The politics of understanding
One of the first challenges we faced at Core Incubator was improving the entrepreneurial climate in Croatia and neighboring countries where we are active. There are a couple of ways to achieve that, one of them is providing more funds to the earliest stage startups. The second is educating potential entrepreneurs about running a business and developing their ideas into clear business visions. The third one is building a quality infrastructure.
The best way is to combine all three paths. Funds, education and infrastructure.
The government (both local and on the EU level) can play quite a big part in all of this. In late 2012, the EIF (European Investment Fund) funded two seed & acceleration stage funds in Bulgaria; Launchub and Eleven. Launchub received 9M€ and Eleven 12M€ to invest in seed and early-stage startups in Southeastern Europe. Both of them improved the ecosystem by a substantial amount, providing the much needed lower access to capital in the region.
From the perspective of Core Incubator, the competition from Eleven and Launchub is very difficult. Public money has no cost of capital, while our investors expect a certain ROI. The main reason we currently cannot go under the 30% mark is because the risk is too high and we can’t provide capital under a certain equity level.
But from the perspective of entrepreneurs, the JEREMIE equity financing financial instrument is one of the best things to come out of Brussels and Luxembourg in the startups era.
In the past couple of days, I joined our CFO in visiting many officials in various EU offices in Brussels and the EIF office in Luxembourg. The main reason for our visit was the concern that the Croatian government is going to ignore equity financing as a financial instrument in the 2014-2020 operational program for regional development. That OP is going to define what EU funds are made available in the member country. The concern was born out of many discussions with high ranking officials at various Ministries in Croatia in the past months.
The Ministry of Entrepreneurship in Croatia is a big advocate of loan financing. I understand why is that. Loan financing is easy to understand and the process usually includes private banks that successfully kill the majority of entrepreneurs that cannot cope with the overwhelming amount of bureaucratic nonsense required in order to apply for funds. The paradox gets clear when the first requirement is that your last financial year must be positive.
Loan financing is bad. Not only are the requirements insane, but the cost of failure is so high that once you fail after receiving a loan, you are very likely to never try your own venture again.
On the other hand, the government is very bad at running a business. In Bulgaria, the EIF is running the JEREMIE programme and selecting the managing partners. In Croatia, the government is inclined to control the SPV by itself through agencies that have a terrible track record even though the EIF offered to manage the fund as they did in Bulgaria. But the final decision is on the local government.
So there are two goals; include equity financing in the OP and make sure the local government does not interfere with the management of the SPV.
It is not a question whether a sister fund of Core Incubator will be selected to run part of the funds from the program in Croatia. This is a question of creating the ground for better infrastructure, education and funds. This will benefit all those interested in better entrepreneurship in Croatia and in the region.
Although this post reflects my business activities, it does not present an official statement from Core Incubator or Core Commercial Investments.