Alternative Investment Vehicles Adapted for Entrepreneurial and Innovative Firms Financing in Emerging Markets

Abstract

Alternative investment vehicles (AIVs) are an innovative organizational form of financing providers that provide opportunities for developed markets. The objective of this chapter is to deeply understand both the capabilities of different types of AIVs (crowdfunding, business angels, venture capital/private equity funds, and hedge funds) and the possibility of being efficiently integrated within the frontier or emerging markets, with a special focus on venture capital funds (VCFs). This topic is very important in the actual context of market turbulences and multiple crises. Following the medical COVID-19 crisis, institutional interferences have proved to be efficient in balancing the short-term situation. Nevertheless, long-term imbalances have manifested as such following the supply chain turmoil as a result of the increased inflation especially after the outbreak of the war in Ukraine. The present turbulent setting has become even more complicated due to both the energy crisis and the recent banking crises and by high and persistent inflation. The financing of innovative and entrepreneurial firms is significantly influenced by the current context. Therefore, the VCFs could have a major contribution in identifying new strategies in adjusting the financing mechanisms and the nature of governance to the ongoing markets’ dynamics.

1. Introduction

In the actual turbulent global context, which has a major impact on both the financial and capital Romanian markets, the entrepreneurial investment process has been also influenced. The need for finance is increasing alongside the negative impact of the restrictions and access barriers on the entrepreneurial processes. The entrepreneurial investments have become more complex and opaque while the understanding of the movement of the markets and the reconfiguration of the opportunities and of the risks require new research strategies and solutions.

The actual context of the entrepreneurial investment processes is extremely uncertain and the decision processes are more complex because investors focus on not only the way to achieving success but also on how to achieve success as well as on the surviving strategies during critical situations. The high number of data that is necessary for the decision-making process fails to enable a deep understanding of the relevant information (i.e. the data on the investment factors, criteria, and risk elements) given the fact that the majority of decisions need to be taken fast and live. The entrepreneurial decision-making process is linked both to intuiting process, System 1 (with fast speed processing and significantly biased based on emotions), and to System 2 (i.e. which is a slower and analytical one given the lack of relevant data or their processing capacity) [1]. The spectral nature of the existing opportunities combined with the lack of a meaningful database call for the latest version of trade-off that manifests between the speed of decision-making and the accuracy of the analyzes. Both the time pressure and the uncertainty level are warning signs against the test jam hazard, which is counterbalanced by the key role of a fast intuiting process as such. The new frame of the intuiting process incorporates cognitions and emotions. In this case, it is both analytical and subjective. The underlying idea is that investors capture and manage an extended set of information in cvasi-real time. Consequently, the trade-off between System 1 and System 2 will no longer be valid in this particular instance. They will both work in parallel and they will complement each other synergistically. The design of an analytical strategy is cvasi-impossible. However, the whole point is to understand the way new ways of entrepreneurial investment approach works with special attention to identifying the optimal financing solution based on understanding the relationship between entrepreneurs and investors. The distinction between the retail investors, professional investors, and fund managers will also be part of the analytical processes.

Section 2 is devoted to presenting the aspects regarding the role of VCFs in emerging markets by highlighting the VC-cycle within the actual market context.

Section 3 presents the evaluation models of the VCFs portfolios. Technically speaking, based on the existence of the classical evaluation models that are already set in place, we have suggested the use of the MBU models (i.e. modified bottom-up) comprising a set of historical data (i.e. the VCF placement memorandum, the portfolio’s evolution, a series of estimated financial multiples) and MCA (i.e. modified comparable approach) in which the valuation is based on a grading strategy. The means through which this particular grading contributes to the bias reduction needs to be examined, too. The monitoring process is constantly revised and adjusted. The two models are complementary because MBU provides more precision for both older portfolios and the short-term evaluations whereas MCA is more geared toward the new funds and the long-term approaches.

Section 4 presents three paradigms that help understand the evolutionary mechanisms and dynamics characterizing the VCF as well as their implications in terms of reconciling the partnership between the fund manager and the fund’s investors.

In the paradigm of complex adaptive systems (VCF-CAS), the focus is on the means by which VCFs incorporate the vectors of innovation. The configuration mechanism of the specific set of opportunities is being explained, too. As far as the paradigm of evolutionary theory in VCFs (VCF-ET) is concerned, the focus is on capitalizing on the way the VCF portfolio management strategies benefit from learning and adjusting to change, namely configuring an adaptive situation which is continuously reshaped based on fitness (survival and competition) processes.

As far as the paradigm of dynamic capabilities in VCF portfolio management (VCF-DC) is concerned, the focus is on capitalizing on getting a sustainable competitive advantage in fast-paced changing environments as a result of a deeper understanding of the management of the resources and of the abilities to keep pace with this kind of dynamics as such [2, 3]. Based on the use of organizational resilience, the strategic actions for adjusting an organization to unexpected and turbulent situations can be improved. It is an extremely useful concept in itself especially in terms of the management of the VCFs portfolios. Both the dynamic capabilities and the organizational resilience can be hybridized (refer to the DCOR concept) by starting from the use of the reconfiguring cycle of the operating capabilities (i.e. discovery-learning-integration-coordination). This fact will enable deciphering a series of implications in terms of the relationship between managers and investors in terms of the VCFs.

