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Screening and valuing venture capital investments:evidence from Hungary, Poland and SlovakiaJudit Karsai a , Mike Wright b , Zbigniew Dudzinski c & Jan Morovic da Research Institute of Industrial Economics of the Hungarian Academy of Sciences,Budapest, Hungaryb Centre for Management Buy-out Research, School of Management and Finance,University of Nottingham, Nottingham, NG7 2RD, UKCorresponding authorc Technical University of Lublin, Lublin, Polandd City University Bratislava, Bratislava, Slovakia

Version of record first published: 29 Jul 2006.

To cite this article: Judit Karsai, Mike Wright, Zbigniew Dudzinski & Jan Morovic (1998): Screening and valuing venturecapital investments: evidence from Hungary, Poland and Slovakia, Entrepreneurship & Regional Development: AnInternational Journal, 10:3, 203-224

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ENTREPRENEURSHIP & REGIONAL DEVELOPMENT. 10 (1998), 203-224

Screening and valuing venture capital investments: evidence from Hungary, Poland and Slovakia

JUDIT KARSA1,t MIKE WRIGHT,$* ZBIGNIEW DUDZINSKIS and JAN MOROVICV t Research Institute of Industrial Economics of the Hungarian Academy of Sciences, Budapest, Hungary; 1 Centre for Management Buy-out Research, School of Management and Finance, University of Nottingham, lvottingham NG7 2RD, UK; §Technical University of Lublin, Lublin, Poland; and fl City University Bratislava, Bratislava, Slovakia

This paper examines the screening and valuation approaches used by venture capital firms in emerging markets using evidence from surveys of venture capital firms in Hungary, Poland and Slovakia. The results show notable differences in the state of development and operation of the venture capital markets both between the three countries and in comparison with the developed UK venture capital market, especially in relation to the degree of cquity ownership sought by venture capitalists, the information used in, deal screening and valuation methods.

Kywordr: venture capital; Central and Eastern Europe; privatization.

1. Introduction

Venture capital markets first showed significant growth in the USA, the concept subsequently being diffused to the UK, Western Europe and beyond. Correspondingly, analysis of the conditions necessary for the development of venture capital markets has primarily focused on the USA (Tyebjee and Bruno 1984, Bygrave and Timrnons 1992), with research covering the UK and Western Europe following some way behind (Tyebjee and Vickery 1988, Roure el al. 1990, Ooghe et al. 1991, Wright et al. 1992, Murray 1995). Research that examines the deal screening operations of venture capital firrns has been heavily focused on the USA (MacMillan et al. 1985, 1987). These studie.; have sub- sequently been extended internationally to include the operation of venture capital firms in Western Europe (Sapienza et al. 1996) and Korea (Rah et al. 19'34). Recent studies have also involved international comparisons of other crucial aspects of the ven- ture capital process, especially valuation and due diligence (Wright and Robbie 1996, Manigart et al. 1997). These studies have shown that while there are similarities in venture capital markets between countries, there are also significant differences in respect of their approaches to deal screening and valuation. The emerging market economies of Central and Eastern Europe (CEE) represent a further environment in which venturt: capital has a role to play in the financing of business enterprises. In these countries, the problems to be faced in the development of venture capital and the operation of venture capital firms

* Corresponding author.

0898-5626198 $ 1 2 . 0 0 0 1998 Taylor & Francis Ltd.

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204 J. KARSAI ET AL.

may be expected to be markedly different from the situation in countries with established market economies.

The creation of market-oriented enterprises and of the institutional framework of a functioning market economy are major tasks facing the governments in the countries of CEE. The task of creating market-oriented enterprises is being addressed both through the establishment of new businesses (Lane 1995, Roman 1991, Gibb 1993) and the privatization of state-owned firms (Boycko et al. 1993, Karsai and Wright 1994). However, surveys in Hungary (Roman 199 1 ) and Slovakia (Ivy 1997), for example, find that accessing finance is a major problem for new firms. Privatizations of state-owned enterprises to incumbent management and employees have left a mass of enterprises facing financial problems (Filatotchev et al. 1996b). Enterprises sold as buy-outs, as in Hungary, typically involve the taking on of debt. The under-developed nature of the financial system, notably venture capitalists, means however that access to equity finance for developn~ent poses major problems (Estrin et al. 1992). The potentially important role of outside investors in entrepre- neurially owned firms is well-recognized in Western economies. In CEE, both newly- created enterprises with entrepreneurs inexperienced in a commercial environment and enterprises that are privatized to incumbent management and employees may need an investor who will be active in providing advice and monitoring (Boycko et al. 1993, Frydman et al. 1993, 1:ilatotchev et al. 1996a,b).

In principle, venture capital firms provide a means of addressing these difficulties. However, in the under-developed market environments of CEE, major issues are raised concerning their ability to fulfil this role. In particular, questions are raised concerning the processes adopted by vrnture capital firms in screening and valuing potential investees. This paper examines the initial development of these aspects of the operation of venture capitalists in CEI! by focusing on the cases of Hungary, Poland and Slovakia. The first two began the transformation process somewhat earlier than other countries and now have two of the most significant venture capital industries in the region; Slovakia began the transformation process later and has a venture capital industry a t a considerably earlier stage. The operation of these three markets is compared to that of the UK as a developed venture capital market. For the purposes of this paper, a broad definition of venture capital is adopted that encompasses the full venture capital spectrum from classical early stage growth opportunities to later stage investments such as management buy-outs, which increasingly also involve investment and growth opportunities (Wright et al. 1992, Zahra 1995). The scope of this defini- tion reflects general developments in venture capital markets (Bygrave and 'I'immons 1992) and also appears to be appropriate to the investment opportunities and finan- cial needs of privately-owned enterpriscs in CEE.

The paper utilizes both desk research of secondary data as well as the results of the first surveys of Hungarian, Polish and Slovak venture capital firms using face-to-face interviews and a mailed questionnaire. These survey results are compared with the results of a survey of venture capital firms in the UK. The following section briefly summarizes the development of the venture capital industries in each of the three CEE countries. The third section discusses the issues involved in deal screening and valua- tion in CEE countries compared to a developed market, i.e. in the UK, and derives a number of propositions. The fourth section outlines the methodology used for the survey of venture capitalists and the fifth section prescnts the results. The final section presents some conclusions.

