Ukraine's Eager Entrepreneurs Tap Into US Venture-Capital Fund

FOR young Ukrainian entrepreneurs full of ideas but short on money, finding financial backers is the real challenge to their ingenuity.

The country's 150 banks, still largely geared toward propping up state enterprises, are unfamiliar with such Western concepts as extending credit to untried private start-ups. And chunks of foreign aid such as Group of Seven grants tend to get funneled through the state government into industry, agriculture, and other areas of subsidy, leaving the little guy empty-handed.

Enter George Yurchyshyn. As manager of the Ukraine Fund, a venture capital investment fund managed by Claflin Capital Management in Boston, Mr. Yurchyshyn is keen to back these committed, capital-hungry entrepreneurs.

Operating out of Kiev, the Ukrainian capital, Yurchyshyn doesn't need to advertise his services. The $11.7 million fund is the only one in the country - and only one of a handful in the former Soviet Union - and entrepreneurs are lining up at his door.

While the risks are high, the fund could see returns of 10 times the initial investment or more, wagers Yurchyshyn, a Ukrainian-born American.

Yurchyshyn's enthusiasm is palpable as he explains the fund's hands-on approach during a recent visit to Boston. Formal board meetings are rare at these fledgling firms, he says, where much of the strategy planning and management pointers are dispensed on an ad hoc basis. But ``we don't want to run their businesses,'' Yurchyshyn says. The problem is one of training these 20- and 30-year-olds to think in market terms. Too often they miss the whole picture, he adds.

Igor Muntianov, an investment officer in the Kiev office, gives an example. A local manufacturer of high-quality nails had everything but the equipment to package its product, he says. The Ukraine Fund invested $60,000 to buy the equipment and so improve delivery and the company's export potential. ``This project is like many other typical former Soviet projects,'' Mr. Muntianov says. ``Their businesses are almost always incomplete, in the sense that they do something but never really finish it.''

ESTABLISHED last year, the Ukraine fund has invested $3.5 million in 14 private companies active in the consumer market. The companies include a sailmaker, tea packer, and furniture manufacturer. Another $4 million in potential investments is in the pipeline. The cap on any single investment is $500,000 to maintain the fund's diversity, Yurchyshyn explains.

The fund's leading institutional investor, the European Bank of Reconstruction and Development, put down $3.5 million, in part because the fund offers EBRD an efficient way to extend aid to small entrepreneurs in Ukraine and fulfill its mandate, Yurchyshyn suggests. The International Finance Corporation (a subsidiary of the World Bank) invested $2 million. Other investors include the Bank of Boston and private individuals.

Wealthy individuals and large corporations like Pepsi-Cola have had investments in Ukraine for some time. But blatantly absent from the mix are big institutional investors such as pension funds, says Thomas Claflin, head of Claflin Capital Management. The risks are too high, he explains. After four years of independence, Ukraine, like the other young republics in the Commonwealth of Independent States, is still stumbling toward a market economy and is considered a ``preemerging market.''

The problem is lack of a financial, legal, and stable political framework, says David Tipple, chief investment officer for Eastern Europe at Boston-based Pioneer Group Inc. ``You need a certain amount of infrastructure to do deals,'' he says. Pioneer, however, does run a mutual fund in Poland for domestic investors called First Polish Trust and is exploring a similar idea in Russia.

The promise of substantially higher growth in Eastern Europe and CIS countries than in Western Europe is gradually drawing the interest of foreign investors, despite the risks.

George Soros, the financier and philanthropist who swore off investments in the region, recently made a U-turn. And Mr. Tipple predicts that United States mutual fund companies will come out with a fund or two targeted at the region before the year is out.

In the meantime, Yurchyshyn and Mr. Claflin are so enthused about the quality and quantity of investments in Ukraine that they plan to start a second Ukraine fund within the year, they say.