Section 5 comprises three analyzes of the portfolio investment decisions from three distinct angles, which are useful for understanding the means of formulating the strategies for harmonizing the investors with entrepreneurial finance in Romania. It is also imperative to focus on understanding the (retail and professional) investors’ preferences in terms of the selection of the assets and the management strategies of the VCF portfolios.

The first case study is based on the CAWI method (Computer Assisted Web Interviewing) and the data have been collected over a 2-week period (16–27 January 2023) based on two distinct questionnaires which were used on a sample of 110 retail investors (investors medium age 45 years, medium investment experience 12 years, medium investment per transaction 9000 Euros) and on 30 professional investors (investors medium age 42 years, medium investment experience 14 years, medium investment per transaction 45,000 Euros). The questionnaire included three introductory questions referring to education and professional background, two questions to general features of investing behavior, two questions to experience in investment decisions, and the main part with six questions, which focused mainly on understanding the attitudes, opinions, and behavior of both the retail and the professional investors.

The second study focuses on understanding the problems related to entrepreneurial investment decisions and the means of shaping up the relevant database for taking advantage of the investment opportunities given the actual inflation context, the understanding of the interactions between the entrepreneurs and the investors. Six entrepreneurs (medium age 48 years, medium entrepreneurial experience 18 years, medium financing amount per transaction 115,000 Euros) who benefited from financing within the VCF partnerships in Romania were interviewed.

The third case study was based on short interviews with three fund managers (medium age 42 years, medium experience in asset management 12 years, medium assets under management 1,552,000 Euros) with the aim to understand the new trend of professional investment approach and portfolio management and the specific strategies adapted for this complicated inflationary environment.

In the final part of the chapter, conclusions and contributions are presented.

2. Venture capital funds – Particularities in the case of frontier and emerging markets

VCF are alternative investment vehicles (AIVs) investing one’s own funds as well as the investors’ funds in long-term opportunities, private or publicly listed companies functioning based on a contract or on a general partnership agreement or on an investment contract for the portfolio management [4, 5, 6, 7, 8, 9]. The VCF partnership focuses on the fund manager (GP-general partner, responsible for operations and portfolio management) and the passive/semi-passive investors (LP-limited partners who provide the capital), the alignment of interests (discouraging the moral hazard, adverse selection and opportunism) based on the confluence of the dual role in which managers are also investors and, as the case may be, investors can participate more actively in the management of the fund [10]. VCFs are usually long-term investments (7–10 years) while the other types are based on close-end investment funds (CEFs) or exchange-traded notes (ETNs) structures [11, 12]. Access to the VCF is limited to retail investors, being usually allowed only to institutional or professional investors. However, there are also distribution options for retail investors, which can be achieved through IPOs of LVCF (listed Venture Capital Funds), LPEFoF (Listed Private Equity Fund of Funds), or ETF (Exchange Traded Funds), usually for large funds and superior financing rounds. It should be mentioned that the main problems of the VCF start from the long life of the fund, the low liquidity especially in the CEIF organization, and the difficult exit especially in the case of distressed situations where investors are affected by the discount compared to the unitary value of the net asset or even worse, situations of self-liquidating funds (with portfolio sell-off). The share capital distributions are fully managed by the fund manager who, in turn, faces difficult exits from companies not listed on organized markets [13, 14].

Unlike VCFs that have a long-term orientation, hedge funds (HFs) aim at a more complex, short-term investment philosophy, based not only on conventional asset opportunities but also on an extended set of strategies (short, leverage, derivatives). Moreover, the HFs are architecturally organized in the form of open-end investment funds (OEIFs) thus providing both an easier liquidity and exit in comparison with the VCFs. It should be mentioned that the evolution of the markets has enabled the creation of hybrid strategies and structures that allow the combination of specific characteristics of the two alternative vehicles, VCFs and HFs. Thus, VCFs can invest in listed companies (a strategy also called PILF - private investments in listed firms), and HFs in private companies, mezzanine-finance, or companies in difficulty and undervalued, prepared for restructuring or subsequent resale [15, 16, 17].

The VC-cycle concept [12, 18] highlights the harmonization of fund placements with its objectives, management based on the rotation of portfolio holdings or carrying out new financing rounds, respectively the periodic liquidations of cash flows or of portfolio holdings. The key elements for the investors refer to the understanding of the general operating model of the VCF, and how to set investment programs and exit strategies.

VCFs are vehicles of great complexity, in which the processes of evaluation and financing of entrepreneurial and innovation opportunities are characterized by insufficient understanding, lack of transparency and often being perceived as having a strictly speculative character [19]. The understanding, the means of evaluating/measuring the portfolio elements, the management, and the long-term diversification of the portfolio involves professional experience and flexibility in continuously adjusting to the evolution of the industrial sectors of which the portfolio elements are part and of the economy in general [20]. In the VCF financing processes, there is an insufficiency or even a lack of clarity regarding the business model, the solutions proposed by the portfolio companies, and the exit processes [21, 22]. Thus, the role and importance of the intuition of the fund manager in the decision-making process can be essential in the successful crossing of some undesirable developments in which the transition from optimism to pessimism creates the perception of a strictly speculative character [23, 24, 25].