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VENTURE CAPITAL INVESTMENT I N EMERGING MARKETS 205

2. The venturr:capitaI markets in Hunga~y, Poland and 4ek: Slovakia ?,.2

2.1 Hungary

The Hungarian venture capital market is one of the most developed in CEE. Estimates by the Hungarian Venture Capital Association (HVCA) suggest that in 1995 the value of amounts already invested and still available to be invested was in the region of US$ 400-500 million, excluding funds that may be invested In Hungary through European Bank for Reconstruction and Development (EBRD) funds and pan-CEE funds. Estimates also suggest that the US$ 250 million already invested has involved 350-400 investee firms. After an initial surge between 198!3 and 1991, there was something of a hiatus in the development of the industry until 1994 as the country's economic problems were deeper and longer lasting than anticipated (Adam 1995).

The HVCA comprises 17 members, but there are other providers of ven ture capital who are not members. Providers of venture capital in Hungary can be divided into several broad groups, comprising: two state-owned venture capital firnis financing innovation; internationally registered investment funds operating in llungary as trust companies and which account for the major part of the industry; pan-CEE venture capital funds that include Hungary as part of their target market, including private sector firms, funds available from international agencies and the Hungarian- American Enterprise Fund; the state-owned Hungarian Development Bank (HBD); eight regional development companies, in which HBD owns a controlling interest and which are aimed at smaller investments; commercial banks with venture capital inter- ests; and private companies whose main interests also include financial services activ- ities. Some 70% of the funds for venture capital firms are sourced from the USA and UK, with further moderate amounts from other European countries. Funds from outside Hungary generally have investment size limits significantly above those for venture capital firms based entirely within the country. Preferred industrim for invest- ment are primarily food processing, followed by electronics, telecomnnunications, pharmaceuticals, precision instruments, financial and information services, and fran- chise networks. Few venture capital firms are involved in high-risk innovation sectors. Most firms focus on private companies with a comparatively short track record. Turnaround or liquidation cases, including buy-outs on privatization, al.so offer sig- nificant possibilities for venture capital firms (Karsai and Wright 1994).

'Hungarian law effectively prohibits the establishment of investment furids that aim to invest in venture capital. The bill to enable venture capital investments to be carried out'through funds and through companies, and which will prov:ide tax con- cessions, has been under discussion since February 1998, and was passed by Parliament in March. Owing to the relative newness of the market, there have been few exits from the portfolios of venture capital firms in Hungary and those that have occurred have tended to be precipitated by financial problems. Up to 1997, five venture-backed firms had achieved an Initial Public Offering (IPO). 'Trade sales to other financial investors are becoming a feature of the Hungarian venture capital market but the most common form of exit for smaller and more troubled companies appears to be sale of the venture capitalists' shares to the other owners of the business.

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206 J. KARSAI ET AL.

In Hungary, as in the other two countries, considerable efforts are required to introduce legal and institutional frameworks appropriate to the functioning of a mar- ket economy, such as corporate law, internationally recognized financial reporting principles, etc. I n general, these frameworks have been adopted in the three countries discussed here, although their full implementation may take time to develop, with consequent implications for the development of venture capital markets. For example, access to reliable financial information may be prob1ematic:al despite the existence of a financial reporting framework base on General Agreement and Accounting Principles (GAAP) .

2.2 Poland

T h e Polish venture capital industry, like that in Hungary, is showing significant signs of development. I n 1996 capital under management was estimated a t over US$ 750 million. Types of venture capital firms include private limited partnerships registered abroad; foreign investment companies, which take the form of management com- panies registered in Poland by foreign investors; domestic independent companies; and bank affiliated firms typically taking the form of joint initiatives by Polish banks and the British Know-How Fund. T h e largest amount of funds for investment in venture capital currently come from outside the country, such as I F C and EBRD. T o late 1996, International Financial Corporation ( IFC) had invested US$ 67 million in nine projects and supported the establishment of two venture capital funds and the EBRD had invested US$ 310 inillion in 17 projects and supported eight venture capital funds. Development agencies are active a t both national and regional levels. T h e Industrial Development Agency (IDA) makes dircct equity for debt investments mainly for restructiring of state-owned enterprises.

The above types of firm cover three clear sectors: traditional early and expansion stage venture capital, the main focus of development agencies; bank affiliated firms targeting the development of deeply restructured companies; and firms focusing on turnaround and bridge financing for mature companies. Target companies arising from privatizatiori are the most dominant category, with the funding of innovativc companies typically focusing on the introduction of commercial organizational struc- tures. Development agencies tend to focus on smaller deal sizes, while purely com- mercial organizations set a minimum limit of around US$ 0.5 million. Investments have primarily been in the construction and trade sectors. These sectors are often considered to involve significant risk in Poland and offer opportunities to adapt exist- ing technologies. Given the immature nature of the market there have been few exits as yet from venture capital investments. One of the most significant constraints on the development of the Polish venture capital market has been the slowdown in both primary and secondary privatization. Other aspects of the Polish economy are receiv- ing greater attention a t present than venture capital, such as macro-economic stabi- lization, Foreign Direct Investment (FDI) and the mass privatization programme. As in Hungary and Slovakia, entrepreneurs' awareness of venture capital is limited.

The venture capital industry is not, as yet, regulatrcl by a specific law. The legal and fiscal environment contains a number of restricting factors which mean that all private funds are registered abroad. A bill has been introduced to regulate investment funds including closed-end funds, which would address the problem of double taxation on venture capital investments. However, the proposed law is con-

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VENTURE CAPITAL INVESTMENT IN EMERGING MARKETS 207

sidered restrictive as regards its emphasis on the public limited company as the only I f . ?<

permissible legal form.

2.3 Slovakia

The venture capital market in Slovakia is the most underdeveloped among the three countries. There are few venture capital firms and the stock market ranks .well behind that of Hungary and Poland. In 1996 an estimated US$ 96 million was available for investment by venture capital firms active in Slovakia, with US$ 33 million having been invested. The five main active venture capital firms in 1996 were F'ovbazsky a Kysucky Fond, funded by the EU and the Office for Strategic Development of Technology and Science in Slovakia; Seed Capital Company, owned by the National Agency for the Development and Support of Small and Medium Sized Entrepreneurship; Slovak American Enterprise Fund (SAEF), fully US-owned; Slovak 'Post Privatisation Fund, funded by EBRD and Framlirigton; and Investment and Development Bank, funded by the National Property Fund, VSZ, and other Slovak banks. The minimum size of investment targeted by the funds ranges from US$60,000 to US89 million. Special taxation and other incentives are available but the legal infrastructure to encourage the development of venture capital firms remains to be introduced.

