure 1).
Solutions such as venture capital have many advantages: (1) they are an effective source of financing, (2) they minimise the cost of capital (no interest), consequently improving financial liquidity, but at the same time (4) they undermine the owners’ independence. According to Polish Agency for Enterprise Development data, this concerns primarily companies classified as SMEs, which account for 48.5%0 of the Polish GDP, meaning that they generate every second Polish zloty, with the smallest companies contributing approximately 30% to this macroeconomic indicator0. According to Eurostat data, the structure of gross value added generation according to prices of factors of production in the enterprise sector by company size is similar in Poland and in the European Union countries: Poland: 44%, EU-28: 46%0. Even the growth structure of economic sectors in Poland and in European countries, though differing in percentages, is identical to their internal shares of the economy – successively: services, industry, trade and construction0. Why then do entrepreneurs seeking modern sources of financing so rarely resort to the capital market? Why do the approach to and opportunities to raise capital differ so considerably between neighbouring national economies?
Given the specificity of the sector of companies seeking opportunities to cooperate with private equity funds, it should be highlighted that funds have different legal forms and structures and are not necessarily registered in countries where a given fund exists. The statistical data presented in this article concern the breakdown into sectors and countries according to where funds are invested rather than where funds that enable development through establishing cooperation are based. Private equity fundraising in Central and Eastern Europe increased its share more than threefold in 2014 (from EUR 409 million in 2013 to EUR 1.47 billion in 2014) (EVCA, 2015). In comparison to 2007, there was a marked decrease of 63.5%, with a 38% drop in the number of funds raising such capital. Venture capital funds were valued at EUR 176 million in 2014 as compared to EUR 62 million in 2013. This amount was 2.8 times higher and represented a considerable 12% of funds raised in CEE in 2014. When analysing the financing according to company development stage (stage focus) in the period considered, it was noted that buyouts0 invariably accounted for the largest share of the total private equity market. Venture capital funds ranked third, after the growth capital (Table 1). Tab. 1: Private equity structure in Central and Eastern Europe in 2007–2014 [in %]
Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. 223.3 Venture capital market in Poland and in Central and Eastern EuropeThe analysis of statistical data on sources of entrepreneurship financing through venture capital published by EVCA in cooperation with PEREP_Analytics in May 2015, showing the development of this capital market sector in the world in 2014 (2013), is clear: Central and Eastern Europe’s share is only 0.9% (1.0% in 2013), although it should be noted that unclassified sources of investment capital represented a very large proportion of 6.1% (0.6% in 2013). Even if both results are taken into account, Central and Eastern Europe increases its share from 0.9% in 2014 to 7.0%, underperforming as compared to even one of these: Germany and Scandinavian countries (Figure 2). Fig. 2: Fundraising geographic breakdown of venture capital – sources of funds in 2014 (2013) [% of total amount] 
Source: EVCA 2015 and PEREP_Analytics An in-depth analysis has shown that it is impossible to define a specific trend as regards the amount share of investment in successive stages of company development. In CEE, solely one correlation can be clearly noticed, namely that for early-stage venturing, specifically seed funds (Figure 3). Companies that seek financing in this way were and are far less numerous than those using start-up or later-stage venturing solutions. Fig. 3: Dynamics of amounts of venture capital funds in Europe and Poland in 2007–2014 (in thousands of EUR).  
Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. This correlation holds true both for the amount share of development capital raised and for the activity of funds cooperating with companies with certain survivability status, both in CEE and in Poland (Figure 4). Fig. 4: Dynamics of the number of venture capital funds in Europe and Poland in 2007–2014.  
Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. In 2014, European investors were mostly interested in start-ups representing the 52% share and the amount of EUR 1.9 billion, with 1930 enterprises involved accounting for the 60% share of venture capital investments in Central and Eastern Europe (Table 2). In Poland, this interest focused on later-stage venturing representing the 48% share with EUR 10.5 million invested in 16 companies. It should be stressed that start-up funds were definitely the prevailing solution in Poland as from 2010 (Figure 4). A prediction may thus be made on the basis of the activity of young entrepreneurs seeking development opportunities to raise capital for the development of their own enterprises beyond the traditional banking options (see: Gilson & Black, 1998, pp. 243–277; Vanacker & Manigart, 2013). Tab. 2: Structure of venture capital funds by stage of companies financing in Europe in 2007–2014 [in %].
