Development Fund investment principles
The main strategic principles are as follows:
1. Investments are based on commercial reasoning, i.e. they must be profit-oriented and economically viable.
2. Investments must be made together with private investors and on equal terms - i.e. for the same amount of money invested the Development Fund has to gain an equal holding. In order to hedge risks and for the purpose of developing the venture capital market co-investors must be private persons or institutional investors who had previously held no stake in the given company.
3. Investments are made into companies showing potential for fast international expansion and whose growth requisites are based on a unique idea, business model, invention, technology or market opportunity that has realistic possibilities in the market - hence there has to be a growth-sustaining long-term competitive advantage.
4. Investment periods range from 3-5 years. If the value of the company is to increase during that period, the business cannot be in a very early development stage. Typical investee companies have passed the product development stage and have either entered or are entering the market.
5. Besides equity investment, for the purpose of improved structuring of the investment project the Development Fund may also issue a convertible loan to the business project.
6. The Development Fund only invests into equity expansion and does not buy out the existing owners.
7. Investments are made in stages, i.e. total funds are not invested into the company immediately, but in instalments in conformity with reaching the agreed milestones.
8. Under no circumstances does the Development Fund deliver grants (i.e. irretrievable aid) to companies. The Development Fund makes equity investments, i.e. becomes a shareholder and shares with other owners possible earnings and related business risks.
9. The Development Fund requests a holding of 10-49% in return for the investment.
10. The co-investor and the Development Fund participate actively in the supervisory board of the investee company, thus fostering corporate development. However, investors can never replace the entrepreneur - thus the company itself must possess the capability, will and ambition for operational management.
11. The Development Funds observes the principles of the European Private Equity & Venture Capital Association (EVCA) and the best international practices and standards of the venture capital industry.
12. The approximate planned annual internal rate of return (IRR) on investment projects is 35%. Depending on area characteristics, the rate may be either higher or lower.
13. The Development Fund does not set constraints on its investments regarding activities or sectors (except activities prohibited under the Estonian Development Fund Act or by the EU). Meanwhile, the Development Fund maintains a balance between different areas and risk levels within its investment portfolio.