‘SHOW ME THE MONEY!’ – THE CRITICAL CATALYST TO FUELING DEVELOPMENT OF INNOVATIVE SMES
Arminfo
2010-02-09 11:08:00
Interview of Dr. Francis J. Skrobiszewski to ArmInfo News Agency
Dr. Francis J. Skrobiszewski has over 30 years of experience in
investment fund management and strategy development in United States,
Central and Eastern Europe, Africa, Asia and the Middle East. In 1990,
he drafted the business plan for the Polish-American Enterprise Fund
(PAEF). PAEF started in 1990 with a USAID grant of $240 mln, and
its privatized investment team has since raised over $1.7 billion
in non-U.S. Government capital for investment in Poland and the CEE
Region. Over the next 15 years, Skrobiszewski served initially as an
officer of the PAEF and later its sister Enterprise Fund in Hungary
(HAEF), where he also conceived and managed the latter’s cutting-edge
high-tech VC fund. He was also director of portfolio management in
a Polish Mass Privatization Fund, advised on the establishment of
the Eurasian Development Bank and serves today on the Investment
Committee of the Polish National Capital Fund (KFK) capitalizing new
high-tech VC funds. KFK has completed tenders of ~$125 million, which
must be matched by private capital, and with more tenders to follow,
its capital is a critical catalyst to stimulating the development of
innovative SMEs in Poland with upward of $500 million in financing.
Beyond the CEE, Skrobiszewski has provided advice on venture
funds and other intermediaries financing indigenous businesses in
Africa, Central Asia and West Bank/Gaza. He is leading a working
group on establishing an SME development fund for Afghanistan as
well as advising a London-based group promoting an SME investment
Fund in Iraq. In 2004, Skrobiszewski led creation of a Booz Allen
Hamilton service to facilitate trade and investment of major MNCs
in newly-emerging countries, and while there, advised the Millennium
Challenge Corporation on structuring its Georgia Regional Development
Fund. He serves on the Boards of Directors of the US-Polish Trade
Council (in Silicon Valley) and of the Afghan-American Chamber of
Commerce. Through USAID’s Competitive Armenian Private Sector Program
(CAPS), Skrobiszewski has been working closely with Armenian IT
entrepreneurs and assisting them to access opportunities in Silicon
Valley and advising the Government on structuring a VC fund tailored
to Armenia’s needs.
What needs to be done to fulfill the potential of human capital
in Armenia?
>>From what I’ve seen, Armenians have a high degree of capability
and intellectual capital. To stimulate it, several things can be done.
Overall, when you have a market economy, entrepreneurs and innovators
begin to see the opportunity to capitalize on their creativity. They
begin to see what happens in the Silicon Valley and similar places,
and they say "we can do that as well as they do". One of the critical
things is having access to the information about the market. The
initiative to construct a broadband network in Armenia on a broader
basis contributes to that goal. Having this kind of network, you
can spread your creativity better, and more Armenian entrepreneurs
will be able to see the opportunities to apply their potential. The
other though relates to how do you grow that potential, and what
do you do with it? That’s another thing, and that’s why "capital"
is so critically important, particularly "professionally-deployed"
venture capital. A Venture Capital fund brings more than just money,
it’s the skills that professional investors bring along with their
capital that makes the critical difference. This is the management and
other help that the small companies funded by venture capitalists need
to develop. With access to capital and larger markets, some of those
opportunities in Armenia will have a better chance to become reality.
Even small Armenian entrepreneurs, who went to the Silicon Valley on
CAPS-sponsored study tours, saw these kinds of market opportunities
as they used the internet. Then through CAPS’ support, they made
direct, personal contacts, and now, they are selling their software
and products of Armenia intellectual capital to larger companies
in Silicon Valley and elsewhere. It’s very impressive what can be
done with a creative mind and a little professional help – but still
capital is the essential "fuel" to grow a business anyplace in the
world, Armenia included.
How can connections with Armenian Diaspora in the US and elsewhere
help to find new opportunities?
The Diaspora can definitely play an important role – they have an
affinity to their ancestral home country, whether they were born in
Armenia or outside. I see that among Armenians living abroad, there
is strong interest in other Armenians, Armenian things, etc. In that
respect, the Diaspora can play an important role, if Armenians on
both sides put to use their energy to make linkages. Whenever I’ve
been with Armenian entrepreneurs traveling to Silicon Valley, they met
with people from the local Diaspora interested in what they were doing.
