Revolutionary Change and the Greek Financial Crisis: Lessons from the Venture Capital World

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Dr. Tamir Agmon is the  Associate Dean for Research and Development at the School of Management and Economics, Academic College Tel Aviv Yaffo in Israel. He is also  a Professor of Financial Economics at the School of Business, Economics  and Law at Gothenburg University in Sweden.

Dr. John Psarouthakis is a Distinguished Visiting Fellow-Professor, Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland. Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. .He is the Publisher of

1.      Introduction  

Greece is in great need for a peaceful revolutionary change in her political and socio-economic structure and culture. All the current programs for austerity and such like are based on the existing system. They are necessary, but not sufficient. We know from our research of the market for ideas that incumbent system cannot initiate or even supports revolutionary change. What is needed are new ideas and independent way of funding the ideas in their development stage. A good example is the case of supporting revolutionary change in technology by venture capital funds

The current financial crisis in Greece is a test case for the ability of the Greek government, the European Union, and the global financial system to deal with the need for revolutionary change. The current crisis in Greece is an outcome and a reflection of deep seated political, social and economic factors in Greece. The fact that Greece is a member of the European Union makes what could be a Greek problem a European and hence to a global problem. In a recent article in the New York Times Professor Aristides Hatzis from Athens University relates the problems today to the, justified, imitative of the senior Karamanlis to join Greece to the European Union. He succinctly summarizes the deep rooted nature of the crisis as follows:

“The Greek New Deal (joining the European Union) was not based on the redistribution of wealth created by the market since the market in Greece is highly regulated: it is a paradise for oligopolies, close shops and pressure groups where tax evasion is socially accepted and politically excused. Greece aggressive pressure groups, (unions, government agencies, cartels, close profession, etc.) seized big chunks of the E.E.C. transfers and government borrowing”. (NYT, June 14, 2011).

It is clear that what is needed is a revolutionary change in the body politics, the social structure and the economy of Greece. It is also clear that such a change is extremely difficult to implement, particularly given the strong incentive of the major EU countries to bail out Greece due to the high cost of its failure for the European Union. The current impasse is not due to lack of understanding what should be done. There are many officials in the Greek government who understand the situation perfectly. That does not mean that they can or are willing to act to address the problem. In a well-known article published in the Harvard Business Review in 1995 Bauer and Christensen said that: “Managers of established companies can master disruptive (revolutionary) technologies with extraordinary success. But when they seek to develop and launch disruptive technology that is rejected by important customers within the context of the mainstream business financial demand they fail- not because they make the wrong decisions, but because they make the right decisions for circumstances that are about to become history”.

In order for investors to be attracted to Greece the country must establish at least the following:

Long-term political stability.

A clear tax regime that leaves no room for misunderstandings or blackmail, just straightforward rules about what is legal and what is not and create the infrastructure to strictly implement such tax laws.

Eliminate monopolies but protect inventions and enterprises based on such inventions for the period the invention holds.

Open closed markets and professions.

Design and implement change in the business culture. The change has to be implemented by a large number of small changes affecting business units like firms, service organizations, and public organizations. Small and medium enterprises (SMEs), and in particular global oriented SMEs, play an important role in the necessary changes.

Establish equality under the Law.

Greece must have a financial and banking industry whose resources, whose inventiveness and the expertise with which it is managed may be unrivaled in her region and command global respect. It should not only exert a predominating influence within south-east Europe, but it should also be active in global commerce, particularly through the great presence of her commercial fleet of ships.

Greece must establish a legal and judicial structure with which it imposes order and the deference with which its authority is yielded to by the public. In terms of the intensity of its professional training and the bond of ethos which ties its practitioners together it would establish a bedrock of needed stability.

Greece should establish an advanced system of higher education comparable to world class universities. This university system should be the center of intellectual rigor, devoted to the pursuit of timely learning, it should be the system that future Greek Leaders are educated and help shape Greek values and methods and attract youth from other countries seeking a great education


Finally, Greece must have a professional, independent minded journalist class that carries, and perhaps most importantly, conducts a perpetual surveillance of ever-changing events and becomes, in effect, a kind of electronic reality that exists unto itself. While it reports objectively on the upheavals of the world it provides a stable frame of reference separate from the world on domestic activities and has the respect of the Greek Citizen!