3. Propositions

This section draws on models of the venture capital process (Tyebjee and Jiruno 1984, Wright and Robbie 1996), focusing particularly on the screening through valuation stages in respect of the following areas: the screening of proposals, due diligence by venture capitalists, the benchmark rates of return that are used, influencl-s on target rates of return, assessment of riskiness, information used for valuation and the relative importance of diffeient valuation methods. The actions of venture capitalists in these areas concern attempts to deal with potential adverse selection problems and to value investments a t entry prices that will permit them to achieve their target rates of return. Access to information is a general problem in these evaluation p~rocesses but may be especially difficult in the context of CEE. This section, therefore, develops testable propositions based on existing concepts that concern possible areas of differ- ence between the behaviour of venture capitalists in CEE countries and those in the developed market of the UK.

3.1 Screening

Venture capitalists face a general adverse selection problem in screening investment proposals. A considerable number of studies have now examined the criteria used by venture capitalists as a means of addressing this issue (Wright and Robbie 1996).

The transaction costs involved in investing in a project suggest that the minimum size of an investment is likely to be an important consideration for all venture capi- talists, although the actual minimum size threshold may vary between countries according to the composition of venture capital firms. I t is not, therefore, expected

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208 J. KARSAl E7- AL.

that there will be significant differcnces between U K venture capitalists and those in the three CEE countries examined here in respect of the minimum size of investment criteria.

Venture capitalists, as with other investors, may be faced with serious adverse selection problems in investing in CEE with respect to screening the capabilities of management who typically have not operated in a market environment before and information may be particularly subjective. Evidence suggests that formal venture capitalists in developed markets place considerably more emphasis on market risk than agency risk since they can deal with the lattcr through various screening, con- tractual and monitoring mechanisms (Fiet 1995). In CEE, both market and agcncy risk may be expected to pose greater problems than in the U K . In respect of market risk, venture capitalists in the UK may attempt to addrcss the problem through focusing on certain market segments where they can develop specialist expertise and bring value-adding knowledge to bear on their investment (Fiet 1995). I n CEE coun- tries, systemic uncertainties regarding market conditions may mean that there is little to be gained, as yet, in focusing on a particular market. Rather, a more important issue may be to attempt to obtain a major degree of direct control and to attempt to identify more viable transactions.

In both the UK and in the threc CEE countries, the expertise of the managers may be expected to bc an important criterion in the initial screening of invcstment propo- sals. Hence, no significant difference may bc expected between venture capitalists in the U K and those in the three CEE countries taken together in this respect. A greater management equity stake may be associatcd with the reduction of agency risk in developed markets such as the UK (Barney et al . 1994). Howevcr, in CEE there may bc concerns about the availability of appropriate managerial expertise. I n addi- tion, managers who are entrenched in their positions and are able to control informa- tion relating to the firm may pose particular problems for venture capitalists; it may be difficult to remove them if they underperform and it may be difficult to persuade them to provide unbiased information if the enterprise underperforms. In an environ- ment where the implementation of corporate law is still developing, there may be difficulties in the enforcement of contracts. Hcnce, venture capitalists in CEE may seek to hold ownership positions in investec companies that give them effective control in order to address potential adverse selection issues and redr~ce agcncy risk.

There may bc a major concern in CEE countries about the performance of potential investees. In an uncertain environment, and an under-developed venture capital market, venture capitalists may seek to invest in those projects that already appear to be commercially viable. I n the UK, generally more reliable information coupled with greater skills of venture capitalists and entrepreneurs may mean that there is less need for potential investces to meet given financial ratlo benchmarks. This can be summed up in the following three propositions:

Proposition l a : Venture capitalists in the UK arc likely to place significantly more emphasis on potential invcstees being in a givcn industry than venturc capitalists in CEE.

Proposition I b : Venture capitalists in CEE are likely to place significantly more empha- sis on potential investees meeting financial ratio benchmarks than are venture capi- talists in the UK.

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VENTURE CAPITAL INVESTMENT IN EMERGING MARKETS 209

Proposition Ic : Venture capitali?ts,in CEE are likely. to place significantly more empha- sis on potential investees a clearly defined exit time And methoti than are venture capitalists in the UK.

3.2 Due diligence

In general, a variety of issues broadly categorized as time restrictions, cost constraints and situational factors, may directly impact the level of due diligence during the process of investee assessment and argue for an emphasis on own rather than third party analysis, as well as information derived from personal references relating to the entrepreneurs and their track records. However, in the three CEE countriea examined here, the relatively under-developed state of networks of independent at:countants, consultants and advisors suggests that venture capitalists in. these countries may place significantly more emphasis on own market evaluations than do their cour~terparts in the UK. The corollary is that venture capitalists in the U K are likely to make greater use of the more developed skills of independent accountants and advisors than their counterparts in the three CEE countries. Hence:

Proposition 2a: Venture capitalists in CEE countries are likely to place s.ignificantly more emphasis on carrying out their own due diligence than are venture capitalists in the UK.

Proposition 26: Venture capitalists in the U K are likely to place significiantly more ' emphasis on involving independent experts (accountants, advisers and market

experts) than are venture capitalists in the CEE countries.

3.3 Benchmark rates o f return

In assessing projects, venture capital firms may use a variety of benchmark returns against which to compare individual investment opportunities. These benchmarks may be defined in standard terms or may attempt to take into account the character- istics of each proposal. In more developed venture capital markets, investn~ent execu- tives may have greater expertise in assessing the specific characteristics of each transaction, while such expertise is likely to be absent or weak in underdeveloped venture capital markets. Hence:

Proposition 3: Venture capitalists in the more developed U K market are less likely to emphasize standard rate of return benchmarks in assessing potential investment pro- jects than are their counterparts in the three CEE countries.

3.4 InJuence on target rates o f retkrn

Venture capitalists rely on considerable amounts of information from different sources in screening and valuing potential investees in order to reduce asymmetr.ic informa- tion problems. In developed markets such as the UK, financial reporting a-nd auditing mechanisms are well-developed. As noted above in respect of the screening of invest-

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210 J. KARSAI ET AIL

ment proposals, differences in rnarket and agency risk may be expected between venture capitalists in the U K and those in the three CEE countries examined here. In a similar fashion to the influence of these factors at the initial screening stage, it may also be expected that they will influence the target rates of return that are sought on investments. The less developed corporate asset and stock markets in the three CEE countries and their implications for exiting, as also noted above, may also have impli- cations for the target rate of return that is sought. Hence:

Proposition4a: The expected length of investment horizon is likely to have significantly greater influence on target rates of return in CEE than in the UK.

