Venture Capital – The Holy Grail of true economic growth?

In the context of the current economic and political environment, where financing a company is in constant flux, there is need for divergence from the traditional approach to raising capital; in the context of companies who find themselves in financial distress the need for a change is ever more apparent.  Such companies, to go to or return to making a profit, must be in a position to overcome a range of difficulties and impediments vis a vis raising financial capital; profit is after all the very essence of any economic activity.

However, in the modern commercial sphere this traditional approach of developing a business with your own resources is becoming bridge too far.

The reasons are objective:

1. fragility of the state's economy;
2. political instability (which is likely to cause significant changes to rates of currency exchange and which consequently may lead to inflation); or
3. reasons which are tangential to the specific economic activity performed by the particular company and its acceptance on the market.

 

For the past 10 years, whenever companies found themselves in financial distress, the Directors of the companies would in usual course negotiate with banks and/or regulated financial institutions, for loans to finance the continuation of the company’s activities. Very often the Directors would use their own personal assets as security for such loans.

Taking into account the fact that financial instability must be understood at a macro-economic level, it is necessary to look at the wider picture, from the national perspective. Loans obtained by Companies turned out to be, most of the time, little more than a bandage on a bleeding wound. Company losses were caused not by the lack of liquidity, but by economic forces and by the lack of real organization, which could take into account the macro-economic reality and which could give the Company a new impulse towards a profitable activity.

Thus, the result was that a lot of these Companies ultimately ended up in insolvency; any real possibility for a successful outcome was a bridge too far. The activity of the Company was, on the surface, safeguarded from the company's creditors, however its losses continued to mount and drag it down, these losses being caused not by claims from the creditors, but by the lack of any substantial restructuring, a turn-around of the economic activity and a need to adapt to the current financial and economic environment.

In order to bring relief for a distressed company Venture Capital shows itself as the next engine for development especially due to its non-regulated nature.

But in this context, what is Venture Capital?

There’s no secret formula or definitive road to success, especially in this field. At the heart of successful Venture Capital is the risk. The risk denotes an investment which in turn is capitalized and then becomes profitable. The investor assumes the risk of the seeding phase and the challenge to invest in a company’s business which may have little chance of success. Conversely a Company, which finds itself in financial distress, cedes part control of its business to an investor, and the Company accepts the possibility that this might lead to a total loss of control over the Company. The risk taken by all parties involved
is that any such investment may impact upon or cause damage to other investors or that the innovation of the Company is basically torpedoed by even greater innovations.

It is obvious, therefore, that reorganization, planning and long term vision are the key elements to be considered when relief for a financially distressed company is being considered. Most of the time a Venture Capital investor will grant to the Company the necessary capital to cover all of the debts of the company, but it will only do so after the seed stage of risk assessment, assessing the possibility of success of restructuring and a turnaround of the management of a company.

The assessment is based on an evaluation of economic activity, potential for development, adaptation and capitalization, and if the re-organization involves a real restructuring at a management level by the appointment of experienced personnel in key positions within the company.

Through Venture Capital, the road less taken can be approached by short-cutting the path to innovation through restructuring and relief of companies, unlike the traditional approach of capital infusions.
Whether Venture Capital turns out to be indeed the path towards the Promised Land (similar to the old idea of the American Dream), remains to be seen. Until then, it presents an alternative to the traditional financing model.

For further information, contact:

Dragos Ramniceanu, Senior Associate

Vasile Deleanu - Attorneys at Law, Bucharest

e: dragos.ramniceanu@deleanu.ro

t: +40 722 538 493