Despite the fact that the specialty literature highlights those periods of time when the VCFs have proved to be quite inefficient in terms of investment opportunities, there are examples of excellent collaboration among managers and investors. Investors aim to strengthen their long-term relationships to have access to recognized management funds, whereas managers focus on collaborating with investors whose main priority is the market itself and the long-term strategies, who understand market terms and conditions, with reduced sensitivity to immediate liquidity. Their goal alignment contributes both to the VCF ecosystem itself and to its resilience in uncertain times.

3. VCF portfolio assessment models

When evaluating both the value of the portfolios and of the overall fund it is essential to report the findings and the performances alike. The communication with investors and the setting up of the administration fees are because in terms of the VCF strategies there are usually more funding rounds. These events need to be geared toward specific situations (especially because there are possible entry barriers for new investors). This process should ensure precision irrespective of the evaluation process of the VCF portfolios’ consistency and quality of information [13, 14, 26].

At a very early stage, the net asset value (NAV) was calculated by the fund manager himself by taking into account the evaluation of the portfolio possession as well as other listed firms for which the recent market quotes have been reduced by a liquidity risk factor or by a long-term risk. There are no similarities as far as the emerging markets are concerned. The estimation models based on discounted future cash flows (DCF methodology) are used. DCF commences with the cash flow forecast. Nonetheless, there are also permanent adjustments to the unexpected movements in the outside environment. DCF needs to be put in place in several scenarios.

The performance of VCF is metaphorically represented by the J-curve which is defined by the curve of different measures of performances generated by the fund on the entire lifecycle [27]. In the case of returns, the J-curve (IRR-J-curve) points at an initial period with negative returns (“the valley of tears”). The IRR internal rate of return is a relevant estimator only after this initial period of the fund itself. There are also other J-curves that can be expressed by the cash flow (i.e. CF-J-curve), namely NAV (i.e. NAV-J-curve). In terms of these quantitative indicators, one cannot make clear distinctions during the first development stage of VCF, too. Most of the time the relevant information is also based on qualitative indicators.

The NAV estimation represents a simple evaluation in itself, which fails to take into account the role of the manager in the development processes of the portfolio elements for start-ups. This evaluation is useful only for those firms that have already grown significantly. The precision and accuracy of the estimations is extremely sensitive for the unlisted portfolio elements which cannot be tested as such.

In practice, due to the obvious limitations of the VAV evaluation models the MBU (i.e. modified bottom-up) models have been suggested. They are based on setting a rating and on MCA (i.e. modified comparable approach) in which evaluation is based on a grading strategy. MBU provides extra precision for both the older portfolios and the short-term evaluations while MCA is more geared toward the new funds and the long-term approaches.

3.1 The MBU model

The MBU model is based on the understanding of the added values factors (e.g. the quality of the management, the structure of the fund, the portfolio, and the existing strategies in terms of the portfolio elements) as well as on combining them in a group based mainly on cash flow streams. The result is the target rate of return, the cost of capital, or the net present value of NPV-VCF.

Investors are not aware of the existing scenarios from the portfolio elements. The initial data comprises historical trends, the VCF manager’s historical suggestions, and the stocks’ progression on the secondary market. The idea of the MBU originated from the understanding of the specific metrics and the structural elements and even comprises those aspects from the memorandum or the VCF prospectus. The undertaking focuses on providing transparency in terms of the accurate value of VCF given the use of certain upgrading factors corresponding to the secondary market.

The MBU steps refer to:

• The management’s historical analysis, the terms of the VCF placement memorandum as well as the portfolio’s actual condition;

• The percentage of the liquidities waiting to be placed; the use of a benchmarking for the return;

• The understanding of the multiples which are expected to correspond to the elements or the portfolio possessions as well as the timeline and the strategies to exist the fund;

• The estimation of the future cash flows (in several scenarios) of the VCF;

• The identification of NPV-VCF based on the update at an appropriate rate.

3.2 Valuation model based on grading MCA

The MCA relative evaluation model is based on the examination of certain comparable or similar elements or funds. The value of the fund stems from comparing it with the values pertaining to similar funds or funds, which have been scaled to the size of the fund itself and adjusted to the qualitative differences. The actual model does not comprise the values of the individual elements but an overall estimation starting from the analogy with the previous performances of similar funds. The expected performance level (i.e. the P level, for example, a rank based on four quartiles such as P-A, P-B, P-C, and P-D) emerges from a hierarchy that refers to the following elements: the qualitative score, the quantitative score, the combination of the two elements based on the weighting with the age of the fund itself (i.e. the inclusion of the J-curve mechanism), the review and the adjustment of the hierarchies. The present rating system is based on the analogy with the rating techniques that have been used for the credit risk (bonds).