Proposition 4b: Market and economic related factors are likely to have significantly greater influence on target rates of return in CEE than in the UK.

Proposition 4c: Whether or not the venture capitalist has a majority of the equity in an investment is likely to have a significantly greater influence on target rates of return in CEE than in the UK.

3.5 Assessment of riskiness

For reasons outlined earlier, the nature of the potential investee's markets may be an important factor in assessing the riskiness of a proposal. Also for reasons discussed earlier, in the three CEE countries the contribution of management in terms of their managerial skills is likely to be as important as it is in the UK; hence no significant differences are anticipated between the two sets of countries. However, a difference may arise between the U K and the CEE countries with respect to the financial contribution made by management. Although, as seen earlier, venture capitalists in CEE may seek to obtain controlling ownership stakes, the generally more uncertain conditions to be found in CEE suggest that they may be exposed to considerable agency risk. A larger financial contribution by managers may signal greater manage- rial commitment to a transaction and suggests reduced risk for the venture capitalist. The generally lower levels of personal wealth in CEE may mean that a given financial commitment indicates a higher degree of commitment than it would for a manager in the UK. Venture capitalists in the three CEE countries may be significantly more concerned than their U K counterparts about the expected time horizon for their investment in assessing the riskiness of a project. Hence:

Proposition 5a: Venture capitalists in CEE are likcly to place significantly greater emphasis on market-related factors in assessing the riskiness of a proposal than are venture capitalists in the UK.

Proposition 56: Venture capitalists in CEE are likely to place significantly greater emphasis on the financial contribution made by managers in assessing the riskiness of a proposal than are venture capitalists in the UK.

Proposition 5c: Venture capitalists in CEE are likely to place significantly greater emphasis on the expected length of investment horizon in assessing the riskiness of a proposal than are venture capitalists in the UK.

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VENTURE CAPITAL INVESTMENT IN EMERGING MARKETS

, 'c,j ic - . I

3.6 ~nfoormation for 'valuation .

Information from interviews with entrepreneurs is likely to be of some importance in all countries, but questions of asymmetric information, honesty, competence, etc. mean that there is also a need to use other sources of information. The Business Plan provided by the entrepreneur is also likely to be an important initial signal of the attractiveness of the proposition. The need for verification in an environment where the network of intermediaries and consultants is undeveloped suggests that in CEE countries venture capitalists' own due diligence will be more important than in the UK. Hence:

Proposition 6a: Venture capitalists will place significantly more importance on own due diligence as a source of information in preparing valuations in CEE coun1:ries than in the UK.

Proposition 66: Venture capitalists will place significantly more importance on informa- tion relating to products and markets as source of information in preparing valuations in CEE countries than in the UK.

3.7 Valuation

Venture capital projects are typically valued by applying one or more valuation techniques to the financial and accounting information relating to the potlential inves- tee typically contained in the business plan submitted by management to the venture capitalist (Wright and Robbie 1996). Forward looking information in the Business Plan may be subject to sensitive analysis both by management and their advisers and by the venture capitalist according to the expected influence on future performance of other information.

In Hungary, Poland and Slovakia uncertain and developing market environments may be expected to pose particular problems for the valuation of enterprises. Historically, different accounting policies and vague ownership legislation, especially in relation to land and buildings, coupled with environmental uncertainty, raises potential difficulties for the use of valuation mechanisms based on historic: or replace- ment cost asset valuations in addition to the well-known general problems with using such approaches. These issues have arisen throughout CEE in relation to the sale of state-owned assets, Hungarian experience being analysed in Valentiny 1% al. (1992) and Pasztor (199 1) and Polish experience in Szomberg and Tamowicz (1 994), but are a general problem in transition economies. The major general need for restructuring coupled with the uncertainty surrounding market developments may suggest that exit or liquidation values of assets may be more important in CEE than in the UK. The absence of developed markets in corporate assets and the absence of historic records of businesses operating in a market environment pose potential problems for the use of mechanisms that rely on benchmarks against the prices of companies sold in similar sectors. Uncertain environments, such as generally prevail in CEE, may pose prob- lems for the use of discounted cash flow based methods of valuation or anticipated earnings. However, in the absence of reliable asset-based methods and benchmarks against prices of other companies, forward looking valuation methods such as Discounted Cash Flow (DCF) and dividend yield approaches may be preferred. In

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212 J. KARSAI ET AL.

the U K , while the theoretical superiority of these methods may be recognized, prob- lems in their practical implementation may mean that they are given less emphasis. Hence:

Proposition 7a: Asset-based valuation methods are likely to be given relatively low emphasis in both underdeveloped and developed venture capital markets, although liquidation values may be given significantly more emphasis in the former than in the latter.

Proposition 7b: Venture capitalists in CEE countries are more likely to use forward looking valuation methods (DCF, dividend yield) than are venture capitalists in the UK.

Proposition 7c: Venture capitalists in the U K are significantly more likely to use valua- tion measures associated with active markets in corporate assets (Price-carnings [PE] ratios, transaction prices of comparable businesses).

T o the extent that there are differences between macroeconomic conditions and the stage of development of the three CEE venture capital markets considered here, significant differences may be expectetl between them with respect to the above vari- ables. Hence, in general, it is expected that there will be close similarities between the perceptions of venture capitalists in Hungary and Poland where transition and the venture capital market are more advanced. I n contrast, Slovakia has the weakest macroeconomic conditions of the three countries, has experienced the extra economic problems resulting from the separation from the Czech Republic, has the least devel- oped stock market (Bulir and Charap 1993) and has the least developed venture capital market. I t is thus expected that, in general, venture capitalists in Slovakia will score significantly lower on the above propositions than their counterparts in Hungary and Poland.

4. Methodology and data

The surveys in Hungary, Poland and Slovakia were carried out between May 1996 and May 1997. They involved either face-to-face interviews and/or mail question- naires administered to managers in the venture capital firms in the three countries. The study was based on a common questionnaire developed fkom research carried out in the U K and Western Europe (Wright and Robbie 1996, Manigart et al. 1997) adapted to the circumstances in Hungary, Poland and Slovakia. The number of active venture capital firms asked to participate in the survey and the numbers actually interviewed in each country are shown in table 1. Taking account also of the general reluctance of financial firms in Central Europe to disclose details of their operations,

Table 1. Sample sizes by country.

