High-tech venture capital in the Baltics

ALLAN MARTINSONManaging 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 high-tech 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!