The comparables which serve as a basis for the multiples of performance have been modified based on the benchmarking data filtering according to the expected performance score (which is similar to the ratings of the bonds) by using both the qualitative and the quantitative criteria.

The steps of the evaluation methodology of the fund are as follows:

• Setting up a qualitative score which will comprise the qualitative aspects (the skills of the fund’s management, the motivation and the stability of the management team, possible conflicts of interest, architectures, costs, and the validation of the investors);

• Selecting the set of comparable funds in order to suggest a quantitative score that has been calculated based on the use of IRR (and possibly on NAV or cash flow timing) of a benchmarking (a linear score between 1 and 4);

• Combining the qualitative and quantitative scores together in a performance score in order to rank the fund to be evaluated as part of the comparable set of (P-A, P-B, P-C, and P-D) funds;

• Reviewing (and adjusting) the expected performance grade based on the set of quality elements such as the portfolio’s diversity level; overexposures on certain sectors; the liquidity that is needed for the support along the way of the elements that make up the VCF portfolio;

• Estimating the IRR-VCF investment return (based on the current grade of the fund, the internal age of the fund);

• Forecasting cash flows starting from the comparison of the cash flow with the historical data of other funds or by using the (Yale) scenario method based on IRR, the age of the fund, NAV (the method is useful for the understanding of certain possible future events and is being used for long-term analyzes);

• Computing NPV-VCF.

This grading system does not eliminate biases. The monitoring process is revised and adjusted continuously. The grading scale is essential when making comparisons, which inevitably can be biased.

4. Paradigms for understanding the mechanism and the evolving dynamics characterizing VCF – Implications for adapting the partnership between the fund manager and investors

There are no clearly defined theoretical concepts in the VCF literature. The authors have resorted to creating comparative metaphors or analyzing certain parallels among organizations, markets and sectors.

4.1 The complex adaptive system paradigm in VCFs (VCF-CAS)

In the first paradigm, VCF could be considered as a CAS (i.e. complex adaptive system) with a huge number of components and interactions. In this particular representation, there are mechanisms that are responsible for the behavior of the entrepreneurs and the financiers (managers and investors) alike. Schumpeter has demonstrated the spontaneous and discontinuous nature of the economic development mechanisms for which innovation plays a crucial role (credit destruction mechanism). VCF comprises innovation in multiple and extensive meanings (i.e. technical, technological, and managerial). He has highlighted a comprehensive set of factors, which interact and create elements of discontinuity (i.e. technological evolution, the change of the customers’ options for products, manufacture and marketing innovation, and multiple changes in terms of mindset and social behavior). All these elements customize the set of opportunities characterizing the VCF.

Venture capital funds (VCF) stands for an interesting niche in the alternative asset market, which has to do with the technological build-ups characterizing the innovative processes that are inherently nonlinear and serve as a basis of the dynamics of the range of new opportunities. Given these complex adaptive systems, one can take notice of the manifestation of the oscillations and punctual balance. The specific aspects characterizing the innovation can be understood based on the use of the scale-free power–law distributions. VCF also represents closely coupled systems in which the movements of the participants will trigger chain reactions of the market players and nonlinear behaviors. The VCF-CAS paradigm could provide a better understanding of certain aspects characterizing the emerging markets that lack the data that are necessary to conduct quantitative analyzes.

4.2 The evolutionary theory paradigm in VCFs (VCF-ET)

The VCF uncertainty limits the possibilities for planning the flashes of portfolio whereas the management will take on improvised actions (i.e. intuiting processes). This fact represents a different approach in comparison with the classical mutual funds. Thus, Chen [28] suggested the analogy with the evolution of natural or biological phenomena in which the evolution of the species contributes to the reduction of the side effects of the changes in the environment. Nature has to deal with extreme situations in a resilient way. In the same metaphorical sense, Beinhocker [29] has stated that the evolutionary theory has a very broad meaning and that, based on learning and resilience; there will always be innovative solutions that will be available to solve problems. Therefore, the portfolio strategy could benefit from the evolutionary theory.

The VCF managers search and experience new strategies and solutions that change the rules of this particular market and bring about spectacular changes. The suggested rules are part of an evolutionary process, which is free of inferior performances and makes room for other rules in order to bring about a performance boost. This kind of adaptive scenario is continuously reshaped based on fitness processes (i.e. survival and competition). Natural selection combined with survival will forge the emerging within the fitness environment. We believe that this is the most appropriate way of understanding the possible itineraries of the set of risks corresponding to the multiple strategic scenarios. Diamond [30] suggested the landscape amnesia concept when he defined the situations when there are long periods of change and the perceptions are missed out. Although investors monitor and analyze the market, the speeds of change are difficult to anticipate (i.e. the anticipation of sectorial speculative bubbles, the differences in identifying the lifetime of the funds by the managers versus the investors, the oversubscription of the sub-optional IPOs).

