Acta Oeconomica 47. (1995)
1995 / 3-4. szám - Karsai Judit: Open and Hidden Channels of Venture Capital Financing in Hungary
REVIEWS The combination of the concept of venture capital with innovation was not accidental, as even in Great Britain in the early 1980s it only meant speculative, risky investments in enterprises at an early stage of their development. However, a broader definition of venture capital had appeared by 1983 in the western countries (Lloyd 1989). Venture capital—according to its internationally accepted current definition— is the equity investment of professional financial intermediaries in an unquoted company having a growing or value-adding potential above the average. The primary goal of the investors is to maximize their capital gains. (Cf. The new palgrave 1992, (EVCA 1994)) In addition to financing, venture capitalists participate in the financed company. They give expert advice to the management and have a say in the control of the company through their representative on the board of directors. They generally plan their investment for a longer period of 3 to 7 years, and they exit only after the passage of this time. In practice, this means the sale of their ownership share to the former owners of the company or to other investors. During this time they generally do not claim their dividends, as their aim is to maximize capital gain—i.e. the difference between the buying and selling prices of the shares. Venture capitalists are willing to assume high risks and to finance (still) unquoted companies. In the hope of excess profits, they are more patient concerning the payback period than creditors, who require immediate interest payment. Hungarian enterprises know that there are other important features of venture financing as well. When a venture capital investor participates in the operation of the financed company, he “lends” his expertise and his established market and professional relations to the financed company as well. Owing to the venture capitalist’s interest in the profitable operation of his portfolio firm, the venture capitalist can provide, if required, managerial knowledge and connections necessary to enter money and capital markets (Grosfeld and Roland 1995). Long-term mutual interest is ensured by a special contract between the parties, making it possible for the venture capitalist to exert control over the portfolio firm continuously as well as to keep his capital liquid, as much as possible. The owners of the company—in addition to the capital, expertise and new connections offered by the investor—will have the incentive compensation of an increasing ownership share, depending on the company’s performance. (Sahlman 1990). Thus venture financing is not simply investing in high-risk enterprises. In the cases of private enterprises with outstanding prospective returns, it provides a combination of finance, consulting and control for the business parties, where their mutual interest is secured by a special contract. Acta Oeconomica ^7, 1995