Estonia: Development Fund to finance startups via investment funds

Photo: Arno Saar / Õhtuleht

The supervisory board of the Estonian Development Fund has approved a proposal of the management board as regards reorganization of the fund's investment activity by switching from direct investment in companies to investment via private equity investment funds.

The chairman of the supervisory board, Alar Karis, said the strategic change enables to make better use of investment capital and achieve the investment goals arising from the law, which is capital offer to innovative and ambitious businesses of the early phase and developing of the Estonian venture capital market.

"The Development Fund's investment activity has been successful, but now a step forward needs to be taken," Karis said.

The CEO of Development Fund, Tõnis Arro, said that as a result of the rearrangement a number of private funds making direct investments will emerge in the place of a single state-held fund, thereby boosting capital offer and increasing the market's activity.

"To sum things up, the aim is to make sure that good ideas having a strong business plan will get both valuable advice as well as necessary investments from a provider of finance well informed about the respective area, and for Estonian startups to have broader opportunities than so far to choose between investors," Arro added.

Also the experience of other countries shows that venture capital investments by the state are more successful in the long term and development of the market more efficient when investments are made not directly into companies but through funds of funds, it stands in the press release by the Development Fund.

Besides, a fund of funds can bring in structural fund assets in addition to state provided investment capital and work closely in investment with pension funds, for instance, which at present have rather limited opportunities for placing their capital on the Estonian market, it said.

The next steps necessary to implement the change are initiating the corresponding legal amendments in the Riigikogu, as under current law the fund can only make investments in the equity capital of businesses.

The Development Fund began venture capital financing in September 2007. Its investment company Smartcap at present is in charge of the largest portfolio of startups in Estonia made up of 16 companies.