There’s always that strong interest. When you form a connection, other
things will follow, but physical presence is critically important to
that connection. Mutual presence makes it easier to connect and to
talk. Two years ago, I discussed the value of the "presence" in my
article in the CAPS news bulletin. When Armenian IT entrepreneurs came
to Silicon Valley for the first ArmTech Congress in 2007, CAPS took
them on a study tour during which they made a series of connections,
out of which has flowed continuous business for some. Business success
can more easily follow when you are connected both with people from
the Diaspora as well as people from your industry.
How can the educational system of the country be improved to reach
that?
First, you need to ensure that your curricula are designed for the
marketplace. It’s very good to learn basic knowledge, but you have to
also be able to apply it in the real world. If you are talking about
technical disciplines, you need to have a bridge between academia
and employers. I know a number of individuals in Armenia who have
been active in that arena. You have Hovhannes Avoyan from Sourcio
who has had a program at the technical universities in Armenia,
where he was bridging that gap and in the process identifying top
students who have gone to work for him. There has also been a program
at Information Technology Center in Gyumri (GITC), where they take
people who have an education, and then strengthen their skills to help
them operate more effectively in a business environment. The other
aspect to consider in the educational realm – to speak more broadly,
not just about Armenia – is always the challenge of being able to
commercialize what’s going on in the academic world, whether it’s
R&D or some basic research. The systems and processes we have in the
United States, like at Stanford University or UC Berkeley, are designed
to incentivize their students and professors to take the technology
they develop in their classrooms and university laboratories to the
market. In Poland today, I am involved with the Intellectual Property
Management Institute, which is a consortium of leading universities, at
the rector and vice rector level, and including other institutions like
the Polish Bankers Association. They have been exploring how to develop
an effective intellectual property rights regime for Poland. It’s more
than producing patents, but taking their IP rights to the market in
an effective way. They participated in a 10-day workshop at Stanford
about a year and a half ago and hold regular conferences in Poland. In
a word, there is that kind of action that helps you understand and
explore what kind of models are working in other environments, and
how you can improve on them tailored to your own country.
Is a university less flexible to market requirements if it’s State-run?
I can’t speak for Armenian universities, but it would seem so, because
generally-speaking, a State-run university is primarily reliant on
State support, and therefore, it would not necessarily be as market
driven as private universities, which by their nature have to be more
aggressive in meeting what the market is looking for, in attracting
students, in seeking grants, and finding out what the grant-making
entity seeks to achieve, etc. Of course, State-run universities
are also looking for a bigger piece of the "money-pie," but I’d say
off-hand that private universities have to be more market-oriented
to survive and prosper. That does not diminish the activity of State
universities though, as I went to one — Virginia Tech, which is
well-funded and now working in collaboration with Slavonic University
in Armenia. Face it, State schools also have to be aggressive about
their fundraising and marketing activities. These are skills that
come over time. The transition in Central and Eastern Europe has
only begun about 20 years ago, and that’s a very short period of
time. Last week, I was in Vienna speaking at a Business Council on
International Understanding’s conference on the 20-year anniversary
of transition in Central Europe and on looking to the future of the
Region in innovation, technology and entrepreneurship. If you stay in
your own environment, you think you have not accomplished much, but
when you look at developments from the outside, as I have been doing
for 20 years in Poland and Hungary, I can see a vast transformation
which has occurred over time. It’s done step-by-step in an incremental
sort of way, by government, private sector entrepreneurial entities
and academic institutions. And if you know where you as a society
want to go, you can move faster in getting there.
What is the reason that, despite human capital, venture capital funds
are yet to come to the country?
I think there are a couple of things. Two and a half years ago, when
I helped USAID’s CAPS prepare the Armenian IT entrepreneurs coming
to the Silicon Valley, almost all were looking for investments
from VC funds in their small businesses. When you examine the
Armenian economy as a whole, it offers only a small market for
investment. Venture capitalists are not just looking to build a
nice little operating business that provides the owner-managers a
steady income, they want to build a substantial business, grow it
and sell it for capital appreciation. Their goal is exiting from the
business. On the other hand, the average entrepreneur wants to build
a business to provide a livelihood for his or her family — unless
they are serial entrepreneurs. In Armenia, it’s a small market with
smaller businesses. When a venture capitalist is looking for places
to position and invest, he goes where he finds greater opportunities.
