Feasibility study
on pre-seed funds
May, 2011
Small Innovative Business Support Network / SIB net (EU 31398)
Contents
1
EXECUTIVE SUMMARY
3
2
INTRODUCTION
4
3
INTERNATIONAL EXPERIENCE
5
3.1
Definition, role and description of pre-seed funds and support
5
3.2
International experience of pre-seed funding
6
4
OVERVIEW OF SUPPLY AND DEMAND FOR PRE-SEED SUPPORT
4.1
Statistical overview of start-ups in the region
4.1.1
Overview of Mid-West Latvia region
4.1.2
Overview of South-Estonia region
4.2
Supply and demand for pre-seed funds and support at regional level
4.2.1
Supply and demand for pre-seed funds and support in Mid-West Latvia region
4.2.2
Supply and demand for pre-seed funds and support in South-Estonia region
5
CONCLUSIONS AND RECOMMENDATIONS
7
7
7
9
10
10
14
16
REFERENCES
18
ANNEX - MODEL OF EFFICIENT PRE-SEED INSTRUMENT
19
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Small Innovative Business Support Network / SIB net (EU 31398)
1 EXECUTIVE SUMMARY
This feasiliby study aimed at exploring pre-seed stage funding and support supply and
demand in the Project’s region – Mid-West Latvia and South Estonia, by identifying the
market bottlenecks and deriving recommendation for covering the identified market
gaps. The relevance of this study is grounded in the topic covered – availability and form
of pre-seed funding and support to innovative and international growth business ideas.
Availability of pre-seed funding and support in the right time, size, quality and form can
be the trigerring point for development of the next Skypes in the Baltics. In turn, absence
of pre-seed stage support can be a death valley to such business ideas.
The following research methods were employed:
- Desk research
- Data analysis
- Interviews with early stage financing and innovation industry experts from
Latvia and Estonia
Essential for guidance in the study process, interpretation of information and data, as
well as for deriving recommendations, was analysis of international experience in preseed stage funding and support instruments. Experience of Finland was analysed
representing one of the best examples how to develop a good strategy for new idea
attraction and successful development.
Clearly scale of this study is attributable to whole Latvia and Estonia because Mid-West
Latvia region and South Estonia region are too narrow focus for such support
instrument.
Feasibility study revealed that there is a gap in pre-seed funding supply in Latvia and
Estonia, namely, demand considerably exceeds supply. Moreover, the gap is not only in
size of the supply, but also type of support instruments. Currently there is a larger
supply gap in Estonia than Latvia. In turn, demand side (deal flow) of high quality preseed stage projects is much better developed in Estonia.
Feasibility study has lead to recommendations that existing support structures should
be used to increase and improve pre-seed funding supply in Latvia and Estonia. Both
size of pre-seed funding per awardee and total size of assignment of funds should be
increased.
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2 Introduction
The feasibility study on pre-seed funds was conducted within scope of Estonia- Latvia
cross-border cooperation programme project “Small Innovative Business Promotion
Network” (SIB Net) covering South-Estonia and Mid-West Latvia regions. Project is
implemented in partnership of six partners: Riga Planning Region, Ventspils University
College, Ventspils High Technology Park, Stockholm School of Economics in Riga, Tartu
Science Park and Institute of Baltic Studies. Project’s implementation period: June, 2010
- May, 2012.
The feasibility study contributes to the overall aim of SIB Net project - to promote new
innovative high growth firms “gazelles” by encouraging entrepreneurial creativity,
providing needed support and evaluating needs for early stage risk finance.
Purpose of the feasibility study was to explore pre-seed funding and support supply and
demand in Mid-West Latvia and South Estonia, and spot the market bottlenecks and
derive recommendation for covering the identified market gaps.
The relevance of this study is grounded in the topic covered – availability and form of
pre-seed funding and support to inovative and international growth business ideas.
Availability of pre-seed funding and support in the right time, size, quality and form can
be the trigerring point for development of the next Skypes in the Baltics. In turn, absence
of pre-seed stage support can be a death valley to such business ideas.
The feasibility study was carried out by Vidzeme Innovation and Entrepreneurship centre
which used research methods of desk research, data analysis and in-depth interviews.
