Heidi Kakko

The reason the Estonian Development Fund was established as a provider of venture capital is even more valid today than it was at the time of the fund’s establishment – the need to create a firm basis on which to support and strengthen Estonia’s long-term growth and its competitive position internationally.

The provision of early and growth-stage venture capital has a significant role to play in generating a critical mass of companies with international growth ambitions in the country. Only by developing business models which are capable of competing against others and which offer considerable added value will Estonia be able to make the most of the therapeutic effect of the recession, modify the structure of its economy and emerge from the financial crisis as a winner.

We have found ourselves in a situation where the country lacks courageous entrepreneurs striving for international growth. One of the major challenges facing the Estonian Development Fund is to develop the venture capital market so that it produces significantly more innovative and uniquely competitive technology-based business ideas, entrepreneurs and businesses which are all worthy of investment.

We also need to ensure that these entrepreneurs are willing and able to raise more than just money. They often have the technological potential (offering a product or solution), but fall down when it comes to marketing their products or services, outlining their strategies and financial prospects and raising capital. But what venture capitalists do is match new technology or new business models to management experience and networks which allow us to capture and secure ourselves a place on the global market.

Since Estonia has no particular advantage or pull factors to offer as a growth environment for companies with international focus which would entice entrepreneurs to the country and thereby increase the number of business projects attractive to venture capitalists, available investment capital is instead being channelled outside of Estonia into projects with growth potential. It is a catch-22 situation. You need two things for growth: capital to invest and attractive businesses to invest in. In Estonia the capital investments of smaller private investors need pampering, as the majority of such investors lack the knowledge and/or the courage to make initial investments in IT or biotech start-up companies. They prefer more traditional branches of industry with more tangible assets.

The Estonian Development Fund encourages the market to broaden its horizons, itself making direct investments in early-stage high-risk start-up companies with a stronggrowth potential and boosting the market's willingness and ability to invest generally by promoting co-investors and implementing best practice. This last one is something from which both the start-up phase of traditional (manufacturing) industry and companies in need of ‘re-start-up' or restructuring win. By encouraging private investors to invest and entrepreneurs to move towards far-reaching growth, ‘lifestyle (over-the-corner) businesses' will also change their tune and look to faster growth and a bigger market.

The long-term effect of venture capital on the economy as a whole can be seen in the example of its biggest market – the United States. The companies which received early-phase venture capital between 1970 and 2005 currently employ approximately 10% of the country’s private sector workers, who account for 17% of GDP. Many business operators who were given a shot of venture capital doubt whether their companies would ever have gotten off the ground, or developed at any more than a snail's pace, without it.

The best examples of venture capital investment internationally are Cisco, Starbucks, Google, eBay, Apple and Skype, while the venture investment of the U.S. Small Business Administration Investment Division has led to an explosion of stars like Compaq, Staples, Intel, Sun Microsystems and FedEx. The experience of the United States, which is at the forefront of the venture capital market, shows that in terms of growth, companies financed through venture capital have consistently outshone those that went without a shot of smart money.

In order for Estonia to reach a middling sort of footing in European terms, at least 0.1% of GDP - between 200 and 250 million kroons - must be invested as early-stage venture capital annually. (The figure in the United States is 2% of GDP annually.) Since the average length of time from raising venture capital to exiting an investment is between 5 and 7 years, the volume of early-stage investment funds in the country should be between 1 and 1.5 billion kroons, provided, for the most part, by funds with reliable cornerstone investors which are based on private capital. In a recession any kind of capital offer is going to be restricted, but early-stage access to capital creates the foundations needed for sustainable new companies and a basis for subsequent, later-stage private sector investments. You reap what you sow: if you don't plant the seed, it will never bear fruit.

As of August 2009 the Estonian Development Fund had made five early-stage investments, pouring almost 36 million kroons into business models with international breakthrough potential. Three of these investments have been made in the last nine months. This is more than any other private sector early-stage capital provider invested in Estonian companies in the same period. By the end of 2009 our investment portfolio is likely to include as many as nine growth companies. Although you do find competitive business models in all branches of industry, the world is primarily seeing new sources of growth in ingenious IT applications, clean energy and the life sciences.

In order to generate more ambitious companies in which to invest venture capital, the Estonian Development Fund has founded a virtual incubator of international business called SeedBooster, in which start-up companies are prepped for investment by consulting and advising the entrepreneurs and developing their plans for growth. Five seed-phase business projects are currently being incubated in SeedBooster under the watchful eye of our investment experts.

The Estonian Development Fund is continuing to look for talented entrepreneurs to open the door to, as well as forward-thinking investors with whom to make big, bold investments.

heidi.kakko[A]arengufond.ee, Head of Investment Division