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Baltics to get a boost from new EUR 250m innovation fund

27.09.2012, 14:51

Estonia, Latvia and Lithuania are pulling together with the support of the European Investment Fund to kickstart investment in their countries – and much of the cash is likely to go to the tech startup sector.

In a somewhat unusual move, three neighbouring countries in the Baltics have pulled together to create a single innovation fund worth at least EUR 200m.

The Baltic Innovation Fund, announced on Wednesday, takes in 40m from the European Investment Fund (EIF) and 20m each from the national investment guarantee agencies of Latvia, Lithuania and Estonia.

In 2013, BIF plans to double the funding to between EUR 200m and 250m by attracting additional placements from private investors and pension funds.

There are no set targets regarding how much of this cash will go to the technology sector, but, given the existence of budding tech startup scenes in all three countries, it would be vastly surprising if they didn’t get a significant share.

“This particular region of the European economy has shown good dynamism in that area, and we hope this will be a further stimulus for that kind of activity,” EIF northern Europe chief Graham Cope told me. “We’re leaving the scope of investment opportunities very wide to allow the fund managers full freedom [but] equity of this nature tends towards certain sectors. Technology is one of them; so are life sciences. We’re looking at growth-focused sectors.”

It is, as I mentioned above, unusual for European countries to band together in this way. Indeed, Cope noted that the EIF has already got similar arrangements in place with individual countries such as the UK, but had not until now dealt with multiple states at once.

“The individual Baltic markets are quite small on their own, and all individual entrepreneurs there are thinking pan-Baltic if not pan-European,” Cope said. “We guided the member states to work together to create Baltic market activity [through critical mass]. It’s more in line with the way private investors see the market, as well.”

The action will apparently start next year, when the EIF will start to process transactions with between three and six fund managers. The cash is expected to support a four-year investment period.

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Like too many Estonian startup companies, this is a solution in search of a problem.

The premise here is that there are all these great companies that would succeed, except they can't get funding. That's simply not the case.

For example, the Estonian government funded their own VC fund, known as Eesti Arengufond.

Over 4 years, they reviewed 280 possible investments, and only invested in 16. Here is a link to some of those companies here:
http://www.arengufond.ee/eng/VC/portfolio
Note the English version is outdated, so here's the Estonian version where I got my numbers from:
http://www.arengufond.ee/VC/portfolio/

Look over those companies. This is the best they could find. Some of them I think will do well, but if I look at the portfolio list from a US VC firm, I see a lot more "winners" there.

One could say that there aren't other options in Estonia to raise money, but that's false too. There is: Ajujaht, Startup Wiseguys, GameFounders, Prototron, Tehnopol, MTVP, ASI (Ambient Sound Investments).

I ran some quick calculations on the size of this 200mln fun in relation to the combined GDP of the Baltics. It's about the size as the total VC investment in the US (versus GDP). It's more than double the size of the % of VC investment in Ireland or the UK.

In short, it's way too much money, and it's going to fail. There will be winners, like the fund managers. The way this is set up, the money will be spread across some fund management companies that will then do the investments. I'm sure those companies will take hefty fees. We've already seen this with Arengufond -- their office space is in one of the most expensive buildings in Tallinn (Tornimae 5) and is lavishly furnished. Our taxpayer money at work.

Also who will benefit is people who set up startup companies to get the funding, with no chance of success. The funds will be desperate to dole out money, so they'll give it out to companies with a poor idea, just to get it out. Those companies will take high salaries and live off the money until it runs out.

It's also interesting that this fund has not been reported much at all in the Estonian press. It has not been listed at all on Delfi's main or business site in the last two days. I'm surprised -- isn't this the type of thing politicians love to talk about?

~ameeriklane [28.09.2012, 18:28]

Investment Funds aren't necessary bad (they're not a freeride). It depends on how the money is invested though.

However, according to EIF's press release, we are speaking here about 100 mln EUROS assured only (there is nothing specific written about the additional amounts of funds):

http://www.eif.org/what_we_do/equity/news/2012/baltic_innovation_fund.htm

Also, it is a bit worrying to me that KredEx is involved in this and that additional amounts (again no specific sums mentioned) may come "from pension funds" also. I don't think KredEx and pension funds are suitable for risk financing.

~knut albers [27.09.2012, 18:24]

... and much of the cash is likely to go to the tech startup sector.

That remains to be seen. I'd still much rather have equal direct payments to farmers than any "funds" or "aid".

~Tom [27.09.2012, 17:53]