LSV – Later-Stage Venturing, E – EUROPE, PL – POLAND Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. An in-depth analysis has revealed that Polish entrepreneurs do not exploit the full potential of the financial market (Figure 2). All venture capital funds used in 2014 amounted to EUR 22 million, representing only 0.61% of funds invested in such development in CEE (EVCA, 2015). Generally, the venture capital market is not easy to predict, both in terms of the amounts raised and the number of funds investing money to support economic development (Figure 4). Analysing further statistics on all forms of investment offered, later-stage venture definitely achieves the largest amounts for development in Poland (Figure 3). The situation in CEE is different. The results after 2009 allow defining further research questions: (1) are those companies with such a well-established financial position – of at least 5 years – and such high profitability that funds and investors are more willing to contribute larger amounts of co-financing, (2) do company age and maturity match the mature age of the company owner who has adopted modern solutions falling within the scope of capital alternatives that encourage funds to invest, and (3) is it perhaps an established market position resulting from the company age – more than 5 years – that makes the owner a reliable partner confident about his/her decisions and choices in a company that shifted its SME mentality of autocracy and short-term liabilities towards a specialised managerial structure appreciated by funds? This issue is definitely worth exploring further and more research should be done on companies with 20–99 employees since small, medium-sized or large enterprises are classified differently by investors and legal regulations in force in the EU-280. Studying the performance of SMEs in 2007–2014, a steady trend can, however, be observed as regards the share of companies involved in financing (2007: 95%; 2008: 97%; 2009: 98%; 2010: 98%; 2011: 99%; 2012: 99%; 2013: 99%; 2014: 99%) and, from 2009 onwards, as regards the amounts of financing obtained by such enterprises (2009: EUR 3.5 bn, 2010: EUR 3.4 bn, 2011: EUR 3.5 bn, 2012: EUR 3.1 bn, 2013: EUR 3.3 bn, 2014: EUR 3.4 bn)0 (Figure 5). The average amounts of development capital raised through venture capital funds by SMEs are shown in Figure 6. Fig. 6: Average size of investment obtained by SMEs in Europe in 2007–2014 [in thousands of EUR]. 
Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. Fig. 5: Structure of venture capital used by amount and number of companies in 2007–2014 [in%] 
* Breakdown of SME entrepreneurs as preferred by funds’ investors: 0–19; 20–99; 100–199; 200–249. Source: the authors’ own elaboration based on data from the European Private Equity & Venture Capital Association. 224.4 Company age as a possible determinant of financing source selection in light of the authors’ own researchThe owner’s equity is a special feature affecting most commonly used possible sources of financing for SMEs (Łuczka, 2013; Małecka & Łuczka, 2016, pp. 93–110). This was also confirmed by the authors’ own research (Table 3). The following correlation is visible: the bigger the company is, the more limited use of its own equity. The amount of investment expenditure in Poland shows no steady trend, yet it did not fall below the level reached in 2009 (Małecka, 2015, p. 50). The larger the studied company was, the wider the range of other possible external financing options, with commercial credit being the most significant (see also: Łuczka, 2013). Tab. 3: Company size and age and the SME capital structure.
Source: the authors’ own research. The company’s survival rate strengthens its negotiating position and affects its credibility. History and experience show that this factor should be taken into consideration since business is based on trust, which grows in direct proportion to company age and size. The authors’ own research has revealed a relationship between the use of own equity and the use of commercial credit as a financing source in various development stages of the Polish enterprises studied (Figure 7). In examining the group, no similar correlation with company age was established (Figure 8).
 
The research has shown that SMEs prefer short-term commitment as a source of financing. A determinant may, therefore, exist that discriminates against capital offered by private equity funds, including venture capital, on grounds that it is third-party long-term (usually 3–7 years) capital. On the other hand, factors such as no need to pay interest, which allows for maintaining financial liquidity, and access to knowledge and experience of investors should encourage young, fast-growing capital-intensive companies to engage in such cooperation. This leads back to the question about the entrepreneurs’ awareness of the opportunities offered by the capital market and a need to carry out thorough research in this area. 225.ConclusionThe market growth is promising since the numbers of both private equity funds and companies using capital they offer are increasing. In examining the use of venture capital funds by companies, what must always be borne in mind is the cycles that each time affect such financing. Poland is in this phase of divestment, with 38 companies having ceased cooperation on their projects. Some of them (28.2%) seized further opportunities offered by the capital market, exiting by means of an initial public offering (IPO). Other companies effected divestment by trade sale (30.8%). Throughout Central and Eastern Europe, there were 2483 enterprises, including 8.0% effecting divestment through the public market and 19.8% by trade sale. What