Access of Enterprises to Venture Financing in Estonia: Feasibility Study of Government Support Sheme, 2004
Estonia is striving to become an innovation-driven economy by making leverage on available resources such as: a highly educated population, good research institutions in advanced sectors, well prepared and motivated public administration, good economic and logistic links with neighbouring countries (especially with the Scandinavian region).
Aware of existing shortcomings, the public administration has designed and put in place a system aimed at speeding up and supporting the process of knowledge and technology development and valorisation in the view of transforming these resources into commercially exploitable assets.
Such a system has already been operational and has produced appealing results. However, it needs some adjustments and additional integration in a few areas.
At first instance, there is a need for specific financial measures capable of providing resources to new companies in the innovative sectors.
New businesses in innovative sectors are in fact characterized by peculiar aspects such as: the central relevance of immaterial elements (knowledge for example), a high risk of failure in initial phases, a substantial dependence from the academic / research environment, the long “incubation” period, and the need for substantial investment in research and development – to name a few.
Considering the typical characteristics of company creation in innovative sectors, it is widely accepted that a traditional banking system finds it difficult to respond with a suitable offer to cover the initial investments due to intrinsic constraints and a lack of appropriate knowledge. The same applies to other bank-like instruments such as public loans.
On the other hand, the existing financial instruments based on grants are mostly too modest to match the needs for investments in innovative sectors.
To complete the picture, the private investors active in the market are not very keen to invest in this initial phase either due to the high risks involved – they might be willing to invest at a later stage instead.
The sketched situation highlights the existing gap of financial resources in the seed phase.
Venture capitalists and policy makers both agree that the market does not properly function at the ‘lower end’, i.e. in seed capital/early stage levels of investment where the perceived risk of an investment is quite high relative to the expected return.
Investors looking for financial return cannot be motivated to go into that segment of the market, unless government schemes try to bridge the gap between return and investments. Even so, in the initial stages of innovation development the support of the private sector should rarely be counted upon.
By ensuring the availability of seed finance, the potential technology development could be fully exploited. In this context, of the situation described above, it is clear that corporate companies will invest only when government schemes act as catalysts, promoting the flow of money to the early stage market.
In the specific sections of the present report we have described possible options to fill in this ‘gap’, drawn from direct experience and from international best practices. The options are characterized by the direct involvement of the public administration in offering risk capital measures there-by playing the part of leading player and hopefully encouraging private players in joining in as co-investors.
Find the research here