The feasibility study covers the following main topics:
-
Definition and role of pre-seed funds and support
-
International experience of pre-seed funds and support
-
Scene of start-ups (birth and death rates) in the Project’s region
-
Supply and demand of pre-seed funding and support in the Project’s region
-
Market bottlenecks and recommendations for covering them
As a result of the feasibility study the most appropriate model of pre-seed funding and
support in the Project’s region is proposed.
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Small Innovative Business Support Network / SIB net (EU 31398)
3 INTERNATIONAL EXPERIENCE
3.1 Definition, role and description of pre-seed funds and support
For purpose of this study pre-seed capital and support is defined as a tool aiming at helping
individuals and SMEs to establish commercial potential of their R&D and innovation/
business engineering activities, namely, whether R&D and business engineering results can
be turned into products or services which are demanded by the market. [ I ]
In turn, within context of this study technology and knowledge intensive high growth
potential R&D results from educational and research institutions are attributable to
proof of concept funding targets.
Not like proof of concept cases pre-seed funding targets are not necessarily technology
and research intensive ideas, but ideas promising high growth meantime being
conceptually new to the market, thus, representing high commercialization or business
risk. Therefore due to the high risk and high transaction costs (small investment size;
time consuming screening of ideas etc.) private sector investors usually are not ready to
invest in pre-seed stage. Therefore in cases when the promoter of the idea does not
have own capital or support from FFFs (friends, family and fools), a funding gap
between research and business engineering results and product or service ready for
start-up phase is present. As depicted in figure below this gap in countries like Latvia
and Estonia could typically be up to 30k EUR.
Growth/ expansion phase (500k – 2M EUR)
VCs, equity capital funds, bank loans, loan
guarantees, profit reinvestment, development
grants.
Early growth phase (150-500k EUR)
Venture capital funds, bank loans, loan guarantees, profit
reinvestment, lease finance, development grants
FUNDING
ESCALATOR
Start-up/early growth phase (30k -150k EUR)
Seed capital funds, business angels, bank loans, loan guarantees,
lease finance, development grants (product development,
investments, marketing, training), business incubators
Pre-seed phase (up to 30k EUR)
Pre-seed funding (grants, investment), own funds, FFF,
business angels, seed capital funds (rarely), business
incubators (rarely).
In-house R&D / business
engineering
Private funding
Figure 1. Funding ecalator for development of high growth companies.
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In order to capitalize on the possible high potential of the R&D and business engineering
results public bodies are to step in by completely or partially covering the funding gap.
Pre-seed stage activities not necessarily but can include all the activities of proof of
concept stage, including:
 Pre-production development or prototyping;
 Technical validation of technology;
 Ascertaining market demand/ readiness, including early customer interactions;
 First phase patenting and licensing or establishing an IP rights strategy;
 Building the management team;
 Devising a development plan.
Meanwhile in cases of non-technology intensive projects pre-seed stage activities can be
merely focusing on market potential assessment, business team-building and business
modeling. The main expected result of pre-seed support is creation of high growth
enterprises.
3.2 International experience of pre-seed funding
Example of Finland in providing pre-seed support was explored as it is one of the
best examples how to develop a good strategy for new idea attraction and successful
development. Foundation for Finnish Inventions (FFI) is an effective tool in
supporting new business concerns in pre-seed stage. FFI screens and evaluates
inventions and innovative business ideas generated by private persons and start-up
enterprises and helps develop them into businesses. Around 20 000 inventors seek
advice from the foundation annually.
FFI helps developing promising ideas which show growth and international business
potential into business proposals or licensing projects together with experienced
business advisors.
Support of FFI is provided in three stages out of which first two are expertise while the
last is pre-seed funding and expertise:
1. Initial evaluation
At the initial stage an overall assessment of commercial potential, technical feasibility,
industrial property rights and funding needs of the project is done. During this phase
the Product Track team can commission novelty searches and market surveys to back
its evaluation work. The strength of the Product Track teams lies in its extensive
network consisting of universities, universities of applied sciences, the Finnish Funding
Agency for Technology and Innovation TEKES, Avera, the Centres for Economic
Development, Transport and the Environment (ELY Centres), business start-up
centres, business incubators, as well as companies and private consultants.