The VCFs have robust adjusting structures and are thus able to cope with the change and innovation pace. Moreover, the success stories reveal genetic strategy and expertise models to the next fund generations. However, biologists have drawn attention to the frailty of the biological systems facing severe extinctions during certain periods. By analogy, there is no guarantee in terms of maintaining the VCF structures in their actual format. The main survival strategies are differentiation and specialization. Furthermore, in order to obtain long-term returns that are superior to the market benchmark portfolios one has to take into account the critical mass for the VCF value, which is essential in terms of diversification, the long-term architecture as well and its relationship with the investors as such.

4.3 The paradigm of dynamic capabilities for portfolio management-contributions in VCFs (VCF-DC) adjustment and resilience

The understanding of the competitive advantage sustainability for the fast-paced change can provide the VCF managers with strategies and solutions for adjusting to turbulent conditions and crises. In spite of the fact that the resilience concept includes strategic actions for an organization’s adjustment to the current situation, there are very few applicative approaches in terms of the issue of the portfolios’ management. As far as the VCF portfolios are concerned, the concepts of resilience and dynamic capabilities could provide a new approach. The fast adjustment strategies and reconfiguration of the resources together with the capabilities ensure a better understanding and a more adequate answer to the issue of the present-day markets. The sustainability of the competitive advantage for the dynamic markets refers to the reconfiguration of both the resources and the corporate capabilities.

The DCP dynamic capabilities paradigm provides a means of understanding the sustainability of the competitive advantage in fast-paced environments, namely the deepening of understanding the resources management as well as the capabilities in order to react to rapid environmental changes [31]. The dynamic capabilities support organizations not only to adjust to the environment but also in order to adjust structurally based on innovation and the partnership with other organizations and markets. The Dynamic capabilities are related to the organizational reshaping and reconfiguration according to the adequate adjustment to the environmental conditions. Organizations need to be flexible and innovative due to the fact that the competition dynamics are difficult to anticipate. The dynamic capabilities start from abilities, processes, procedures, organizational structures, and decision-making rules which promote the detection and the size of the opportunities in order to transform and adjust continuously the capabilities as such [32]. The dynamic capabilities refer to designing the resource combinations, which create value and are difficult to imitate including the coordination of the inter-organizational relationships which can provide a competitive advantage by thus representing a genuinely sustainable advantage resource for the fast-paced changing Schumpeterian regimes [33].

The implementation of the dynamic capabilities is based on the configuration of the cognition processes. However, exploring the opportunities needs to be fast and ensure the ability to learn, innovate, and integrate. The efficient use of the external knowledge needs to be accomplished based on internalization (i.e. identifying the opportunities and the learning from the acquired knowledge) and the combination (the integration) of the information together with the latest knowledge, namely the coordination with the existing understanding. The turmoil, the instabilities as well and the crises will decrease the growth potential and the organizations’ survival chance, which stands for a critical aspect in terms of the VCFs. The consequence is to identify the routes and the understanding of the means to combine the existing knowledge with their capturing and processing in order to adjust efficiently to new opportunities. Furthermore, one needs to enhance these capabilities in order to take advantage of opportunities, to understand the amplification mechanisms of those capabilities in order to set up businesses that will be more resilient to the impact caused by turmoil and crises.

Organizational resilience refers to the need of an organization to deal with the rapid changes of the business environment based on the understanding of the environment’s dynamic nature [34]. Organizational resilience is a universal concept that is used for the strategic actions of making an organization adjust to unexpected situations and turmoil. This concept could be extremely useful for the VCFs management [35, 36].

Organizations need to take into account behaviors and strategies such as agility, integration, leadership, change, and communication. Resilience has to do with the forecast and the prevention of unexpected threats [37]. However, certain elements such as sensitivity, the perception of change, and the management of flexible decision-making need to be incorporated, too. In the given context, resilience has become a key strategy that allows the establishment of the trends that unbalance a business from the point of view of understanding the impact and anticipating the moment of acceleration of the process of change. Having in view the present-day uncertainty context as well as the rapid changes, one needs to design a way of creative action that will be efficient in the most difficult situations, too. Consequently, a resilient organization will be able to estimate the opportunities and will be able to take advantage of the situation.

Resilience focuses on the system’s ability to compensate for the distortions and the shocks, which are a result of an external phenomenon. Resilient firms are capable of facing these challenges. Survival during turmoil stems from understanding and anticipating the changing mechanisms from the point of view of the turmoil and crisis scenarios [38]. In other words, resilience is the ability to maintain the system’s functionality when it experiences severe turmoil and makes it possess the ability to maintain its functionality. In the event the distortion/shock affects the system’s functions significantly, it will be able to adjust itself by making use of renewal or reorganization processes.

The resilience together with the organizational resilience can be used for the VCFs portfolios’ management based on the following issues:

• The ability to absorb the shocks as well as the quality of the restructuring processes of the VCF portfolio;

• The renewal ability in the event the distortions/shocks will alter or even block the portfolio’s liquidity;

• The ability to evaluate, acknowledge, adjust, and absorb the variations, changes, shocks, and unexpected events [39] is essential for the VCFs portfolios, too where shakes of the portfolio are being anticipated and have a spectral nature.

