Study: GreenFund’s 100 MEUR could be directed first and foremost to hardware companies

According to a recent study conducted by EY among entrepreneurs and investors, GreenFund which was set up to accelerate the green transition, and which presently has 100 million euros available, should focus its investments primarily on hardware companies, whose solutions are more time-consuming and riskier compared to software.

In addition, according to the study, the development of innovative solutions is hampered by the lack of market readiness to use green solutions.

“Estonia is the world leader in innovation and start-ups. In order to maintain this role and at the same time achieve the climate goals, a clear and conscious direction must be taken to develop and bring to the market research-intensive green technologies,” said Andres Sutt, Minister of Entrepreneurship and Information Technology.

The recent study shows that the business model of hardware-focused green companies is generally less attractive and too time-consuming for investors. Therefore, the state has an important role to play in making capital available and thus in attracting private investors.

Commenting on the results of the study, Sille Pettai, a member of the management board and the fund manager of SmartCap, explained that the operation of companies involved in hardware development is time-consuming, and it is much more difficult and expensive for such companies to start production or scale up than for software companies.

“Entrepreneurs and investors believe that the key role of GreenFund’s resources should be to invest primarily in companies with hardware and physical technological solutions that require longer development process and bigger research intensity. Sharing and mitigating these risks is also an important prerequisite for attracting private investors, as well as for creating a springboard for foreign capital,” said Pettai.

According to entrepreneurs and investors who participated in the study, the availability of money alone is not the key factor in achieving the goals of GreenFund. Knowledge sharing and non-monetary support, such as assembling business teams, providing a support network or validating technological solutions was also considered important. Entrepreneurs and investors pointed out that research-intensive projects or projects created in collaboration with universities could be preferred.

“I view GreenFund as a so-called informed investor who, through venture capital funds, offers not only patient capital, but also the knowledge, contacts and other support that market participants need in order to succeed in developing and bringing new green technologies to the market,” said SmartCap’s fund manager Sille Pettai. “Based on the input of the study, we will move forward at a faster pace in order to establish more detailed conditions for GreenFund in the coming months and to make first investments already this year.”

In addition, participants in the study pointed out that the low readiness of Estonian society to start using green technologies and solutions is a significant obstacle to bringing them to the market. According to entrepreneurs, this is illustrated by the slowly changing regulatory environment, and by the lack of social and regulatory pressure on end-users and companies to be more environmentally friendly.

The study conducted by EY and presented today focused on Estonian green technology companies whose activities potentially contribute to reducing or solving environmental problems. The study was conducted between February and April 2022, and in-depth interviews were organised with 23 green technology companies and 11 capital providers.

The goal of the study was to map and assess shortcomings in terms of capital and the need for additional capital for existing Estonian green technology companies, in order to obtain input for the development of conditions of GreenFund. The study was completed at the end of April, and its summary is available here (in Estonian).

Through SmartCap’s GreenFund it is planned to offer equity investments in the amount of 100 million euros until 2026, and the addition of contribution of private investors is also expected. GreenFund is funded by the European Union from resources of NextGenerationEU (RRF) recovery instrument.

SmartCap is a subsidiary of the joint venture between KredEx and Enterprise Estonia, and it is registered with the Financial Supervision Authority as a small fund manager which manages the state Venture Capital Fund and GreenFund.