The “managers” of Greece understand the needed change, but their main traditional customers, (unions, government agencies, cartels, close professions, etc.) prevent them from doing what they know is the right policy to follow. As long as they can avoid the change they will do so. The current power of the incumbent groups is sufficient to prevent a change that may redistribute value among different groups.

This situation is well-known in economics theory. There is much discussion in the industrial organization literature on the entry of new actors into a monopolistic or otherwise restricted industry. Most papers focused on the behavior of the incumbent, the current holder of the rent. There is however some work based on a classic article by Arrow (1962) that deals with introducing “drastic” innovation. In a recent study Agmon, Gangopadhayay, and Sjogren  (2011) discuss the process by which revolutionary innovation is introduced to a market dominated by incumbents who control the current technology.  They show that venture capital funds act as instruments to go around the forces who oppose a change that will hurt the incumbent rent holders. The specific legal and financial structure of venture capital funds creates an incentive structure that is congruent with the need for a change. This is why venture capital funds thrive in countries where there is a large potential for revolutionary technological change like the US and Israel.

In the following we discuss the financial crisis in Greece in terms of the need for a revolutionary change. The main proposition is that in addition to the effort to change the Greek body politics, a very complex and difficult process, there is a need to develop other venues for revolutionary changes. One such venue is to use the global capital market in funding change oriented investment by creating special purpose financial intermediaries fashion after the successful model of venture capital funds. If successful such funds can contribute in two ways; first, by funding change oriented investment in technology and other fields of business in Greece. Investments that are based on revolutionary changes aimed at extraordinary high return (upside). Extraordinary return can be achieved where the market is controlled by a monopoly or otherwise restricted. Naturally such investments are highly risky as the incumbent monopolists oppose changes. The other benefit of such investments is that they change the expectations of the market regarding the future of Greece. This secondary effect is of extreme importance. If global high risk equity investment by US and other large institutional investors will go to Greece it will have an effect on the rating of Greece in the financial market.

In the section below we discuss the role of the capital market in facilitating revolutionary changes. We use the development of venture capital funds in the US as an example. The Israeli experience in changing the competitive advantage of the country through the globalization of the financing of financing revolutionary technological change is presented and discussed in section 3. The way that revolutionary changes are financed by the savings of middle income families in the US is presented and discussed in the context of Greece in section 4. A proposal for a “change fund” for Greece is presented in the last section of the paper, section 5.

  1. 2.      The role of the capital market as a facilitator of change

In a 2005 article Merton and Bodie present and discuss what they call functional and structural finance (FSF) as a synthesis between the neoclassical approach to finance and the more recent institutional approach. One of the main points in their argument is that in many cases the capital market responds to needs by developing specific institutions and financial instruments to answer the needs. Venture capital funds are an example to the way that the capital market in the US provided ways to answers specific needs. Following World War II there was both a potential and a need for technological innovation. Much of the innovation was revolutionary in nature and for the reasons mentioned above could not be served by the incumbent companies and by the “mainstream” capital market. The digital world and the information technology that are now part and parcel of daily life were at the time revolutionary ideas. Financing ideas directly through venture capital funds has started in 1946 as an idea of one person, Doriot and his American Research and Development Corporation (ARDC), but in a short span of less than fifty years it has grown to a financial intermediation system that invests tens of billions of dollar a year and supports a constant flow of revolutionary innovation that has a substantial effect on what people consume all over the world.

The current situation in Greece presents similar problem; there is a need and a potential for revolutionary change in the Greek economy. The change once implemented will have a substantial positive effect on the Greek economy and society as well as a positive effect on the European and the global markets. The necessary change cannot be implemented through the current political, economic and social system in Greece. There is a need for a structural change. It is easier to introduce the necessary change through new institutions and new financial instruments than to try and change the existing system. Because Greece is a small country it is possible to have a large enough effect by going around the existing system and create a short cut for change through the global capital market.

