E24: Development Fund to start financing startups through investment funds

The Supervisory Board of the Estonian Development Fund approved the management board’s proposal to restructure the fund’s investment activities, moving from direct investments to investing into funds that raise private equity.

Chairman of the Supervisory Board of Development Fund, Alar Karis, said this is a strategic shift that allows for better usage of investment capital and achieving the investment goals established by legislation, namely offering capital to innovative and ambitious companies in the early stage and developing the venture capital market of Estonia.

“The investment activities of Development Fund have been successful, but it is time to take them to a new level,” Karis said, in explaining the reasons for the strategic change.

Chairman of the Management Board of Development Fund, Tõnis Arro, said that as a result of the change, several direct investment private funds will appear instead of one, state-owned fund, which will bring along an increase in the equity offer and a more active market.

“In a nutshell, the aim is to ensure that great ideas with a valid business plan will receive valuable advice as well as the necessary investments from a field-savvy financer and that Estonian startups will have a wider range of investors from which to choose,” Arro counted the expected results of the restructuring.

The experience of various countries shows state-run VC investments are more successful in the long run and market development more efficient if the investments are made not directly into companies, but rather through funds of funds.

Also, a fund of funds can raise additional resources from structural funds besides state venture capital and have investment-related partnerships with e.g. pension funds, which have rather limited opportunities for investing on the Estonian market today.

The next steps in carrying out the changes will be a motion to amend the law and its proceeding in the Estonian Parliament, as the law presently states that the fund can only make investments into a company’s share capital.

Arro emphasised that the early stage investments must continue during the transition period and that professional management of the present portfolio must be guaranteed along with the interim investments required by the existing portfolio ventures.

Estonian Development Fund is a venture capital fund and thought centre established by the Estonian Parliament with the aim of investing into internationally orientated innovative Estonian companies, monitoring developments and starting growth programmes to develop entrepreneurship. Development Fund’s investment company SmartCap manages the largest startup portfolio in Estonia, containing 16 companies.

Source: http://www.e24.ee/1134600/arengufond-hakkab-idufirmasid-rahastama-labi-investeerimisfondide/