Several years ago while running a fund in Hungary, I was actively
involved in the European Venture Capital Association (EVCA). I
distinctly remember the interest and activity of the larger global
funds in going to China, where a large VC industry was beginning to
emerge. That was because China was a big, hot market, and continues to
be so. And in 1994, I remember when private equity funds were beginning
to deal in Romania, but later withdrew for a time, when they did not
see the opportunities materializing as quickly as they had expected
after their experiences in Poland and Hungary. These decisions
by Venture Capitalists and other investors are market-driven. In
Armenia, you have to build an ecosystem to facilitate fast growth of
companies. In my original proposal to the Ministry of Economy for
an Armenian-focused VC Fund, I suggested that one of the primary
objectives should be in helping Armenian businesses expand out of
Armenia to larger markets. This is because the size of the market
will dictate the size of the company, and since capital can be more
efficiently deployed in such larger growth markets, venture capitalists
will have an Armenian technology business they could invest in where
the market would present a better opportunity to achieve an exit. So
you can use Armenian technology, but have a marketing arm, say, in
Silicon Valley, and that marketing arm is the essence of the company
that might be sold; whereas, the capital from sales and in capital
appreciation when the company is sold flows back to Armenia. where
the intellectual property and parent company are located.
Developing a venture capital fund or a private equity fund is not
a momentary process, it is a long and time-consuming effort. When I
was Senior Vice President of the fund in Hungary – Hungarian-American
Enterprise Fund – and we went out to raise our parallel private fund,
it took us a good three years. It involved a number of people working
full time, because one must structure the right kind of fund that will
be effective in the particular marketplace and which will attract
investors. It is first structuring properly, and then finding the
parallel capital.
In a private equity fund, you can have a governmental investment,
but the fund must be commercially operating. You need a critical mass
of capital so that you can support the operations. That’s the staff
of people to generate the deals, close them, and then actively manage
the investment. There are costs associated with these activities, and
many are essentially the same for large and for small funds. That’s
why small funds traditionally have disproportion operating costs in
comparison to capital under management for larger commercial funds.
One approach is to subsidize a smaller fund with technical assistance
grants provided by development agencies. That is the reason that
in my presentation at the CAPS Armenian IT Competitive Conference,
I suggested that Armenia needed to start with a developmental fund,
like we had in Poland and Hungary with the Enterprise Funds in 1990.
Through that approach, it was capital from the public sector deployed
as a "catalyst" that was used to make the initial investments to
grow local businesses and develop the ecosystem for private equity
investments, but this capital was managed privately by investment
professionals. In this way, you can demonstrate the opportunity and
the real risks in the given emergent market, and when that happens,
you have real success stories that attract other investors.
Do you think that statements of Russian authorities on transition to
innovation-driven economy could result in entering of Russian VC’s
in Armenia?
That could very well be. I did read the Russian President’s remarks,
and during the BCIU Conference on Entrepreneurship and Innovation
for CEE Competitiveness I spoke at in Vienna the week before coming
to Yerevan, those remarks were featured to kick-off one of the panel
discussions. Those views of the President could set a direction, it’s
a vision, but then you need to bring that vision to execution. And
as I mentioned, when you are actually putting in place this kind of
long-term business funding and the professionally-managed vehicle
to deploy equity capital and manage investments, it takes time and
commitment of resources. That could mean over the early period,
investors would be expending money without much to show for it. It
may very well be that Russian VC funds will come into Armenia, but
of course, first someone has to define the risks and demonstrate
the opportunity Armenian technology and other firms offer. Success
stories are what attract investors. In Poland in 1992, the stock market
achieved the highest rate of return in real dollar terms of any other
stock market in world history. When that happened, financial investors
and private equity funds came started taking a closer look at Poland,
and we at the Polish-American Enterprise Fund with a capital base of
$240 million had no trouble raising our first parallel private fund.
Since then, my former colleagues have raised over $1.7 billion in a
series of private funds, and complemented by the assets of competing
private equity funds, there is over $8 billion committed for investment
in Poland. But that was because the market saw the opportunity and the
success stories. In Armenia, for example, you have Hovhannes Avoyan,
who had a startup company that was sold to Brience Inc., and Lycos came
into Armenia by purchasing Brience. Then, he as a serial entrepreneur
started his next company, Sourcio, which EIF had provide support and
capital to develop and has demonstrated success.
