Business Angel and Venture Capital Financing in Serbia
In this article we shall focus on: 1) Business Angel investor and 2) Venture Capital investor. To distinguish between the two simply in a few words, a Business Angel investor invests in business start-ups or start-up ideas, with smaller investments, and a Venture Capital investor invests in more mature companies or start-ups, with larger investments. Business Angel investing is riskier due to financing in an almost unknown business, whereas Venture Capital investing is investing in larger amounts in a relatively established and proven business idea.
What is Equity Financing? Equity financing is the process of raising capital through the sales of shares or percentage ownership in a company. A company may have a need to raise money because of a short-term issue to pay bills or a long-term goal to invest in their expansion. In the process of selling shares, the company sells ownership of the company in return for cash.
Equity financing can come from a number of sources, namely, the owner’s family, friends, investors, or going public and selling shares, such as an initial public offering (IPO).
Although the term equity financing refers to financing of public traded companies on a stock exchange, the term also applies to private company financing or direct, one-on-one financing without an intermediary.
How Equity Financing Works? Equity financing involves the sale of common equity, but also the sale of other equity or quasi-equity instruments such as preferred stock, convertible stock and other equity units that include common shares.
Business Angel Investor
What Is a Business Angel Investor? A Business Angel is a private investor with considerable financial means (who can be a seed investor, private investor or angel funder) who provides financial capital for business start-ups or early stage entrepreneurs, in exchange for partial equity ownership in the company. You can usually find most of your Angel investors being family and/or friends.
Who Are Angel Investors? Most Business Angel investors are individuals looking to invest in a business start-up in its early stages. Investing in a start-up at this stage is extremely risky. An investor usually limits their investment portfolio on this level below 10%. Angel investors are usually wealthy individuals and take the risk of high-returns on a relatively unknown idea as compared to investing on a Venture Capital level.
An Angel investor gives more favourable terms compared to other financers since they invest in the entrepreneur and not so much in the business idea. An Angel investor is essentially the opposite of a Venture Capitalist in that they concentrate on getting the start-up off the ground instead of earning a profit.
Sources of Funding: Angel investors normally use their own money as compared to Venture Capitalists who oversee collected money from other investors and place them in a centrally managed fund. An Angel investor can be a frontman, though, which is financed by another company, a trust or an investment fund, among other types of backers.
Investment Profile: Angel investors, unfortunately, who provide seed financing for start-ups in the early stages, are likely to lose their entire investments. More experienced Angel investors have a built-in exit strategy, option to buy or IPOs to limit their risk.
A seasoned Angel investor may have a portfolio with a 22% internal rate of return. This may appear attractive for investors but may be far too expensive for a start-up owner. A bank can offer much cheaper financing, but a start-up usually cannot qualify for such loans. In this instance, an Angel investor is perfect for a start-up who desperately needs financing.
In recent years, Angel investing has grown as a financing instrument to become the primary source of funding for many start-ups.
Additionality of Angel Investors: Besides infusion of financing, an Angel investor brings to the table non-financial means. Namely, a Business Angel brings their experience of getting a start-up off the ground, mentoring and business connections to the outside world. In some cases, just the connections to the right players in a field may be enough to get the start-up off the ground. For instance, if an ICT start-up is backed by an Angel investor who specifically invests in ICT start-ups, the Angel investor may have contacts in Silicon Valley which may prove invaluable to securing new work.
Venture Capital Investor
What Is a Venture Capital Investor? A Venture Capitalist (VC) is private equity investor that provides capital to companies showing high-growth potential in exchange for an equity stake. VC investing could be funding start-up ventures or supporting small companies that wish to expand but do not have access to equities markets. VCs are willing to invest in such risky companies because they can earn a significant return on their investment if the company succeeds. VCs experience a high-rate of failure due to the uncertainty involved with new and unproven companies.
One way to possibly differ a Business Angel from a VC is that a Business Angel invests in the earliest stage of a company, and with smaller amounts of investment, whereas a VC invests in the later start-up stage commercialization process with larger amounts of financing.
Insight into a Venture Capitalist: A VC can be an individual, but more than likely is a limited partnership fund where financial backers place their money to perform investments. The fund usually has a board that performs investment decisions. The board reviews promising growth companies that the pooled VC capital can invest in exchange for a significant equity stake. The VC will divest in these firms later in the process timeline with a substantial return on investment.
International Venture Capitalists of fame include, Peter Theil, co-founder of PayPal and Facebook’s first investor and Chris Sacca, early investor in Twitter and Uber.
VCs look for a strong management team, a large market and a product or service with a strong competitive advantage or possibility to disrupt the market. VCs most often are industry-theme focused with the opportunity to buy into a large percentage of the company to leverage overall management.
