I had an interesting discussion last night about financing opportunities in the software industries. There were two options mentioned. One - the private equity side which is a bit inaccessible not because of the unattractiveness of the industry (it is growing at double digit rates after all) but because of the lack of managerial skills. This is a very good point indeed as unfortunately Romanian technical skills and innovation abilities are not backed up by the management ones. Solution for this one -- bridge the gap between the business/industry players and universities, more entrepreneurial classes, internships, etc.
Second option was debt from the banking system. Now, I am the one claiming that microcredits can be a very good way for sorting things out - you have a good project, an accordingly sound business plan for it and then ask for the dough. However, it looks like the banking industry is not ready yet (read interested) in such opportunities for the simple reason that they can find very easily alternative better investments (or less riskier or better returns). In other industries of course. Someone even mentioned about one banker claiming that "software projects are difficult to be quantified". Besides the lack of understanding of the industry per se, which I may add is a two way street, it certainly makes sense, actually this is a need that will be solved by the market forces. As long as the opportunity costs for not going after software projects is low banks will purely neglect them. However, I think that more than ever nowadays software industry is an underdog which can offer handsome returns if smart guys play it right. And sooner or later, with all the constraints considered, things start to settle and companies become more mature.
And btw, Doug has interesting stats about the microfinancing situation in Romania. What I think it would be even more interesting to know though is the industry spread.
Hi Dragos, Just wondering what you mean by "industry spread". Geographical? Sectoral? Geographically, MF lending tends to be focussed in towns and smaller cities. It has avoided Bucharest -- long story -- and is only just starting to penetrate deep rural areas. Timisoara is a major center of MF lending; one of the major lenders (CHF International) has its HQ there. But keep in mind -- when I say microfinance, I'm talking about loans under $20,000. Over that, it's sort of a different category. Doug M.
By industry spread I meant sectorial allocation of course. And yes, projects in the range of $20k is what I had in mind. Well, perhaps in the $20k-$50k let's say.
Well, the sectoral spread is actually pretty wide. Some light manufacturing, a lot of service industry stuff, a little tourism. Not so much IT, I think -- though there could be stuff I don't know about. But I suspect that MFIs (microfinance institutions) have the same issues that the banks do: they don't understand the sector very well, so they're a little reluctant. One problem here is that the MF market is a long, long way from saturation. The MF portfolio in Romania has grown from about $25 million to about $37 million in the last 12 months. That's rapid growth, but from a tiny base -- we're still talking about less than $2 per Romanian citizen. Demand for MF loans is so high that the MFIs don't feel a compelling need to make "difficult" loans. They have people climbing over the doors, willing to pay up to 18% on hard-currency denominated loans. So why should they spend a lot of time learning about the complex details of an IT business? They can make that $20,000 loan to the guy who wants to expand his taxicab business, the couple who want to turn their house into a bed-and-breakfast, or the nice lady with the flower shop. Less effort, same return. That said, I think there are a lot of financing opportunities out there for smart IT entrepreneurs. While MFIs have a lot of hungry would-be clients banging on their doors, the number of people who can write a good business plan is much smaller. If a potential borrower walks in the door and is articulate, numerate, and well-prepared with a serious business plan, his chances of getting some money go way up. Further: in addition to the MFIs, there are a few banks that are fishing in the waters between $20,000 and $100,000. The best of these IMO is Banca Transylvania, which is aggressively attacking this "small loan" market. If I were an IT entrepreneur, I would definitely pay a visit to my local BT office. Finally: for larger businesses, there are an increasing number of equity investors out there. These guys usually aren't interested in anything smaller than about $500,000. But at that point or above, they can be very useful partners. Most of them are foreigners, and they're typically looking for two things: very good management, and an exit strategy. (Since "we'll do an IPO" is not really plausible here, you have to show them how they'll recoup their investment, plus profit, three to five years down the line... keeping in mind that they're foreigners, and so will want to be able to liquidate into hard currency.) There are some other options out there, like finance leasing, but this is probably enough for now. Short version: there is money out there, but you need to be smart, present well, and know where to look. Doug M.