Nurturing small firms

They are known as venture capitalists -- two words which in most developing countries, including Indonesia, have negative or even exploitative connotations. But it was these capitalists and several tycoons that President Soeharto summoned for a special meeting on the development of small enterprises at the Presidential Palace in Bogor, West Java, over the weekend.

The capitalists represented 20 venture capital companies from 19 provinces which were established over the last three years by the government, through state-owned PT Bahana Artha Ventura, in cooperation with big businesses. Venture capital, though largely the concept of liberal economies, has proven to be one of the most effective ways of fostering small, start-up businesses.

Venture capitalists provide the vital infusion of funds -- in both equity and loan funds -- to help small, budding enterprises blossom. As they also share the risks of the business, venture capitalists usually package their financial participation with managerial and marketing assistance as well as consulting services. But as their name suggests, venture capital companies are not charity organizations but are business entities seeking profit.

The main difference between venture capitalists and other investors is their daring operations in that they venture into small, new businesses which have no proven track record and are not bankable. The risks are understandably usually high but the potential returns also are very big. No wonder, venture capital companies raise their funds mostly from shareholders.

Venture capital really suits the needs of small enterprises which barely own assets that can be offered as collateral for bank loans and have no proven track record to qualify for listing on stock exchanges.

The government therefore decided a few years ago to develop venture capital as another effort to help accelerate the development of small businesses and prodded big businesspeople to become their main shareholders. The idea was to set up at least one venture capital company in each province to help foster local small, start-up businesses. President Soeharto himself led the initiative by joining several of the companies as a shareholder.

As venture capital companies can thrive only if the businesses they join as shareholders grow and turn a profit, they should be aggressive in identifying start-up businesses with high-growth prospects. Venture capitalists reap profit from dividends and capital gains when they later divest their equity investment either through private placement or share issues on stock exchanges.

It is obviously too early to assess the performance of the country's venture capital companies, given their relatively short period of operations. But as reported by Minister of Finance Mar'ie Muhammad at the Bogor meeting, their records are not bad at all. The venture capitalists, Mar'ie said, had so far assisted 112,765 small firms with total employment of around 139,160.

Venture capital companies can not simply pour money into small enterprises as business viability and potential growth remain the prerequisite for their participation in start-up enterprises. But as they gain more experience, they will become more skilled at picking potential winners among small enterprises. Of most importance, though, is that venture capitalists offer what has proven to be the most effective program to help develop small businesses -- a fully integrated assistance package.