Structure of VCs: Financially well-off persons, pension funds, insurance companies, foundations and corporate pension funds may pool money together to be managed by a VC. The VC firm manages the fund, but the investors have limited partnership in the fund. A VC invests in companies too risky for banks or capital markets would consider.
Compensation: VC management is compensated in the form of management fees and interest earned. The rule of thumb is 20% of profits is paid to the company managing the private equity fund, while the remainder goes to the partners who invested in the fund.
The Business Angel and Venture Capital Scene in Serbia
Below is a chart illustrating the amount of equity-based financing for SMEs in Serbia, broken down by financing institutions and stage of enterprise size and need. Numbers entered below are estimations researched over a three-to-five year period (2013-2018) and expected available funds in the following period.
| Source of financing/Business stage | EUR, thousands |
| Startup HUBs and Accelerators | 400 |
| Business Angel investors | 300 |
| Venture Capital funds | 2,000 |
| Private equity funds | 2,000*–5,000** |
| Total | 4,700–7,700 |
| Seed and start-up | 2,700 |
| Growth and expansion | 2,000–5,000 |
| Total | 4,700 – 7,700 |
Source: Research into the Supply of Equity Financing for SMEs in Serbia and Selected Countries, Cardno Emerging Markets, USAID, 2018
*estimation based on annual investing realized during 2017
**estimation based on expected potential of local funds
As of this report, it can be seen that equity-based financing is quite limited in Serbia. The chart shows representation of financing on all levels, in reality it is very limited. The entrepreneurship ecosystem in Serbia is quite under-developed in Serbia, lacking government support in the form of incentives and private sector players taking a significant lead. Another issue is a lack of equity investing culture in Serbia. Serbian companies are family oriented and are very reluctant to outside investment, preferring to grow the company slowly with funds that allows the owner to hold onto full control.
Business Angel Investing Scene: The Angel investing scene in Serbia has evolved since 2010. The Angel investing scene is varied with intents and interventions. The players showing up on the Angel investing field:
Serbian Business Angel Network – first on the scene with Angel investing, operating since 2009, chartered with EBAN since 2013. SBAN has self-described themselves as an providing an altruistic to the ecosystem, not facilitating investments themselves.
Belgrade Venture Forum – has been organizing three-day equity environment conferences on an annual basis for nearly ten years. Nearly 400 equity-minded and ecosystem enthusiasts attend the event each year, holding pitching events for 30 start-ups and 50 Business Angel investors.
Angel List – the world-wide platform for Business Angel investors also has a page for Serbian Investors. Listed are 22 persons identifying themselves as investors, 12 which have actually angel invested for a total of 80 investments.
Entrepreneurship Ecosystem SME Development Organizations: Hubs, co-working spaces, accelerators, entrepreneurship centers, etc., have been around since 2010, with an expansion of organizations into this field over the last five years. These organizations usually provide trainings, business acceleration or similar, for start-up companies negotiating an equity position. These organizations also offer working space alongside other start-ups, mentoring, linkage with international networks, meet-ups and more. Major players in this field:
StartLabs – quite easily the first business accelerator in Serbia, although describe themselves more as an Angel investor, founded in 2013. StartLabs has two offices, one in Belgrade and the other in San Francisco. From recent information, StartLabs has 11 investments in start-ups in Serbia and the Balkan region. Investments are up to 50,000 EUR for a 10-15% equity position.
SEE ICT – started in 2010 to develop the start-up scene, with emphasis on ICT technology and disseminating advertisements for jobs in ICT companies. Investment information is sparse, but have noted as of several years ago investments from their business accelerator attained nearly one-million EURs, with a number of investments from the EU financed, ELEVEN investment program in Bulgaria.
Nova Iskra – established itself as a design incubator in 2012. Nova Iskra does not take an equity position in incubated companies, but offers revenue earning opportunities through projects and commercial work.
ICT Hub – started operating in 2013 with several founders with the idea to develop ICT start-ups in Serbia. ICT Hub offers start-ups working space, mentoring, meet-ups, international networking and financing. ICT Ventures, equity arm of ICT Hub, finances investment of SMEs up to 50,000 EUR for a 5-15% equity position and opportunity for follow-on investment in a second round. In 2017, ICT Ventures had 6 investment and total assets of 250,00 EUR.
Impact Hub – began operating in 2013 and is one of 100 Impact Offices operating globally. Impact Hub Belgrade offers up to 50,000 EUR combined with mentoring and other start-up services. They note seven invested start-ups in Serbia.