Recently, Sourcio won the first prize at a contest in Boston. These
kinds of successful people and ventures begin to attract attention to
the Armenian marketplace and to other promising entrepreneurs. But
Armenian tech firms have to tell their stories outside of Armenia
to attract attention, so if the Armenians begin to show up on
international investments forums, like those in Silicon Valley such
as the Global Technology Symposium at Stanford and ArmTech, then
they will demonstrate the opportunities and attract interest. Again,
physical presence is critically important, as I mentioned earlier
in this interview. Meeting with people face-to-face, giving panel
presentations like those at the CAPS-supported Armenian IT Competitive
Conference, and reaching out in a visible way are all steps in making
business connections and creating the proper image of Armenia as a
source of quality technology.
What are the preferable directions of positioning the country for
possible VC investments (new jobs, software engineering, semiconductor
design, etc)?
I see the strength of Armenia in technology and in the initiatives
that have been underway to begin to present it. Armenia needs a clear
and consistent strategy to "brand" itself as a source of innovative
technology – this involves "image-building" based on the realities.
The government just joined the San Francisco Global Trade Council,
which will help Armenia better position itself in Silicon Valley in
the imaging of Armenia. But again, you’ve got to do the outreach on
your own as well – that is, to tell your story. You also have to
go to Silicon Valley – or wherever else you want to make business
connections – with some regularity. You can’t just show up once and
then go home. And Armenian delegations have been going to Silicon
Valley enough to build a base of connections. CAPS sponsored the
Silicon Valley Study Tour after ArmTech 2007 and a Silicon Valley
Marketing Road Show in 2008. On the latter, Armenian Deputy Minister
of Economy Mushegh Tumasyan participated, and CAPS arranged a meeting
with San Francisco Global Trade Council and others. Then, when the
Prime Minister came to ArmTech 2009, CAPS was able to arrange for him
to speak at the SFGTC Luncheon. He also had a very productive set of
meetings with groups like Plug and Play Tech Center and others which
were enlightening on the business dynamics of Silicon Valley, how
some of the processes could be employed in Armenia and how Armenia
could work with Silicon Valley groups. CAPS had also reached out
in Silicon Valley with the US-Polish Trade Council, of which I am a
Director, the Estonian Government’s Rep Office and the tech center
established by the Danish Government. I know Armenia is planning to
open a Rep Office there as well, and this kind of experience helps
Armenia see how others are doing their promotion and imaging and you
can begin to get a sense of what to concentrate on. Silicon Valley
is definitely a source of quality technology. Armenia is a source of
quality technology and quality products like terrific agricultural
and mineral products. Depending on how you tell that story about your
country, there is a real opportunity to position yourself in Silicon
Valley and other markets.
Are the overall conditions of running businesses in Armenia (including
practices of tax collection, custom procedures, etc) able to attract
foreign investors?
It’s always a consideration how you look at the various economic
indexes. When I spoke at the ECA Innovation Conference with the World
Bank, Enterprise Incubator Foundation and CAPS in September 2007, I
noted that the Heritage Foundation’s Index of Economic Freedom ranked
Armenia the highest of any of the former Soviet Bloc. I don’t know
if that’s still the case, but there are different rankings issued by
different groups – I was at a World Bank program a couple of months
later, and the speakers cited slightly different rankings for Armenia
by the CATO Institute and the World Bank from those of the Heritage
Foundation. Anyway, Armenia ranks up at a relatively good position,
and that tells me something. What the realities are though might be
quite different from rankings, and Armenia might have to actually take
steps to do something that is different from the theoretical aspects.
