The venture capital mirage : assessing USAID experience with equity investment

Chapter 1 lays out the traditional rationale for venture capital activity, while Chapter 2 describes the structure of the industry in developed countries. Chapters 3 and 4 summarize USAID"s experience; Chapter 5 examines the experience of private enterprises and multilateral agencies that have promoted venture capital in developing countries; Chapter 6 examines why venture capital projects usually fail (donors" inability to be relentlessly concerned with profitability); and Chapter 7 presents the following conclusions. (1) Poor project design, partly caused by USAID"s procedural requirements, has contributed to the failure of the Agency"s venture capital projects. (2) The experience of other "official" and "benevolent" venture capital funds strongly reinforces the conclusion that this is a sector where donors, or socially oriented private institutions, are likely to perform poorly. Moreover, evidence from the rapidly growing Asian economies suggests that dynamic activity in the equity market is more likely an effect than a cause of rapid private sector growth. (3) The enterprise fund concept avoids many of the problems associated with USAID"s venture capital projects, but so far the funds have had only mixed success. Their success depends heavily on quality of management and clarity of purpose. Even successful enterprise funds have not demonstrated that lack of equity capital is a problem that donor funding can solve; their rate of return could be well below 10%. Enterprise funds do, however, provide a means for developing instruments adapted to a country"s private sector financial needs. It is their flexibility and ability to innovate and look for market niches that provides the likely payoff. Such niches are unlikely to be found in equity financing. (4) In sum, there is no basis for believing that equity funding -- either as venture capital or in some other form -- is a high-payoff activity for donors. In fact, experience suggests the opposite. USAID should leave this activity to private organizations willing to accept the risk. Includes bibliography.