is important, however, is a growing number of companies that consistently strive to develop, promote the culture of entrepreneurship and commercialise scientific research results. This requires involvement in research and development. Certainly, a key to faster success is international activity that contributes to more intensive development and creation of more jobs than companies operating in local markets only. Opportunities exist for both Poland and the whole Central and Eastern Europe and the presented statistical data appear to be promising. Taking actions for development, SMEs mainly resort to their own equity, thereby determining the extent of their economic expansion. They tend to be undercapitalised because of, inter alia, their limited use of solutions offered by today’s financial market, namely capital market solutions, including venture capital. It is noteworthy that despite the difficulties in access to third-party capital, they take limited advantage of another type of financing, i.e. the private equity market offer. The low level of awareness may be a reason why SME entrepreneurs were and still are afraid to adopt such solutions. The concluding questions relate mainly to the effective promotion of the capital market among managers of modern enterprises. They might be answered correctly based on a thorough examination of the principles guiding the selection of financing sources by today’s entrepreneurs and their awareness of the opportunities offered by the capital market. References Acharya, V.V., Almeida, H., & Baker, M.. (2015). Introduction: New perspectives on corporate capital structures. Journal of Financial Economics, 118(3), 551–552, http://dx.doi.org/ 10.1016/j.jfineco.2015.06.010. Beck T., Demirigüuc-Kunt, A., Laeven, L., & Maksimovic, V. (2006). The Determinants of Financing Obstacles. Journal of International Money and Finance. Da Gbadji, L.A.G., Gailly, B., & Schwienbacher, A. (2015). International Analysis of Venture Capital Programs of Large Corporations and Financial Institutions. Entrepreneurship Theory and Practice, 39(5), 1213–1245, http://dx.doi.org/10.1111/etap.12105. [EVCA] 2015. Central and Eastern Europe statistics from years 2007-2014. Brussels: European Private Equity & Venture Capital Association (EVCA). Galbraith, J.K. (1957). Market Structure and Stabilization Policy. The Review of Economics and Statistics, XXXIX(2). Gilson, R.J., & Black, B.S. (1998). Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets (November 1997). Journal of Financial Economics, 47, 243–277, http://dx.doi.org/10.2139/ssrn.46909. Gompers, P., & Lerner, J. (2001). The Venture Capital Revolution. Journal of Economic Perspectives, 15(2), 145–168, http://dx.doi.org/10.1257/jep.15.2.145. Łuczka, T. (2013). Makro- i mikroekonomiczne determinanty struktur kapitału w małych i średnich przedsiębiorstwach. Poznań: Wydawnictwo Politechniki Poznańskiej. Małecka, J. (2015). Economic condition of legal persons in the SME sector – potential participants of the capital market in Poland. In M. Starnawska (Ed.), Social, innovative and financial dimensions of enterprising organizations (pp. 39–54). Gdańsk: Gdańsk University of Technology. Małecka, J., & Łuczka, T. (2016). Venture capital as a source of financing small and medium-sized enterprises in Poland: selected aspects. In T. Łuczka (Ed.), Zeszyty Naukowe Politechniki Poznańskiej 69/2016. Organizacja i Zarządzanie. Poznań: The Poznan University of Technology. Metrick, A., & Yasuda, A. (2011). Venture Capital and Other Private Equity: a Survey. European Financial Management, 17, 619–654, http://dx.doi.org/10.1111/j.1468036X.2011.00606.x. Modigliani, F., & Miller, M.H. (1958). The Cost of Capital Corporation Finance and the Theory of Investment. American Economic Review, 48(3), 261–297, http://dx.doi.org/10.2307/1809766. Muller, P., Caliandro, C., Peycheva, V., Gagliardi, D., Marzocchi, Ch., Ramlogan, R., & Cox, D. (2015). Annual Report on European SMEs 2014/2015. SMEs start hiring again. Karen Hope Editor, for the European Commission. Myers, S.C. (1983). The Capital Structure Puzzle. The Journal of Finance, 39(3), Papers and Proceedings, Forty-Second Annual Meeting, American Finance Association, San Francisco, CA, December, 28–30, 1983. (Jul., 1984), pp. 575–592. http://links.jstor.org/sici?sici=0022-1082%28198407%2939%3A3%3C575%3ATCSP%3E2.0.CO%3B2-%23. Vanacker, T., & Manigart, S. (2013). Venture Capital, in Alternative Investments: Instruments, Performance, Benchmarks, and Strategies, H.K. Baker & G. Filbeck (Eds). Hoboken, NJ, USA: John Wiley & Sons, Inc., http://dx.doi.org/10.1002/9781118656501.ch12.
Joanna Małecka The Poznań University of Technology Strzelecka 11, Poznań joanna.a.malecka@doctorate.put.poznan.pl
The Poznań University of Technology Strzelecka 11, Poznań teresa.luczka@put,poznan.pl Directory: wp-content -> uploads -> 2015 2015 -> Police Militarization 2015 -> 2015 ihbb championships: hs history Bowl Round 4 – Prelims First Quarter 2015 -> Wrtp/big step · 3841 W. Wisconsin Ave., Milwaukee, wi 53208 2015 -> Rao bulletin 1 December 2015 html edition this bulletin contains the following articles 2015 -> Darton College 2015 -> Training Workshop on Planning and Implementation of Multi-Sectoral Development Programme (MsDP) in Bihar Date : 6th 2015 -> Rao bulletin 15 June 2015 html edition this bulletin contains the following articles 2015 -> Rao bulletin 1 September 2015 html edition this bulletin contains the following articles 2015 -> Rao bulletin 1 August 2015 html edition this bulletin contains the following articles 2015 -> Science, and transportation united states senate Download 2.73 Mb. Share with your friends:
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||