High-tech venture capital in the Baltics

High-tech venture capital in the Baltics ALLAN MARTINSON Managing Partner No alternative to knowledge economy • The Balts are used to 5-9% growth rates – Equal to doubed GDP in absolute terms in every 6-8 years • To sustain this growth we need to increase productivity 10-15% per employee per annum • Productivity gains in traditional industries will be slowing down in coming years • Unless we discover (more) oil or conduct a succesful war against rich neighbors our only option is to rely on our brains • High-tech and high value-add: – IT service industry (MicroLink): 3-4 X over traditional industries – Top-class high-tech industry (SAF Tehnika): 7-8 X over traditional industries – High-tech startups: low to medium No real Baltic high-tech industry yet • Baltic ICT industry is mostly a service industry focused on local clients – Increasing competition, growth limits • Offshore programming industry relatively small – Competitive advantage will further disappear • Electronic manufacturing industry adds little value – Thousands of people employed (Elcoteq, Ekranas etc) but value-add often very small • Real high-tech: Tens of startups but no real success stories besides Skype or SAF Tehnika The lacking growth hormone • High-tech industry means: – Tens and hundreds of interlinked high-tech enterprises in clusters – Synergy between univesities and businesses – Well-developed financing market – Well-developed labor market – Venture culture • Baltic high-tech ventures tend to stop growing when reaching 0.5-1 m EUR in revenues and size of 10-30 employees • Lack of certain “growth hormone”? Components of high-tech hormone • Economy = enterprises = enterpreneurs • Knowledge economy = knowledge enterprises = knowledge enterpreneurs • There will be no dramatic change unless – Baltic enterpreneurs and capitalists discover hightech as Next Big Thing – The governments declare Knowledge Economy their top priority – Univesities turn faces to business and vice versa – Venture capital industry emerges Baltic high-tech venture capital • Baltic private equity market: ~15 participants plus occasional excursions by Nordic and European PE players – Mostly generalist funds – Occasional investments to ICT: MicroLink, Sonex, Alna, IT, Helmes etc – Very little number of investments into high-tech startups • ~10 business angels – – – – Investments ranging from 50000-1000000 m EUR Doc@Home and Celecure (Rainer Nõlvak) LDI (Endel Siff) … • Most startup financing from “friends and family” • Government support is limited to R&D and export subsidies and loans • No dedicated high-tech VC insofar – Martinson Trigon Venture Partners to fill the void Venture Capital: a human business • What makes a succesful venture capitalist? – Listening skills – Ability to recruit management – Qualitative analysis skills – Coaching and advising skills • Financial and technical skills are rated the least important • Source: Human Capital Aspect of Venture Capitalists by Ignite Associates • • • • The first dedicated high-tech VC in the Baltics 20-30 m EUR fund, the first closing in January 2005 Investment geography: the Baltics and Russia Investment focus: – growth and consolidation of existing ICT and media industries – Early growth capital for high-tech companies • Investment criterias: – – – – – MTVP understands and likes the business Values and culture of the team, ability to execute Unique competetive advantage Strong business plan, strong growth opportunities Good risk/reward ratio Government venture capital • Controversial discussions whether the government shall participate in high-tech VC • Contra: – The government shall not enter business – Risk of failure and corruption – Lack of experience • Pro: – All developed economies do have state VC structures (Sitra, Industrifonden, Singapore VCs etc) – Government VC helps to overcome market disruption in high-tech financing – Better than grants and loans as it targets the enterpreneurs – Needed to send a signal to enterpreneurs • Estonia: state VC concept developed by public-private task force with Ministry of Economy and but has failed to receive support from Ministry of Finance Thank you! Ačiu!