Hungary Poland Slouakin U K

No. of active venture capital firms approached 12 12 5 114 No. of responding firms 9 6 3 66

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VENTURE CAPITAL INVESTMENT IN EMERGING MARKETS 2 13

the number of responses (62%) represents a very encouraging rate of participation and provides coverage of all'iji'pes of ve'nture c'apital firm. skiring in mind that, given the transitional nature of the markets the number of active venture capital firms is less than the number established, the respondents to the survey included the main active venture capital firms in each country, accounting for a greater proportion of funds invested than of the number of established firms. This is important since responses from recently established firms that have so far not been active in these markets may have been misleading where they are based on hypothetical rather than actual experi- ence. T o the extent that the survey is a snap-shot of a dynamic market, where newer venture capitalists may bring different approaches to evaluation, the rc:sults of the survey may not be generalizable to the longer term behaviour of these markets. Non- respondents were also generally those venture capital firms who were particularly concerned about commercial secrecy in an environment not used to research of this type. Detailed comments on the respondents for each country are presented below. Given confidentiality undertakings, the results are presented in aggregate form. Owing to the small number of active firms in each country and hence the small number of participants in the study, the mean scores reported in $5 need to be considered only as indicative of differences between countries.

In Hungary, face-to-face interviews were conducted with the managers of venture capital firms. These interviews on average lasted for about 1 h, and comvered issues concerning the background to the firm, sources of funds, main areas of activity, investment policy, etc. Following the interview, the detailed questionn;lire was left with the manager for completion. I t became clear during the interviews that managers were reluctant to provide information on required rates of return, because of com- mercial confidentiality, and in some cases information relating to inveslment stages was not available. Seven of the Hungarian participants were members of HVCA and their cumulated investment value represented nearly 70% of that of the I-IVCA. The Pan-European regional development funds were not surveyed as their establishment was too recent. Among the nine venture capital firms surveyed, three were investment funds registered outside Hungary but investing only in Hungary. Two 01- these funds were the largest institutions in the Hungarian venture capital industry. Thle remaining seven firms were mainly concerned with investment in the SME sector. Of the nine, two funds were founded by the State, two others belong to the Hungarian Bank for Investment and Development and the remaining two funds were private firms for whom venture capital was only a part of their activities. Overwhelmingly, the Hungarian firms have funds available for investment from their own sources, with one of the foreign funds and the independent fund making significant use of finance from outside sources. O n average the funds have been established for 4.67 years, although there was a wide variation that reflectcd the initial and later waves of development in the industry noted earlier. The mean number of executives was 6.8 although there was also a wide range. At the time of the survey the number of investments rangcd from 3 to 20. The main investment stage focuses were early and expansion stage, with three firms also engaging in investments in privatizations.

In Poland the detailed questionnaire was sent to the 12 venture capit.4 firms that could be identified as present in the market and responses were received in six cases. Three of the funds were foreign owned, one had majority bank ownership, one was an independent private firm and one was an independent public firm. In four cases funds were from outside sources, in one case all funds were from own sources and in the remaining case 5% of funds were from own resources. The oldest firm was established

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in 1991 while three were created in 1995. The firms still have a majority of their funds available for investment and havc 2-6 investment executives, except for one firm with- 33 investments in 1996 which had 14 executives. The most common investment stage focuses of activity are early and expansion phases. At the time of the survey, the number of investments made ranged from 4 to 33.

The detailed questionnaire was sent to the members of the Slovak Venture Capital Association of whom only five were active providers of venture capital. Three venture capital firms provided full information. In Slovakia, the firms surveyed comprised a regional development fund, an SME fund and an investment bank, providing cover- age of both large and small anti early and late stage venture capital firms in the country. The first two were established in 1994 and had two executives each, while the third was founded in 1992 and had 35 executives. The first two primarily invest in early stage funds, while the investment bank invests across the spectrum with one-half of its SK 2,200 million funds invested being in expansion projects. The regional development fund has invested SK 84 million in six projects and the SME fund SK 20 million also in six projects.

The U K survey, with which the three CEE countries are compared, was carried out in 1994. The questionnaire was sent to the 114 venture capital firms who were then members of the British Venture Capital Association (BVCA). A total of 66 completed and usable replies were received, representing a response rate of 57.9%. Analysis of the respondents showed that they covered a substantial proportion of the U K venture capital industry. Virtually all the principal and longest established venture capitalists had participated. The respondent firms had on average been in existence for 13 years (median 10 years) and employed on average 9.6 (median 6) investment executives.

5. Results

In the discussion that follows, data presented in tables are mean scores based on a range of responses where 1 = not important through to 5 =very important. The struc- ture of the discussion follows the previous discussion of the conceptual issues. The results mainly focus on the outcome of statistical tests between the three CEE countries taken together and the UK. However, qualitative commentary is also made on differ- ences both between the three countries and within each country where, because of small numbers, statistical tests are not appropriate.

5.1 Screening

Not surprisingly, greatest emphasis across all three CEE countries and in the U K was placed on the entrepreneurs' experience in the area of the proposed project in screen- ing proposals (table 2). Although comparable data were not collected in the U K survey, as expected there was great emphasis in the three CEE countries, especially Hungary, on the ability of venture capitalists to obtain a particular ownership stake in a project. There was no significant difference between the U K and the three CEE countries taken together in respect of exit issues. Also as expected, venture capitalists in the three CEE countries placed significantly greater emphasis on proposals meeting given financial ratio benchmarks. The three CEE countries also placed emphasis on proposals meeting strictly defined size criteria, but this was not significantly different

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Table 2. , ,Evaluation of'investment propqsals.

Facfoss Hungary Poland Slovakia CEE me,zn U K t

The proposal must require funding 4.1 4.0 4.0 4.1 3.5 above or below a strictly defined minimum or maximum size

The proposal must result in a given 4.4 3.6 4.0 4.1 n.a. percentage of ownership for your firmlfund

The proposal must fall in a given 1.6 industry

The exit timing and method must be 4.6 clearly forecast

The proposal must meet a given 4.4 financial ratio benchmark

The managers (entrepreneurs) must 4.6 have thorough grounding in the given field

-- - - - -

In this and subsequent tables, figures are mean scores based on a range from I =not important through to 5=very important

t Aster~sks relate to results of Mann-Whitney U-test for differences between UK and the weighted mcan score for the three CEE countncs, where *p < 0.1 level, ** p < 0.05 level; *** p < 0.01 level !-tests were also computed and produced consistent results. For space reasons, 1-tests and standard deviations are not reported here but are available on request from the authors.

from the finding in respect of the UK. Hence, propositions l a and 1 b are supported but not lc.

