A cautious venture capitalist.

• Author: Patricof, Alan
• Position: Evaluation of ventures in Eastern Europe - Chairman's Agenda: Acquiring in Eastern Europe

How does a venture capitalist view the opportunities in Eastern Europe? What better person to ask than Alan Patricof, founder of Alan Patricof Associates, one of the largest, most international and most experienced venture capital firms. He has more than 35 years of experience in the venture capital business, has played an important role in the founding of Silicon Valley, and has helped bring the modern concept of venture capital investing to overseas markets. In the midst of raising a new pan-European fund, he had just returned from a visit to Eastern Europe when Directors & Boards met with him in his New York office to gather a few of his impressions.

I am by no means an expert on Eastern Europe, but as an observer I'd say a viable venture capital operation is not the first thing that is going to happen. There is a cycle of development that is needed.

"Venture capital is something that operates best in an environment in which there is a viable secondary market. That is a condition that is absolutely crucial. You have that in the U.S., in England, in France. There is venture capital in Belgium, Holland, Finland, Sweden, and a variety of other places. It is developing slowly in those countries, but it's surviving and, in some places, prospering. In the last year, Japan's secondary market has become much more active, so Japan is becoming more viable as a venture capital location. But Germany is not even at least stage yet. The opening of the Hungarian stock market is a first step. You may have a primary market for the 10 or 20 largest companies, but it will be a long time before you have it for the smaller companies, which is what venture capital thrives on.

"Secondly, you don't have a spirit of entrepreneurship that is readily obvious. There are a lot of people who say there is a built-up reservoir of Eastern Europeans who can't wait to start doing their own thing. I realistically believe that it is going to start with small shops first. There are lots of those. There are very active conversations in Hungary now about turning over 30,000 small businesses to the people who are running them for the state. This doesn't lend itself to venture capital.

"While I was there, I met with an independent, privately owned company doing about $10 million in sales. It was in five different businesses. It would have been very difficult to figure out how to make an investment in that company. Because there hasn't been an infrastructure of suppliers in the...