Despite labor inefficiencies and transitional challenges, venture capital activity is on the rise in Romania, a country many view as one of the last unexplored frontiers in Eastern Europe.
At present, there is approximately $500 million of venture capital invested in Romanian companies. While that’s a small sum compared with other countries, VCs say it represents only a portion of the total money venture capital funds have committed to investing in Romania. With the country’s economy improving, an increasing number of venture capitalists are giving this nation of 22.3 million people a closer look.
“In the long term there are certainly opportunities for high returns,” said Gregory White, chief operating officer of Value Quest, a division of TA Associates, and board member on the Romanian-American Enterprise Fund.
Laying the groundwork for VC investments is Romania’s improving economy, which is positive for the first time in three years. Inflation is down from 50% to 30% – and declining – and exports rose 29% in the first quarter of 2000 over the 1999 first quarter. The country isn’t short on start-ups, either. According to the Romanian Commission on National Statistics, 1,993 new companies with foreign venture capital were registered in Romania in the first quarter of 2000 and although, on average, very little money was invested, this represents the country’s entrepreneurial mindset.
Thus far, most of the VC funds there have focused on health care, consumer goods, distribution and retail, telecommunications and, just recently, the Internet. Unlike the U.S. market, an initial public offering on a Romanian stock exchange such as the Bucharest Stock Exchange or the RASDAQ is not a viable exit, VCs said. Instead, investors have seen success exiting through sales. One example is the Romanian Investment Fund’s recent sale of Monopoly Media, which generated an IRR of 45% in one year. Advent International acquired 90% of Monopoly, paying a little more than $7 million.
Many VCs are comparing Romania’s current venture capital investment prospects to those of Poland a few years ago and believe that strategies that worked in Poland in the past will work in Romania today. Cornel Marian, senior investment officer and head of Oresa Ventures Romania, cited the optics industry, which has grown in Poland but is a wide-open field in Romania. “In Romania you can come in and be the first,” he said.
Since there are relatively few venture capital funds in the area and banks do not make long-term loans, entry valuations are quite appealing right now, added Marian.
That said, Romania still presents a host of challenges to any investor. Problems related to inefficiency are common: TA’s White tells of visiting a manufacturing company that diligently maintained a year’s supply of obsolete material and employed, on average, 10 people to do the job of one.
More deleterious for venture capitalists in Romania is the risk of fraud. Although not directly related to venture capital, the National Investment Fund (NIF), a unit trust, recently collapsed as a result of fraud, causing investors to lose $48 million. “This comes with the territory when investing in the wild, wild East,” said a Silicon Valley executive currently recruiting Romanian engineers for his U.S. venture-backed technology start-up. One positive development from this recent event is that Romanian authorities have vowed to create stricter financial market rules with the help of the International Monetary Fund.
Government red tape is another obstacle, as it slows the process of obtaining licenses for Internet service providers said Esther Dyson, head of New York-based EDventure Holdings. Bureaucracy is why she will not invest in government-related companies or companies that depend on licensing.
One way foreign VCs are trying to combat these challenges is by westernizing their investments. Oresa Ventures, for example, currently has a Romanian management team on just one of its 14 portfolio companies; the rest are comprised of members from the U.S., England, Germany and other western countries. Marian said the goal is to transfer management to local teams within three to four years. White points out that there is a strong educational base in the country and as exposure to the West becomes more frequent, Romania will begin to shed its often inefficient business habits.
Looking ahead, the most immediate potential speed bump is the Romanian elections in November. Sources say that if the left, which was leading the election polls in May, manages to take power, reform could be retarded. However, the incentive of money from the IMF and the preparations necessary to join the European Union will be enough to keep any government – incoming or incumbent – on the reform track, said Raymond Beimers, an Eastern Europe analyst at ABN Amro.
Most likely, no new funds will be created before the elections. However, with the overall economy apparently headed in the right direction, several venture capitalists said they are looking for Romania to follow Poland on the path to strong private equity returns.