More detailed evidence from the interviews undertaken showed that in the inde- pendent fund surveyed in Hungary, entrepreneurs' experience'and the need for the proposal to meet a given financial benchmark stood out as being scored very low. Similarly, for one of the public venture capitalists, exit timing and method was scored very low.

5.2 Due diligence

In both the U K and CEE countries, greatest reliance was placed on personal refer- ences in conducting due diligence (table 3). However, as expected, the more devel- oped U K market made significantly greater use of independent accolmtants and advisors. Also as expected, venture capitalists in the CEE countries rely significantly more heavily up& their own market evaluation. There was some weak evidence to suggest that venture capitalists in the three CEE countries placed significarntly greater reliance on access to previous track records of entrepreneurs. Their significantly greater emphasis on obtaining independent market reports contrasts with the lower reliance on accounting reports already noted. This suggests, as might be expected, a greater concern with the need to establish the existence of viable markets in CEE countries, rather than the current financial situation of the company. There is thus support for proposition 2a and some support for proposition 2b.

A. more detailed examination of individual countries suggests that Hungarian and Slovak venture capital firms placed greatest emphasis on carrying out 'own market t:valuation. While Polish venture capital firms also emphasized this aspect of due

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Table 3. Carrying out due diligence.

Factors Hungary Poland Slovakia GEE mean U K t

Ordering independent accountants report 3.0 3.8 2.0 3.1 3.7* Involving of independent financial adviser 1.6 2.4 1.7 1.8 3.1*** Access to previous track records 3.7 4.6 4.0 4.0 3.5* Obtaining independent market report 3.9 3.8 3.0 3.7 3.1 * Carrying out own market evaluation 4.7 4.4 4.3 4.6 4.1* Personal references 4.2 3.8 3.6 4.0 3.9

t Asterisks relate to results of Mann-Whitney U-test for differences between UK and the wcightcd mean score for the three CEE countries, where p < 0.1 level; ** p < 0.05 level; *** p < 0.01 level. 1-tests were also computed and produced consistent results. For space reasons, I-tests and standard deviations are not reported here but are available on request from the authors.

Table 4. Assessment of the targeted rate of return.

Factors Hunsary Poland Slovakia GEE mean U K t

We require the investment to meet a 4.0 3.6 3.3 3.8 2.3** standard required rate of return on equity (internal rate of return, IRK)

We require the investment to meet a 3.4 3.8 3.7 3.6 3.3 standard required rate of return on equity ( IRR), according to the risk band of the investment

We require the investment to meet 3.1 a specific required rate of return on equity (IRR), according to the characteristics of each investment

We require a rate of return which 3.3 3.2 2.0 3.1 3.4 yields a total cash return commen- surate with amount invested

t Asterisks relate to results of Mann-Whitney U-test for difrerences between UK and the wcightcd nlean score for the three CEE countries, where * p < 0.1 level; * * p < 0.05 level; * * * p < 0.01 level. 1-tests were also computed and produced consistent results. For space reasons, (-tests and standard deviations arc not reported here but are available on request from the authors.

diligence, their highest mean score concerned access to previous track records. Slovakian venture capital firms placcd least emphasis on independent accountants' reports. Within the Hungarian market, the interviews undertaken suggest that the emphasis given to independent accountants' reports varied, with the two publicly owned venture capitalists, one of the bank captives and one of the foreign firms placing little emphasis on this source of information.

5.3 Benchmark rates of return

The survey results suggest some differences between countries in respect of the type of benchmark against which to compare individual investment opportunities (table 4). As expected, the developed UK market places significantly less emphasis on standard benchmark required rates of return. The three CEE countries on average place great- est emphasis on such standard benchmarks. There is thus support for proposition 3.

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Table 5. Influencing factors of targeted return. , . sro;;i;a

Factors Hungary Poland GEE me,zn UKt

'The expected length of investment in 4.7 2.8 4.0 4.0 3.5* a particular proposal

The actual cash amount invested in 4.0 3.2 3.0 3.6 2.8** a particular proposal

Market conditions relating to a 4.4 3.8 4.0 4.2 3.3*** particular proposal

General economic conditions 3.7 3.6 2.7 3.5 3.2* Changes in returns for quoted equities 2.5 1.8 2.3 2.3 2.5 Changes in returns of long term treasure 3.1 2.6 1.3 2.6 2.1

bonds and bills Changes in base rates 3.0 2.2 3.0 2.8 2.5 The actual cash amount you seek to 3.8 2.4 2.7 3.1 2.9

receive from an investment The industrial/product sector of the 4.0 3.2 2.0 3.4 3.1

investment 'The geographical region of the 3.5 3.4 2.0 3.2 2.1***

investment The expected gearing ratio when the 3.3 3.2 2.3 3.1 2.9

finaice is structured Whether you have a majority of the 4.3 2.2 1.7 3.1 2.4**

equity

?Asterisks relate to results of Mann-Whitney U-test for differences between UK and the weighted mean score for the three GEE countries, where * p < 0.1 level; * * p < 0.05 level; *** p < 0.01 level. f-tests were also compu:ed and produced consistent results. For space reasons, 1-tests and standard deviations are not reported here but are available on request from the authors.

Considerable emphasis appears to be placed on meeting a standard required rate of return in Hungary. Polish venture capitalists give thcir highest scores to the meeting of standard returns according to the risk band of an investment and Slovak venture capitalists to meeting specific returns according to the characteristics of each invest- ment. Least emphasis in general is given to the meeting of total cash return targets. Interestingly, more detailed examination suggests that the independ'ent fund in Hungary scored a requirement to meet a target internal rate of return (II2R) accord- ing to the characteristics of a particular investment highest and the meeting of a general benchmark lowest, while the foreign-owned funds gave strongc:st emphasis

the meeting of a general benchmark IRR.

5.4 Influence on rates of return

The actual target rate of return that was sought may be varied according to a number of factors (table 5). There are some notable significant variations in the relative importance of these factors between the UK and mean score for the three CEE countries studied, as well as between the three CEE countries individually. As expected, reflecting the particular problems faced by the three CEE countries, venture capitalists in these countries taken together place a significantly highcr emphasis than UK venture capitalists on the market conditions relating to a particular proposal. General economic conditions also figure significantly more importantly in CEE than

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Table 6. Assessment of the riskiness of a proposal.

