National venture capital fund-of-funds SmartCap will increase its cornerstone investment in the upcoming deep tech fund to 15 million euros, to which selected fund manager will raise additional private capital.
10 million euros has been allocated from the state budget for the creation of the deep tech fund, and SmartCap will direct additional funds in the amount of 5 million euros that were previously planned for the creation of a new accelerator into the upcoming fund. ‘The necessity to increase cornerstone investment became clear both from the survey ordered by us, as well as from the analysis of international practices – the creation of a sustainable fund clearly requires a higher contribution from the public investor in today’s market situation’, said Sille Pettai, a Member of the Management Board of SmartCap.
The total volume of the upcoming fund will, however, be significantly higher since in addition to SmartCap’s cornerstone investment, the private fund manager is required to raise private investors capital into the upcoming fund as well. ‘We prefer fund managers who are able to provide a reassuring capabilities to attract private capital’, said Pettai.
The fund will begin investing in deep tech companies whom product or service development and business models are based on research and development and intellectual property.
‘Deep tech companies are the driving force behind the multilateral development of the economy and have a major long-term economic effect. One of Estonia’s goals could be becoming a preferred state for the creation of such enterprises, and supporting their success as well. SmartCap, as a trustworthy cornerstone investor, helps to fill the clearly visible void of capital provision on the market, facilitating the growth and development of deep tech start-ups in Estonia’, clarified Pettai on the necessity to create the new fund.
The underfunding of deep tech fields mainly follows their large capital intensity, the longer development cycle of the product or service, the longer period of achieving the expected yield, also the higher risk level and the limited experience of investors in research-intensive fields.
Results of the survey, ordered by SmartCap in 2019, showed clearly current fund managers fundraising plans in fields such as software development, financial and information technologies, and artificial intelligence, for example. Investments are not planned, or are even ruled out, in such market segments that are related to hardware, medical technology eg sectors where the development cycles of the product or service is related to extensive research.
‘We must certainly continue offering investments to funds focused on software-based companies, but it is important to activate investors from outside software-based fields as well. As an cornerstone investor, SmartCap is lowering the entry barrier for private investors, and the State’s contribution into the upcoming fund also provides private investors with the reassurance they need to make the decision to invest’, Pettai highlighted.
The market consultation stage for the creation of the new fund will commence in November. In addition to their own team, SmartCap will also involve an independent expert with specific international experience, who will participate in all stages of the call. The open call for finding a suitable fund manager will be announced at the end of December and the new fund manager will be selected in the second quarter of 2021.
SmartCap is small fund manager registered with the Financial Supervisory Authority, and since 2017, SmartCap is operating as a subsidiary of Foundation KredEx. The venture capital fund assets managed by SmartCap are invested in venture capital funds which, together with private investors, place capital into research and technology-intensive early stage small and medium-sized companies with large international growth potential, mainly located in Estonia.