June 24, 2005 PAxis workshop, Salamanca

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June 24, 2005 PAxis workshop, Salamanca

  1. 1. <ul><li>Planning for early stage financing in Estonia </li></ul><ul><li>CONNECT E STONIA Tarvo Tamm </li></ul>
  2. 2. Presentation outline <ul><li>Planning multi-level Funding measures </li></ul><ul><li>Market Study lessons- investment professionals </li></ul>
  3. 3. Support measures for early stage funding Start-up Early Growth Expansion Public sector leverage Private sector envolvement Seed funding Pre-seed Funding Public sector spillover Pre-market conditions Regulatory improvements
  4. 4. Pre-seed Funding, Seed Funding <ul><li>Technology Grant System Development </li></ul><ul><ul><li>Development Centre funding </li></ul></ul><ul><ul><li>Project funding </li></ul></ul><ul><ul><li>2,7 MEUR for Technology Development Centres (2005) </li></ul></ul><ul><ul><li>6,5 MEUR for Technology Development projects (2005) </li></ul></ul><ul><ul><li>Variation of funding levels </li></ul></ul><ul><ul><li>Variation of funding applicants: universities, start-up companies and SMEs </li></ul></ul>
  5. 5. Pre-seed Funding <ul><li>There is need to improve linkages between industry and academia </li></ul><ul><li>There is a pre-seed funding gap which is restricting the flow of technology from the laboratories to the market place </li></ul><ul><ul><li>SOLUTION </li></ul></ul><ul><ul><li>There is possible to improve the level and quality of commerciali z ation through the provision proof-of concept funding and/or widening technology grant funding </li></ul></ul><ul><ul><li>Need for cluster support </li></ul></ul>
  6. 6. Start-up Funding <ul><li>Equity Gap – virtually no investors in the start-up , pre-cash flow situation </li></ul><ul><li>Under-developed private equity/venture capital market </li></ul><ul><li>Consensus about the need for a public venture fund </li></ul><ul><ul><li>Direct investments to companies </li></ul></ul><ul><ul><ul><li>100% publicly owned fund </li></ul></ul></ul><ul><ul><ul><li>Private co-investment on project basis, public fund invests up to 50% cash-to-cash </li></ul></ul></ul><ul><ul><ul><li>Prospective co-investor in the fund EIF or other EU sources as well as similar funds in neighbouring countries </li></ul></ul></ul><ul><ul><ul><li>Minimum investment EUR 0.1m, maximum investment EUR 1.5m </li></ul></ul></ul>
  7. 7. Start-up Funding <ul><ul><li>Why direct investments (matched project by project) </li></ul></ul><ul><ul><ul><li>Limited dealflow, limited number of feasible projects </li></ul></ul></ul><ul><ul><ul><li>Growing informal investment community </li></ul></ul></ul><ul><ul><ul><ul><li>Mobilizing private investor community to invest in early stage </li></ul></ul></ul></ul><ul><ul><ul><li>Strong signal to private sector- partner is available </li></ul></ul></ul><ul><ul><ul><li>Competence building for industry (like SITRA in Finland) </li></ul></ul></ul><ul><ul><ul><li>Support actions—awareness building, business development, competence building, business internationalization– private fund management companies engage on limited scale in these actions </li></ul></ul></ul>
  8. 8. Early Growth and Expansion Funding <ul><ul><li>Public Venture Fund -- Fund Investments </li></ul></ul><ul><ul><ul><li>Fund-of-funds </li></ul></ul></ul><ul><ul><ul><li>Investments into private venture capital funds </li></ul></ul></ul><ul><ul><ul><li>Under planning, but favored structure with strong upside incentives to trigger equity market development </li></ul></ul></ul><ul><ul><li>Why investments into private venture capital funds </li></ul></ul><ul><ul><ul><li>Need for local cornerstone investors in private funds </li></ul></ul></ul><ul><ul><ul><li>Triggering private/equity venture capital development </li></ul></ul></ul><ul><ul><ul><li>Support for institutional professional investment development into non-listed equities </li></ul></ul></ul><ul><ul><ul><li>Competition between funds is essential </li></ul></ul></ul>
  9. 9. Seed Capital Funding - point for discussion <ul><li>Separate seed capital funding vehicle </li></ul><ul><ul><li>Minimum Investments 0,03-0,1 MEUR </li></ul></ul><ul><ul><li>Strong links with universities and technology incubators </li></ul></ul><ul><ul><ul><li>Incubator/University Seed Fund </li></ul></ul></ul><ul><ul><li>Early project incorporation </li></ul></ul><ul><ul><li>No need for private sector co-finacing in the seed round </li></ul></ul><ul><ul><li>Filling the gap between pre-seed and start-up </li></ul></ul>
  10. 10. Estonian Private Equity/VC Landscape <ul><li>Small Estonian market </li></ul><ul><li>Part of a bigger market(Baltics, Baltics and Scandinavia, CEEC countries, EU) </li></ul><ul><li>5 fund management companies managing institutional funds </li></ul><ul><li>Big role of private (informal) investor capital, but without well-defined fund management companies </li></ul><ul><li>Only one VC-type company (who is raising funds currently) is targeting start-ups, others growth investments </li></ul><ul><ul><li>Three have closed their investment activities </li></ul></ul>
  11. 11. Interviews with private equity/venture capital investment company professionals in Estonia <ul><li>10 interviews </li></ul><ul><ul><li>3 GPs in private equity/VC companies </li></ul></ul><ul><ul><li>7 investment company professionals </li></ul></ul><ul><ul><li>284 MEUR under management </li></ul></ul><ul><ul><li>Representative investment community sample </li></ul></ul>
  12. 12. Interviews with investment professionals- Results <ul><li>Problems in tax system </li></ul><ul><li>Incentive system favored by investment professionals </li></ul>
  13. 13. Problems in tax system <ul><li>No possibility for legal domicile for VC fund </li></ul><ul><li>Taxing stock options as salary costs </li></ul><ul><li>Net assets are less than 50% of share capital– it is possible to liquidate the venture by public auhority </li></ul><ul><li>Convertible debt is limited </li></ul><ul><li>Taxing dividends within the holding company </li></ul>
  14. 14. Preferences by investment professionals <ul><li>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 . </li></ul><ul><li>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 fund’s operation. SCORE 3.33 . </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
  15. 15. CONTACT <ul><li>Connect Estonia </li></ul><ul><li>www.connectestonia.net </li></ul><ul><li>Tarvo Tamm [email_address] </li></ul><ul><li>Kristjan Kalda </li></ul><ul><li>[email_address] </li></ul>

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