Planning for early stage financing in Estonia

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• Planning for early stage financing in Estonia
• CONNECT ESTONIATarvo Tamm

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Presentation outline

• Planning multi-level Funding measures
• Market Study lessons- investment professionals

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Support measures for early stage funding
Start-up
Early Growth
Seed funding
Pre-seed Funding
Expansion
Public sector spillover Pre-market conditions
Regulatory improvements
Public sector leverage Private sector envolvement
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Pre-seed Funding, Seed Funding

• Technology Grant System Development
• Development Centre funding
• Project funding
• 2,7 MEUR for Technology Development Centres
  (2005)
• 6,5 MEUR for Technology Development projects
  (2005)
• Variation of funding levels
• Variation of funding applicants universities,
  start-up companies and SMEs

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Pre-seed Funding

• There is need to improve linkages between
  industry and academia
• There is a pre-seed funding gap which is
  restricting the flow of technology from the
  laboratories to the market place
• SOLUTION
• There is possible to improve the level and
  quality of commercialization through the
  provision proof-of concept funding and/or
  widening technology grant funding
• Need for cluster support

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Start-up Funding

• Equity Gap virtually no investors in the
  start-up , pre-cash flow situation
• Under-developed private equity/venture capital
  market
• Consensus about the need for a public venture
  fund
• Direct investments to companies
• 100 publicly owned fund
• Private co-investment on project basis, public
  fund invests up to 50 cash-to-cash
• Prospective co-investor in the fund EIF or other
  EU sources as well as similar funds in
  neighbouring countries
• Minimum investment EUR 0.1m, maximum investment
  EUR 1.5m

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Start-up Funding

• Why direct investments (matched project by
  project)
• Limited dealflow, limited number of feasible
  projects
• Growing informal investment community
• Mobilizing private investor community to invest
  in early stage
• Strong signal to private sector- partner is
  available
• Competence building for industry (like SITRA in
  Finland)
• Support actionsawareness building, business
  development, competence building, business
  internationalization private fund management
  companies engage on limited scale in these
  actions

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Early Growth and Expansion Funding

• Public Venture Fund -- Fund Investments
• Fund-of-funds
• Investments into private venture capital funds
• Under planning, but favored structure with strong
  upside incentives to trigger equity market
  development
• Why investments into private venture capital
  funds
• Need for local cornerstone investors in private
  funds
• Triggering private/equity venture capital
  development
• Support for institutional professional investment
  development into non-listed equities
• Competition between funds is essential

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Seed Capital Funding - point for discussion

• Separate seed capital funding vehicle
• Minimum Investments 0,03-0,1 MEUR
• Strong links with universities and technology
  incubators
• Incubator/University Seed Fund
• Early project incorporation
• No need for private sector co-finacing in the
  seed round
• Filling the gap between pre-seed and start-up

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Estonian Private Equity/VC Landscape

• Small Estonian market
• Part of a bigger market(Baltics, Baltics and
  Scandinavia, CEEC countries, EU)
• 5 fund management companies managing
  institutional funds
• Big role of private (informal) investor capital,
  but without well-defined fund management
  companies
• Only one VC-type company (who is raising funds
  currently) is targeting start-ups, others growth
  investments
• Three have closed their investment activities

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Interviews with private equity/venture capital
investment company professionals in Estonia

• 10 interviews
• 3 GPs in private equity/VC companies
• 7 investment company professionals
• 284 MEUR under management
• Representative investment community sample

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Interviews with investment professionals- Results

1. Problems in tax system
2. Incentive system favored by investment
   professionals

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Problems in tax system

• No possibility for legal domicile for VC fund
• Taxing stock options as salary costs
• Net assets are less than 50 of share capital it
  is possible to liquidate the venture by public
  auhority
• Convertible debt is limited
• Taxing dividends within the holding company

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Preferences by investment professionals

• 1. Public sector participates in the fund as a
  passive investor with up to 50 of the capital
  and gives you an option to buy it out at the
  original value plus a hurdle rate. There are
  restrictions on the investment policy, mainly
  directing the fund to early stage investments.
  SCORE 4.12.
• The public sector participates in the fund with
  25 of the capital pari passu (at the same
  conditions as the private investors), however
  there are no restrictions on the funds
  operation. SCORE 3.33.
• The public fund autonomously co-invests together
  with the private funds in selected early stage
  companies with maximum the same amount of money
  (50). There are no restrictions to the private
  fund. Score 3.04
• Public sector guarantees private investors in the
  fund (limited partners) that they will not lose
  more than 50 of their investment in any case
  (venture fund guarantee scheme) Score 2.25
• The public sector pays to the management company
  100,000 Euros per year for the first three years
  of operation and covers part of its expenses
  (maximum 50). Score 1.8

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CONTACT

• Connect Estonia
• www.connectestonia.net
• Tarvo Tamm tarvo.tamm_at_connectestonia.net
• Kristjan Kalda
• kristjan.kalda_at_microlink.ee