Within the following theoretical development, the two paradigms—the dynamic capabilities and the organizational resilience-can be hybridized (the DCOR concept) starting from the reconfiguration stage of the operational capabilities (i.e. discovery-learning-integration-coordination) [40]. DCOR refers to designing new products and processes and implementing new organizational forms and entrepreneurial business models. Dynamic capabilities enable the understanding of the mechanisms based on which the opportunities once identified can be made to reconfigure the business when both the market and the technologies change, too. Dynamic capabilities have an indirect impact on performance based on changing the operational; capabilities into new capabilities that will blend with the environment. The organizational performance is tightly linked with the portfolios’resilient nature. In order to maintain long-term sustainable competitiveness the VCF management needs to engage in a continuous process of searching for new opportunities of interest. The understanding of the survival strategies as a critical endeavor for small funded businesses, VCF is even more important in those situations when the uncertainty on the market, the turmoil, and crises will make this endeavor more difficult to accomplish.

4.4 Implications in terms of the relationship between managers and investors

The understanding of the relationship between managers and investors differs significantly for VCF in comparison with one of the classic mutual funds. As far as emerging markets are concerned, these aspects should be more carefully studied. Irrespective of their (retail, professional, investment) nature, investors are inclined to consolidate their long-term relationships with the fund managers based on their access (through invitation or IPO) to the recognized management funds whereas the managers, on the other hand, look for investors that are concerned with understanding the market mechanisms as part of a long-term approach lacking the sensitivity for the immediate liquidity [41]. The alignment of the managers’ and the investors’ interests will ensure both the progress of the VCF ecosystem and the resilience in uncertain times.

5. Analyzes for portfolio investment decisions – A strategy for matching with entrepreneurial finance in Romania

5.1 Studies regarding the understanding of the investors’ preferences for selecting the assets and the portfolios’ management strategies

The research methodology for the portfolios’ active management strategy starts from the understanding of the investors’ motivation and from the possible alignment of the objectives with the offers that have been suggested by the fund managers together with the criteria used by investors to make asset valuations and the mechanisms for perceiving the investment opportunities. The given context of the research is extremely interesting due to the fact that it is an evaluative crossroads which refers to: crossing 2022 which was an extremely difficult and turbulent year for all the markets; the impact of the dynamics of the interest rates (both a direct and an indirect effect on the risk premiums); the bank crisis in the USA and its contagion effects in Europe. The present study has been done by using the CAWI (computer-assisted web interviewing) methods. The data were collected during 2 weeks (16–27th January) based on two separate questionnaires which were given to 110 retail investors (of average 45 years old, 12 years average investment experience, average investment per transaction of 9000 euros) and to 30 professional investors (of average 42 years old, 14 years average investment experience, average investment per transaction of 45000 euros). The questionnaire comprised three introductory questions referring to the educational and professional background, two questions referring to the general features of the investing behavior, and six questions that focused on understanding the retail investors’ and the professional investors’ attitudes, opinions, and behavior.

1. What kind of investment strategies do retail and professional investors prefer (portfolios’ passive management vs. portfolios’ active management)?

2. What types of investment strategies do retail and professional investors (direct investments or investments based on mutual funds or other alternative tools, which are managed by a professional)?

3. What kind of direct investments did investors prefer (at the Bucharest Stock Exchange, investments on international stock exchange, ETFs, alternative investment)?

4. What types of alternative investments were preferred (real estate; cryptocurrencies, business angels, crowdfunding; venture capital/private equity VCF/PEF funds)?

5. How do you rank the management performances of the mutual funds, which are offered by the Romanian market (satisfactory, good, very good)?

6. What solutions for improving the performances do you suggest (cutting down on the administration fees, simplified access to ETFs, easy access to the discretionary individual portfolios, speeding up the access to the alternative tools)?

After the centralization of the results it was established that:

• There are significant disparities between the two types of investors. The retail investors are 84% in favor of the passive management as compared to 9% of the professional investors;

• Eighty one percent (81%) of the retail investors are in favor of professional management, which is ensured by the mutual funds as compared with 4% of the professional investors;

• As far as the direct investments are concerned, retail investors are in favor of including equity investments at Bucharest Stock Exchange (75%), investments on international exchanges (35%), ETF exchange-traded funds (11%), alternative investments (9%) in their portfolios while professional investors prefer joint-stock investments at Bucharest Stock Exchange (67%), investments on international exchanges (65%), ETFs (41%), alternative investments (9%);

• As far as the alternative investments are concerned, retail investors prefer the context of diversification real estate investments (65%), cryptocurrencies (32%), and crowdfunding (8%) while professional investors have access to the context of the diversification of the real estate investments (48%), cryptocurrencies (43%), crowdfunding (18%) and the venture capital/private equity VC/PE (19%);

• The retail investors have considered the performances of the mutual funds on the Romanian market as follows: low (15%), good (19%), and very good (66%) while the professional investors have manifested a decreased interest in these performances based on the big commissions as low (35%), good (30%), very good (35%);

• As far as the means of enhancing the performances, investors have identified the limited possibilities of diversifying their portfolios. The retail investors have suggested cutting down on the administration fees (65%), designing a simplified access mechanism to the discretionary individual portfolios (27%), speeding up the access to the alternative tools (10%) while the professional investors have suggested the reduction of the administration fees (65%), simplified access to the ETFs (45%), a more convenient way to use the individual discretionary portfolios (4%), speeding up the access to the alternative tools (10%).