Novi Sad Business Incubator – established in 2010 with physical incubation space, although has existed since 2004 with virtual incubator activities, establishing by 2010, 100 companies grossing nearly 100 million EUR. The Novi Sad Incubator is connected to the University of Novi Sad’s Technical Faculty and is concentrated on ICT start-ups. There is no information on equity investments.
Other ecosystem organizations in Serbia – there are a number of other ecosystem organizations in Serbia offering ecosystem services which spreads information about Business Angel financing, although on a reduced level. Organizations count as: Science and Technology Park Belgrade (which houses the Belgrade Business Incubator and the Serbian Innovation Fund), science and technology parks in Nis and Cacak, numerous business incubators/innovation centers spread out in Serbia and co-working spaces.
The total estimated early stage financing invested in Serbia from the ecosystem players is estimated to be between 1–2 million EURs annually. On an annual basis, up to 400,000 EUR is available for early stage financing.
Crowdfunding: Serbia has a couple local crowdfunding platforms: Crowd Funding RS and Donacije RS. Serbia also has access to Indiegogo, while Serbian campaigns have been held on Kickstarter, although Kickstarter is not available in Serbia. As of 2017, Crowdfunding raised 653,134 USD with a total of 570 campaigns, 41 successful. The number of crowdfunding campaigns since 2012 has grown 400%.
Venture Capital Funds: No VC funds exist in Serbia. There are several regional VC funds that have Serbia representational offices to support capacity building of portfolio companies, although these VCs are registered in countries with preferential tax status.
The VC with the greatest visibility in Serbia is the Enterprise Innovation Fund (ENIF)currently managed by South Central Ventures. This is not a private equity fund, but a program financed by the European Union. The total fund is 40 million EUR financing from seed to venture capital stage investments throughout the Western Balkans. Financing is from 100,000 to 1.5 million EUR for investments. The amount of annual equity financing available for Serbia is 2 million EUR.
Private Equity Funds: Five investment fund management companies operate in Serbia with 231.5 million EUR in assets under management. The Law on Investment Funds regulates investment funds suitable for professional investors (private equity funds – under AIFM Directive in the EU), as well as funds suitable for the general population (under UCITS Directive in the EU).
Two private equity funds are registered in Serbia, but the amount under managed assets is insignificant.
Foreign funds are also investing in Serbian companies. These funds are registered primarily in the EU member states with a preferential tax status. Foreign investors have expanded their activities on the Serbian scene over the past ten years.
The following equity funds are most prominent in Serbia:
Enterprise Expansion Fund (ENEF) – is an EU funded project, sister to ENIF, operates over the Western Balkan region. ENEF manages 100 million EUR, investing in companies in the expansion phase. Since the program began in 2014, ENEF has invested in a number of Serbian SMEs: Delmax — car parts manufacturing and distribution company; Gomma Line — also in the same industry as Delmax and BG Reklam — a company selling permanent point of sales material. ENEF has not released size of investments in their companies.
SEAF Balkan Fund — launched in 2005 with a current investment fund of 13 million EUR, currently liquidating its portfolio and returning funds to investors. SEAF Serbia’s investments are between 300,000-1.5 million EUR. SEAF invested in Adore Chocolate, Finear, Factoring A2B Express, Gomex, among others.
Blue Sea Capital — works throughout South East Europe, investing in businesses with regional growth potential. Blue Sea targets investment ranging in size from 5–15 million EUR. The fund has invested in a number of private medical care providers and co-invested with other private equity funds to acquire Danube Foods Group.
Serbian Private Equity Fund (SPEA) – founded in 2010 with the aim to raise awareness about private equity and venture capital in Serbia. Although not active these days, their website boasts 20 corporate member — private equity funds, law offices, advisory companies, etc.
From educated estimations, total invested amount in Serbian SMEs from private equity funds is estimated between 15-20 million EUR over the past decade. Annually, equity financing available for Serbian SMEs is at 2-5 million EUR.
Initial Public Offering (IPO) — in 2017, EBRD and Belgrade Stock Exchange (BELEX) initiated the IPO Go Project where the first IPO company, Fintel Energija, was introduced issuing 6.5 million shares on the market of a 27.4 million EUR value for 20% equity position.
Real Estate Investment Trusts (REIT) — There are no real estate investment trusts registered in Serbia. Of interest, a large number of companies are present in Serbia that represent private or institutional investors in real estate. A limited number are foreign investment funds and most are companies engaged in investment and real estate development.
The most prominent investors are Zepter Real Estate, Globe Trade Center SA, Atterbury investment group, AFI Europe Hyprop Investments, BIG CEE and others. These noted companies are primarily investing in shopping malls (Ada Mall, Usce Shopping Mall, Delta Shopping Mall, other malls in Serbia, Airport City Belgrade, other retail office spaces, etc.)