Factors Hungary Poland Slovakia GEE mean U K t - - -

Nature of product market of the 4.3 4.6 3.5 4.3 4.3 company

Contribution by management in terms 4.9 4 2 5.0 4.7 4.8 of their managerial skills

Financial contribution by management 3 8 3.8 4.5 3.9 3.3** Expected time horizon to exit of company 4.2 4.0 2.0 3.9 3.5 Nature of thc capital market 3.1 2.8 1.5 2.8 2.6 Expected time horizon to redemption of 2.5 3.0 2.5 2.7 3.0

preference shares

t Asterisks relate to results of Mann-Whitney U-test for d~Herences between UK and the weighted mean score for the three CEE countries, where * p < 0.1 level; " p < 0.05 level; * * * p < 0.01 level. 1-tests were also computed and produced consistent results. For space reasons, I-tests and st;indard deviations are not reported here but are available on request from the authors.

in the UK. Also as expected, venture capital firms in the CEE countries place sig- nificantly greater emphasis than is the case in the U K on whether they have a majority of the equity. The actual cash amount they receive from an investment is also significantly more important for venture capitalists in the three CEE countries. There is weak evidence that UK firms place significantly less emphasis on the expected length of investment in a particular proposal. These results provide support for pro- positions 4a, 4b and 4c.

Closer examination of individual countries suggests that Hungarian venture capital firms appear to place significantly greater emphasis and Polish firms correspondingly less emphasis on this issue. General economic conditions appear to be more important in Hungary and Poland than in Slovakia. Hungarian venture capital firms also appear to place greater emphasis on whether they hold a majority of the equity in an investment and on the industrial/product sector of the investment than their counterparts in Poland and Slovakia.

I n general, venture capitalists in the U K and in Hungary, Poland and Slovakia taken together assess the riskiness of a proposal using similar factors (table 6). There is no significant difference between U K venture capitalists and their counterparts in CEE taken together in respect of the contribution by management in terms of their man- agerial skills, in both cases this factor is rated as a highly important factor in assessing the riskiness of a proposal. The nature of the product market of an investment pro- posal is also important across countries. The financial contribution made by manage- ment is of significantly greater importance across the three CEE countries taken together than it is in the UK. These results provlde support for proposition 5b.

Further examination of differences betwcen the three countries suggests that Hungarian and Polish venture capital firms seem to place more emphasis on the expected time horizon to exiting their investment than d o their counterparts in Slovakia. Slovakian venture capital firms also distinguish themselves fiom their coun-

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Table 7. Sources of information in preparing valuation.

Sources Hungary Poland Slovakia GEE mtan UKt

Financial and trade journals 3.0 Information provided by entrepreneurs 3.6 Information provided by the personnel 4.1

of the given company CSO statistics Other statistical and information services Other venture capitalists Own due diligence report Accounting/consulting firms' reports Business plan data (e.g. balance sheet, income statement, planned data) Proposed exit timing and method Sales and marketing information Product information Production capacity/technology information Curriculum vitae of management

-

TAsterisks relate to results of Mann-Whitney U-test for differences between UK and the weighted niean score For the three CEE countries, where ,b < 0.1 level; " P < 0.05 level; *** p < 0.01 level. 1-tats were also computed and produced consistent results. For space reasons, 1-tests and standard deviations are not reported here but are available on request from the authors.

terparts in the other two countries because of the emphasis they place on the expected participating dividend yield that they expect to earn.

The authors' detailed interviews within the Hungarian market indicates that the nature of the product market of the company was irrelevant for one of the publicly owned companies and the financial contribution by management was not important for the independent venture capital firm. Some differences in objectives were reflected in assessment of riskiness, with notably one of the bank captives attaching greatest iinportance to the expected participating dividend yield. The expected time horizon to the redemption of preference shares was the least important factor on mean but two of the foreign-owned firms score this as important.

Across all three countries studied, venture capital firms clearly make usc: of multiple sources of information in preparing their valuations of investments (tat~le 7). Apart from Slovakia, greatest importance is attached to own due diligence reports and also accounting/consulting firms' reports. Business plan financial data also figure highly, especially in Poland and Hungary. However, consistent with the findings relating to due diligence noted earlier, venture capitalists in the three CEE countries taken together place significantly greater emphasis than their counterparts in the UK on their own due diligence reports.

Also as expected, venture capital firms in the three CEE countries taken together place significantly greater emphasis than their counterparts in the UK on sales and marketing information, product information, and production capacity/technology information. These findings emphasize the particular importance of these factors in markets in transition.

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Table 8. Methods used to value investment.

Hungary Poland Slouakza CEE mean U K t Sources

Historic cost book value Replacement cost asset value Liquidation value of assets Discounted future cash Rows Dividend yield basis Capitalised maintainable earning

(pricelearning multiple) (historic basis) Capitalised maintainable earning

(pricelearning multiple) (prospective basis)

Capitalised maintainable earning (EBIT multiple)

Recent PE ratio of the parent company's shares

Recent transaction prices for acquisitions in the sector

Responses to attempts to solicit bids for the potential investee

Normal industry specific pricing ratios

t Asterisks relate to results of Mann-Whitney U-test for differences between U K and the weighted mean score for the three CEE countries, where ' p < 0.1 level; ** p < 0.05 level; *** p < 0.01 level. (-tests were also comp~jted and produced consistent results. For space reasons, t-tests and standard deviations are not reported here but are available on request fiom the authors.

Polish and Hungarian venture capital firms appear to place greater emphasis on the proposed exit timing and method than their counterparts in Slovakia, possibly a reflection of the somewhat more developed nature of the formcr two markets. I t is noticeable that information relating to or provided by entrepreneurs is important in preparing valuations in the U K and the threc CEE countries, there being no signifi- cant differences between the countries. However, venture capitalists in the three CEE countries taken together, and especially in Hungary and Poland, place significantly more emphasis on information provided by the personnel of a company. 'These results provide support for propositions 6a and 6b.

5.7 Valuation

Venture capital firms in the three CEE countries taken together place significantly greater importance on discounted cash flow (DCF) based valuation methods than do their counterparts in the U K (table 8). Similarly, there is significantly greater empha- sis on dividend yield bases in the three CEE countries than in the UK.

As expected, and reflecting the more developed nature of capital and asset markets in the U K , significantly greater emphasis was placed here than in the three CEE countries taken together on valuation methods relating to price/carnings multiples and recent transaction prices for acquisitions in comparable sectors to the investment proposals being considered.

