Public venture capital in Latvia

Abstract

The first generation of Latvian public venture capital programmes was launched in 2005 and so far five programmes have either been launched or are being planned. Given that the explicit focus from the side of the policy maker has been to supply the Latvian venture capital market with capital, the programmes could be seen as a partial success. However, the programmes have failed to address the demand side. This is of particular importance for the future development of the Latvian venture capital market since the evidence reported suggests there are not enough good projects to invest in, while at the same time Latvian entrepreneurs look for venture capital outside Latvia. The paper also pinpoints severe weaknesses in the design and implementation of the five public venture capital programmes. JEL classification: G24, G28, L26

Are CEE States Successful as Venture Capitalists?

“…the ability to pass professional knowledge to the future companies, in addition to the equity. By contrast, the management fee offered and the expected highest equity contribution received a greater emphasis in the evaluation (Avots et al, 2013). After the first round of JEREMIE, in 2012, the Latvian authorities launched another round, where, after the change of the holding fund's manager, the criteria were slightly restricted and a great number of experts were involved in the evaluation.…”

“…As a follow-up, the court decided that the authority should not enter into the contracts and rewrite the draft contracts. However, this delayed the expected launch date of the funds by a year, leading to a very short investment period (Avots et al, 2013). In the first round of the Hungarian JEREMIE programme, during the period between the publication of the scheme and the awards, the authority amended the terms of the call for tender, postponed the announcement of the award, then declared the tender unsuccessful and published a new one.…”

“…It sought to solve this issue by trying to find companies abroad that were ready to register themselves in Latvia and transfer a part of their activities. However, it can be assumed that these companies will not remain in the country later on, since their further financing cannot be ensured (Avots et al, 2013).…”

“…In addition to this, the revenue again went to private investors until the pre-set minimum yield was reached, then to the public fund, again until a minimum yield was reached (KFK, 2011). In the Latvian equity scheme, the share of private investors from the success was applicable above the expected 6% internal rate of return, and in the event of a loss, private investors were the first to receive their equity back (Avots et al, 2013).…”

“…The main mistake was the failure to involve the representatives of the venture capital industry in the early development stage of the programme. The profit/loss distribution parameters of the private investor incentive scheme had to be corrected during the notification procedure but before its completion (Mannick, 2007;Avots et al, 2013).…”