Legal regimes and policy and business practices contribute to what
you call the ecosystem. How do you create a conducive ecosystem
for Armenian SME growth? What do you do to attract businesses and
capital to Armenia? What do you have to do to make it easier for your
companies to grow so that they can pay their taxes? The Chairman of
my high-tech Fund’s Board of Advisors in Hungary, Zoltan Merszei, was
formerly the Chairman of Dow Chemical Company. He led that company to
the position of the international giant it is today. Zoltan was very
proud of brochures he produced about his company that emphasized,
"We pay our taxes!" And that was what he would publish pamphlets on
in the countries where he opened new Dow offices. He did that because
he wanted to tell the officials and citizens of these countries about
the benefits of making it conducive for Dow Chemical to come there —
because if they let Dow make money, then it could pay more taxes. I
think the smart approach for policy-makers is to look at how you
encourage business growth. If you want to encourage high-technology
development and a knowledge-based economy, you don’t put burdens on
critical technology being imported. You have to figure out what is
the cost-benefit of taxing somebody on a computer, when there might
be greater value produced for society by having more people buying
and using those computers. The same goes for broadband usage – these
kinds of things can be manipulated, so that you can encourage greater
value to society than what you might gain from collecting additional
taxes or imposing regulations.
Are there successful cases in other countries, including neighboring
ones, for Armenia to study?
In Georgia, I helped to structure the Georgian Regional Development
Fund for the Millennium Challenge Corporation’s account a couple of
years ago. It is a $30 million fund to begin to build an investment
ecosystem for that country. Although this Fund is focused on regional
development, it recognizes that small enterprises need equity capital
and that funding must be professionally deployed. The best example
though is the transformation process I have been involved in over
the last 20 years in Poland. Recently, the Polish National Capital
Fund (Krajowy Fundusz Kapitalowy) was created, and I serve on its
Investment Committee. KFK is designed to fill the equity gap for
innovative SME’s in technology. The Polish Government recognized
that generally speaking, the risk was too high for the private
sector to invest in early stage technology ventures. Thus, astute
Polish policy-makers have stimulated such private sector investment
by setting up this "fund-of-funds" to match the capital of private
investors in new Polish venture capital funds. So we at KFK invest not
in high-tech businesses directly, but in VC funds that are investing
in innovative SME businesses. And that way, we can spread the impact
of this money across Poland. KFK issued its first tender in 2007 for
about $25 million, and now with an injection of 180 million Euros in
EU Structural Funds going to Poland to capitalize KFK, it has closed
a $100 million tender and will be issuing another approximately
$100 million tender when the current one is allocated. Since KFK’s
commitment to these funds requires matching private capital, the fund
managers must attract an equal amount or more of private capital. So
in reality, there will in coming years be close to $500 million in
venture capital available to finance development of innovative Polish
SMEs. But this progress didn’t just happen overnight. I gave a speech
in September 2008 at the Economic Forum at Krynica, Poland – a kind of
"mini-Davos" — on the evolution in building this ecosystem in Poland
over a period of 20 years – from when we created the Polish-American
Enterprise Fund in 1990 as the pioneering investment fund there. What
you are doing here in Armenia with institutions like SME DNC or the
Enterprise Incubator Foundation or the proposed Venture Capital Fund
the Armenian Government is evaluating, all contributes to building the
kind of ecosystem Armenia will need to develop its high-tech sector.
Likewise, when you have a properly-designed educational initiative,
when CAPS takes Armenian entrepreneurs to Silicon Valley, when Armenian
institutions and entrepreneurs participate in international forums
on technology, these things help to create a knowledge base on which
Armenia can create the ecosystem its private sector and Government
needs. But if I’m an entrepreneur, an innovator, or an academic
researcher without money to commercialize my inventive idea and
grow my business, it’s all abstract – just a theory. Money is what
makes the world go round, what gives vitality to business. I set up
a high tech fund in Hungary with $5 million dollars, with subsidized
support from my parent fund to manage it, and the availability of our
small capital stimulated Hungarian entrepreneur-innovators to come
forward. Indeed, we generated 400 deals in about 5 years. Of course,
we only invested in six or seven companies, but the reality is that
money stimulates invention and business development. You start with
a couple of deals, and when you have success stories that demonstrate
the opportunities, others are attracted to come into the marketplace
and make their own investments. We attracted other private investment
funds that came into Hungary, because they saw the success of our
high-tech fund – just like large private equity funds came into
Poland when they saw the opportunities that the Polish- American
Enterprise Fund demonstrated. These things go hand-in-hand. I think
it’s difficult to foresee what the volume of deals might be in Armenia
until you put the money on the table to draw out and motivate Armenian
entrepreneur-innovators.
Thank you
Aram Gareginyan, ArmInfo, 09.02.2010