 A necessary condition for a success of such an approach is that the potential for a real change in Greece exists. No venture capital funds system is successful unless there is a supply of revolutionary ideas and the will of entrepreneurs to try and make their ideas work. Greece has such potential evident among other things by the success of Greeks in the US, in Australia, and in many other places outside Greece. Greek research institutes are of high quality, and even in the current situation there are successful Greek companies outside the restricted oligopolistic market.

  1. 3.       Changing the competitive advantage through the global capital market: The case of the high-tech industry in Israel

The purpose of this section is to demonstrate how a potential value became a realized value by combining appropriate financial intermediary to “dormant” but existing ideas for doing things in a different way. Israel prior to the introduction and implementation of high tech as a competitive advantage was semi-socialistic country with a very high level of government involvement where most of the export was either natural resources or agricultural products. In the case of Israel, like in the case of Greece it does not take much to make a meaningful change. An investment of few billion dollars a year in ideas in Israel has changed the country; it can happen in Greece as well.

  1. 4.      Why should US pension funds invest in a “Private Equity Fund” in Greece?

 US pension funds do invest in some high risk, high upside “Funds” and could do so in Greece for two reasons; first because the future situation in Greece will affect, positively or negatively, the future consumption of the beneficiaries of the defined benefits plans managed by the pension fund. The effect is small, but so is the investment. Second, the nature of defined benefits plans encourage the managers to invest in high upside, high risk financial instruments and the proposed funds provide such investment opportunities. Assisting Greek recovery through the global capital market is better than direct government intervention. Applying the existing legal and regulatory structure to special purpose “Change Funds” in Greece is a good way by which the US government can help the capital market to implement the necessary change in Greece.

  1. 5.       A brief outline for a “Greek Fund” to invest in change related projects in Greece

The idea here is to design a special purpose private equity fund that will invest in change related projects in Greece. This may involve some cooperation from the Greek government as well as innovative ideas about potential projects and how to generate the deal flow. Here are four criteria:

  1. The Greek Fund (GF) should be a private equity fund focusing on creating value by implementing change in Greek globally oriented small and medium enterprises (SMEs).
  2. The business model of the Greek Fund (GF) should be based on the following:
    1. The crisis in Greece generates high value business opportunities.
    2. An understanding of the Greek economy and body politics and an understanding of how private equity funds generate value are two necessary conditions to realize the potential value in Greece today.
    3. Choosing globally oriented Greek SMEs is a way to build on the inherent potential in Greek businesses today by focusing on already proven SMEs while minimizing the problems associated with the Greek government by focusing on globally oriented SMEs. GF would provide three critical ingredients in unleashing the value Greek SMEs; (1) A proven ability to introduce and manage change, (2) acceptability in the global market by “removing” the target companies from the Greek negative association and put them in a global framework, and (3) providing capital to finance the change.
  1.  The financing model of the Greek Fund (GF) should be comprised of three stages.

Stage One: Raising 5 million Euros and investing this amount in 2-3 SMEs within one year, (first closing). The money for the first closing will come from individuals in Greece and in the Greek Diaspora.

Stage Two: Once the investment is completed raising 30-50 million Euros under normal conditions, (8-10 years). This will complete the first fund. The sources of the money will be institutional investors (from corporate social responsibility (CSR) allocation) and from EU sources.

Stage Three: Raising a second fund together with a U.S. based private equity fund. The target of the second fund will be between 150-250 million Euros. Likely time is 3-4 years after the closing of the first fund.

GF should establish professional relations with U.S. based and / or other private equity funds as a part of the deals to be made.


Prof. Tamir Agmon is Associate Dean for Research and Development at the School of Management and Economics, Academic College Tel Aviv Yaffo in Israel. He is also a Professor of Financial Economics at the School of Business, Economics and Law at Gothenburg University in Sweden. Professor Agmon main research interest is the economics and finance of private equity and venture capital.

Prof. John Psarouthakis is a Distinguished Visiting Fellow-Professor,
Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland
Publisher: The Business Thinker, llc. (
Professor (Ret), Ross School of Business, The University of Michigan.
and former CEO, JPIndustries, Inc. (a Fortune 500 industrial group)
Prof. Psarouthakis’ interests are in the University of the Future, Economic Development, and Business Enterprise and Society. He is the author of several books.


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