5.2 Short-interviews with entrepreneurs

The interviews were conducted with 12 entrepreneurs (of average 48 years old, 18 years of average entrepreneurial experience, and average investment per transaction of 115,000 euros) and there were six entrepreneurs who benefited from financial support within the VCF partnerships. The goal of having of this set of short- interviews with entrepreneurs was as follows:

• To understand the issues related to entrepreneurial investment decisions and the means of setting up the relevant database in order to take full advantage of the set of investment opportunities during the present-day inflationary circumstances;

• To understand the interplay between the entrepreneurs and the investors (i.e. accessibility, knowledge, communication) given the present-day situation.

After the centralization of the results it was established that:

• There are significant disparities among the investment decisions during the turbulent circumstances (the actual situation of the inflationary environments) as compared with instances of normality;

• Entrepreneurs are sometimes focused on overcoming inflation through investing in new opportunities;

• In the present circumstances the relationships between the entrepreneurs and the investors suffer from communication issues and alignment given the fact that sometimes investors over-appreciate the risk premiums in regard to the actual funding of certain opportunities.

5.3 Short-interviews with fund managers

There have been eight fund managers who have been invited to take part in the interview and only three fund managers actually responded to the questionnaire (of average 42 years old, 12 years average management experience, average investment per transaction of 1,552,000 euros).

The goal of the set of short-interviews with fund managers was to understand:

• The new trend of professional investment approach and portfolio management in the context of a limited set of market opportunities;

• The specific strategies adjusted to the present-day high inflationary environment.

After the centralization of the results it was established that:

• The present-day possibilities of diversifying the professional management portfolios continue to have a low value in our country due to the small number of transactions on the BSE stock exchange;

• Even though nowadays there are still legislation distinctions on the alternative investment funds (AIFs) and a surge of interest for these tools, access to alternative assets is still limited while investors search for innovative liquidity and scalable solutions (e.g. crowdfunding, crypto-assets) as they are not that educated and motivated by the long-term investments such as the VCFs.

6. Conclusions

Starting from the understanding of the set of actual issues characterizing the investment portfolios focusing on alternative investment vehicles (AIVs) for entrepreneurial and innovative firm financing, Section 2 provides certain peculiarities regarding the role of venture capital funds (VCFs) in emerging markets by highlighting the change of the VC-cycle countenance in the actual context of volatile and turbulent markets.

Section 3 focuses on the comparative analysis of some of the latest evaluation models of the VCF portfolios. The research had in view the MBU (modified bottom-up) models emerging from a set of historical data (i.e. the VCF placement memorandum, the portfolios’ evolution, the estimated financial multiples) as well as the MCA (the modified comparable approach) in which the valuation is based on a grading strategy. It has been shown that this grading contributes to the reduction of biases, which is an interesting aspect in terms of the VCF portfolios. The role of grading in terms of VCF portfolio management is spectacular and offers new practical perspectives for the VCFs in Romania as an emergent country. The grading is used not only for valuation but also for portfolio management by offering indications of the risk, especially for the turbulent markets. These are additional models because MBU ensures extra accuracy for the stable VCF portfolios and short-term evaluations whereas MCA is geared toward both the newly founded portfolios (in which the J-curve effects can be significant) and the long-term approaches.

In Section 4 three paradigms are presented that are useful for the understanding of the VCF mechanisms and dynamics. In the paradigm of complex adaptive systems (VCF-CAS) the means in which VCFs comprise the innovation vectors is capitalized and the mechanism of setting up of the set of specific opportunities is explained. The paradigm of evolutionary theory in VCFs (VCF-ET) capitalizes on the way the VCF portfolio management strategies benefit from learning and adjusting to change as well as the creation of a responsive setting that is continuously reshaped based on fitness processes (i.e. survival and competition). The paradigm of dynamic capabilities in VCF portfolio management (VCF-DC) capitalizes on those mechanisms of getting a sustainable competitive advantage in the fast-paced changing environments based on a thorough understanding of resource management and of the abilities to respond to these dynamics. The strategic actions of maintaining and adjusting the organization to the unexpected and turbulent situations can be accomplished based on the introduction of organizational resilience. It is a very useful concept in terms of the VCFs portfolio management. The dynamic capabilities and the organizational resilience can be hybridized (the DCOR concept) starting from the reconfiguration cycle of the operational capabilities (i.e. discovery-learning-integration-coordination). These paradigms can be used for analyzing the VCF portfolios. However, there is also an impact on the means of adjusting the partnership between the fund manager and the fund investors during the volatile and turbulent periods. Investors intend to take part in recognized management funds based on IPOs while managers intend to work with investors that have long-term approaches and who are somewhat not affected by possible immediate liquidity issues.