Asset-based valuation methods are suspect theoretically and also may be particu- larly unreliable in emerging markets. I-Ience, as expected, these methods generally

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VENTURE CAPITAI, INVESTMENT I N EMERGING MARKETS

received low scores in all three CEE countries and in the UK. However, s:ignificantly greater emphasis was placed on replacement cost asset values and liquidation values of assets in the three CEE countries taken together than was the case in the UK. The existence of such a significant difference is a little surprising, although the relative importance given to liquidation values may reflect greater general concerns about the viability of enterprises in the three CEE countries. These findings provide some sup- port for propositions 7a, 7b and 7c.

Closer examination of individual countries suggests some areas of difference. In Hungary, Earnings Before Interest and Tax (EBIT) multiple valuation methods score more highly than in either Poland or Slovakia. There was some variation in practice within the Polish market, with DCF-based methods of valuation only used, sometimes by the private venture capital firm but almost always by the others. ThLe publicly- owned venture capital firms usually used replacement and liquidation cost valuations of assets as well as dividend yield bases, while this was not the case with the private firm and the mixed privatelpublic firm. In contrast, the private sector firm almost always used EBIT and pricelearnings multiples, recent transactions prices in the sector and industry-specific pricing ratios.

6. Discussion and conclusions

This paper has provided a preliminary analysis of the operation of ventme capitalists in markets in transition using the cases of Hungary, Poland and Slovakia. There are marked differences in the current stage of development of the venture capital markets in Hungary and Poland compared with that in Slovakia. The first two have experi- enced marked growth while the Slovakian market remains somewhat underdeveloped. However, in all three countries there continue to be major infrastructure impediments to the development of venture capital including specific legislation to permit venture capital firms, the development of reliable sources of information on potential investees, and the development of stock and corporate asset markets.

The analysis focused upon a comparison of the operation of venture capitalists in the developed UK market and the three CEE countries with respect to screening and valuation issues. The analysis identified a number of significant differences between UK practice and that in the three CEE countries. Although it is too early to conduct rigorous statistical tests between individual countries because of the small number of participants, there are also suggestions that the three CEE countries are not entirely homogeneous in their venture capital practice. In general, where significant differ- ences are identified between the three CEE countries, responses in Hungary and Poland are close together, as expected given that economic conditions a.nd stage of venture capital market development are similar. The responses from S l ~ v ~ i k i a tend to be different, reflecting the less developed venture capital market in that country. The most notable results may be summarized as follows.

In respect of screening issues, different requirements for investees to meet financial ratio benchmarks were particularly notable. Own due diligence in assessing invest- ment projects was significantly more important in the three CEE countries. There appears to be some lack of sophistication in the three CEE markets examined here compared with that in the UK with respect to the use of standard benchmark ratc of return targets for investees rather than specific targets that reflect the chariicteristics of individual projects. As might be expected, market conditions have a greater influence

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222 J . KARSAl E T AL.

in the three CEE countries than in the UK on the level of rate of return sought from investment projects. Product market factors are also more important in the former countries in assessing riskiness of projects. In Hungary especially, obtaining a majority equity stake appears to have an important influence on the target rate of return that is sought. There appears to be an important significant difference between Slovakia and the more developed Polish and Hungarian markets with respect to the importance attached to the timing of exits in assessing riskiness and preparing valuations. Venture capitalists in the three CEE countries make greater use of discounted cash flow methods ofvaluation than is the case in the U K where PE ratio methods are preferred. Although strongly theoretically grounded, the weight of importance attached to the DCF methods in CEE countries raises questions concerning reliability of forecasts in relatively uncertain emerging markets, as well as the extent to which sensitivity ana- lyses are undertaken. However, the absence of developed capital and asset markets and concerns about the reliability of past trading records may help to explain the importance of DCF-based valuation methods in these countries.

The analysis presented in this paper suggests a number of policy implications. Perhaps the greatest requirement is to develop specific legislation conducive to the establishment of domestic venture capital firms, and especially limited partnerships, in Hungary, Poland and Slovakia along the lines available in the developed UK and US markets. Given the role already of foreign-based venture capital firms in the Central European markets there is a need to ensure that such investors are not discouraged by disadvantageous taxation arrangements.

Closer analysis of the venture capitalists within each of the three CEE countries suggests that while there are cases of best practice by venture capital firms in all three Central European countries, there is a need in particular to develop the investing skills of public sector venture capital firms to enable these firms to play the role expected of them in the development of commercially successful enterprises.

The difference in the behaviour of private sector and public sector funds in the three countries examined here appears greater than is generally the case in developed market economies. Much of this difference arises because of the not-for-profit nature of public sector funds. Rather, such funds are often required to represent regional devel- opment interests or to promote privatzsation, innovation and small business develop- ment. Increasingly, public sector venture funds in developed markets have generally become more profit-oriented because of the problems of limited budgets and concerns about accountability (Lovejoy 1988). For the future, it may become necessary for public sector funds in Central European countries to also follow this shift.

The findings from the study emphasize the need for practitioners seeking to enter the CEE markets to be aware of the applicability of different valuation methods and of the importance of obtaining larger equity stakes than might be expected in domestic markets in order to achieve control that may otherwise be problematical.

For researchers, the study presents the first detailed analysis of emerging venture capital markets. However, given the relatively early stage of market development, the analysis needs to be regarded as preliminary. As venture capital markets in CEE de lop, further research especially of a quantitative nature will become more feasible. "l St% istical testing of differences between individual venture capital markets in CEE countries will become especially useful to verify the differences suggested in the pre- liminary analysis in this paper. There is clearly a need to compare the results of this study with results from other emerging markets as they develop. In addition, although this paper has focused only on venture capitalists there is a future need for research

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VENTURE CAPITAL INVESTMENT IN EMERGING MARKETS 223

that examines the dyadic li?ki+.between venture capitalists I , .- and -;., entrepreneurs. The findings with respect to size-of venture' capitalists' equity stakes and the financial contribution made by management suggest possible differences in approaches to deal- ing with agency risk than indicated by studies from developed markets. I t is too early as yet to be able to obtain general results on the performance outcomes of venture capital investments. Future research might usefully examine not only t.he absolute performance of venture capital investments in CEE but also the link between screen- ing and valuation approaches and investment outcome.

Acknowledgements

Financial support from the EU-ACE programme grant no. P95-2031-R iis gratefully acknowledged. Financial support for CMBOR from Barclays Private :Equity and Deloitte & Touche Corporate Finance is also acknowledged with than.ks. Helpful comments from the editor and two anonymous referees are acknowledged with thanks.

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