The different ways of considering (the short-term vs. long-term) investments make room for certain discrepancies whereas the correspondence between the interests of the management investors and entrepreneurs has become a crucial goal in terms of the progress of the VCF ecosystem as well as for ensuring the critical resiliency given the volatility and the turmoil on the market.

In Section 5 we have suggested three case studies related to the decision-making process of investors, entrepreneurs, and fund managers. Based on the design of the research methodology, we have focused on highlighting the effect of joining the three approaches. The result can be traced out in understanding the shaping up of the strategies of aligning investors with entrepreneurial finance in Romania. We took into account the negative evolution of the markets in 2022 given the rise of inflation and interest rates as a result of the war in Ukraine, the energy crisis, and the recent bank crisis in the USA. The analysis of the findings has led to a series of very interesting elements.

The deepening understanding of the (retail and professional) investors’ preferences for the selection of the assets and the management strategies of the VCF portfolios are based on the use of the CAWI (computer-assisted web interviewing) method whereas the data has been collected during 2 weeks (16–27th January) as a result of using two distinct questionnaires that have been used on 110 retail investors (investors of average 45 years old, 12 years average investment experience, average investment per transaction of 9000 euros) and 30 professional investors (investors of average 42 years old, 14 years of average investment experience, average investment per transaction of 45,000 euros). The questionnaire comprised three introductory questions referring to education and professional background, two questions referring to general features of investment behavior, and two questions referring to experience in investment decisions. The main part consisted of six questions aimed at understanding the retail and professional investors’ attitudes, opinions, and behavior given the present-day volatility and turmoil in the market which is significantly influenced by the high inflation rates.

The first study has shown that there is a very high confidence and openness among the investors for the latest tools and creative performance strategies. There are major differences between the retail and the professional investors (i.e. the preference for active management, the acceptance of externally managed elements based on the mutual funds of VCFs in the individual portfolios, an openness toward the inclusion of a sub-portfolio for alternative investment within the actual portfolios). However, there are certain common features characterizing our country (both categories of investors are interested in short-term treasury bonds as well as in crypto-assets and real estate investments).

Another aspect has to do with the interest in the active management of the portfolios and the inclusion of in some sub-portfolios of the alternative assets in which the interest for the VC/PE funds is diminished while there is an incredible interest for crowdfunding and crypto-assets.

The second case study focused on the issue related to entrepreneurial investment decisions and the means of designing the relevant database for a deeper understanding of the set of investment opportunities given the present-day inflationary circumstances, namely the understanding of the relationships between entrepreneurs and investors. The interview was conducted with six entrepreneurs (of average 48 years old, 18 years of average entrepreneurial experience, average investment per transaction of 115,000 euros) who were the beneficiaries of funding within the VCF partnerships in Romania.

Romanian entrepreneurs are very rigid when it comes to business control and they are reluctant to involve the VCF in the funding processes. We have even identified significant evaluation disparities in our relationship with the investors.

The third case study referred to short- interviews with three fund managers (of average 42 years old, 12 years average in the field of asset management, and average assets per transaction of 1,552,000 E). The goal was to understand the new trend of professional investment approach and portfolio management together with the specific strategies adjusted to this complicated inflationary environment.

The main contributions of the present research are as follows

• To understand the adjustment of the VC cycle for a better alignment of the fund’s placements with its goals as well as the means of designing certain flexibility solutions for the portfolio management issues (i.e. the rotation of the sub-portfolios, the management of the latest rounds of financing, namely the regular liquidations of the cash flows or of holdings of portfolios);

• To design the comparative analysis of the valuation models of the VCF portfolios in emerging markets with a special focus on grading methodology which fails to have a predictive power and an early possible warning tool;

• To design the means of putting into practice those three paradigms for the understanding of the evolutionary mechanisms and dynamics characterizing the VCF as well as to formulate the implications for adjusting the partnership between the fund manager and the investors;

• To use the dynamic capabilities and organizational resilience paradigms within a hybridized concept starting from the reconfiguration cycle of the operational capabilities (i.e. discovery-learning-coordination) which will have an impact both on the internal VCFs processes and on the means of implementing the latest organizational solutions in order to partner fund investors with entrepreneurs.

• To put in practice the investigations from Section 5 from a triple perspective (i.e. investors-entrepreneurs- fund managers).

The limits and future research are:

In spite of the fact that BSE was inaugurated only in 1996 in Romania, investors have adjusted and have focused on understanding the market mechanisms. As far as Romania is concerned, investment opportunities remain low, whereas the actual communication among investors, fund managers, and entrepreneurs is limited. Database shortage has restricted the development of some relevant qualitative research, yet our suggested case studies have provided extra knowledge in the field under discussion.

Future research could focus on the following issues: the use of the assessment methodologies of the portfolios, a deeper understanding of the interactions between entrepreneurs and investors (starting from issues such as accessibility, knowledge, and communication), finding solutions for the reduction of the obstacles in making VCF investment partnerships, highlighting the means of dealing with the investment biases characterizing the VCFs.