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Ideas or inventions targeted at the national market after the initial stage are channeled
to other financiers and operators.
2. In depth evaluation
Once the idea or invention has progressed to the development stage, more in-depth
surveys concerning IPR strategy and patentability, as well as competitor mappings and
market studies are carried out, and the idea is processed further to increase its
functionality.
3. Development
If in-depth evaluation reveals that new idea has international growth potential, a
development team is set up around the idea, consisting of experts from FFI and
external partners. Likewise during the development stage, the foundation may grant
support funding for the idea or invention to cover, among other things, patenting,
building a prototype, testing of the technical and commercial performance and product
development. Funding may also be granted for consulting an experienced business
advisor, who will provide support and guidance in establishing, growing and
internationalizing the enterprise.
Interesting policy, being a relevant long-term sustainability factor of the support
instrument, is that the support funding (if project is a success) is paid back to FFI
according to either of the options - share of profit or royalty.
Implications derived
4

Threshold for effective investment of pre-seed funding could be high expertise in
evaluation of the business idea and inventions.

Public funding is essential for financing high level expertise in pre-seed stage.

An option for ensuring sustainability of pre-seed funding and support scheme is
repayment of the granted pre-seed grants by the successful nascent entrepreneurs.
However, such scheme would be justified only if the institution provides high level
expertise and sufficient size of grant to the pre-seed stage projects.
OVERVIEW OF SUPPLY AND DEMAND FOR PRE-SEED SUPPORT
4.1 Statistical overview of start-ups in the region
4.1.1 Overview of Mid-West Latvia region
According to former administrative division the Mid-West region of Latvia includes the
following districts: Talsi, Ventspils, Saldus, Kuldīga and Liepāja (Kurzeme Planning
Region). As well as Tukums, Rīga, Ogre and Limbaži (Riga Planning Region).
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District
2007
Birth Death
rate
rate
126
51
40
21
139
80
78
53
413
213
135
92
8011 7857
237
115
63
33
2008
2009
Birth Death Birth Death
rate
rate
rate
rate
88
38
60
37
29
19
31
24
85
63
76
62
82
35
68
51
316
152
271
197
136
36
94
41
6113 2908 5162 3500
165
51
132
37
55
20
40
24
Talsi
Ventspils
Saldus
Kuldīga
Liepāja
Tukums
Rīga
Ogre
Limbaži
Latvia
14208 11186 11347
total
4764
9228
5715
2010
2011
Birth Death Birth Death
rate
rate
rate
rate
112
58
34
11
37
32
16
4
72
65
29
11
90
60
33
9
341
364
102
51
102
47
46
6
7864 5585 2737
397
186
85
55
4
64
35
22
7
13421
8835
4737
873
Table 1 Enterprises death and birth rates in Mid-West Latvia 2007-2011/ Source:
www.lursoft.lv/lursoft-statistika
On average the table shows birth rates are higher than death rates, it shows positive
tendency for the regions. Essentially different data can be noticed in 2009 when the
balance between previous and next year are different. It can be explained by the fact that
after the registered decrease of newly created companies in 2009, when the number was
lowest in the last six years, a positive trend has been noticed in 2010 – the number of
newly created companies has reached the level of previous years. The gathered
information by Lursoft shows that last year 13 421 new companies have been
registered, that is by 31.24% more than in 2009, still, the number of liquidated
companies has increased (+35,31%).
Lursoft statistics shows that highest number of new registered business is limited
liability companies and sole traders. Both of these entrepreneur forms every year reach
level of several thousand. For example, sole trader start-ups range from 1245 up to
2104, and the number of Limites liability companies start to noticeably increase from
year 2009, now reaching 4423 level (data from 2011).
Almost for a half of small-capital limited liability companies fixed capital is LVL 1.
Starting from the beginning of May, 2010, there is an opportunity to register a smallcapital limited liability company in Latvia, including those with fixed capital LVL 1, and
as the Lursoft data have shown, in eight months of 2010 a great number of
entrepreneurs have seized this opportunity, because 43.53% or 5,179 of all limited
liability companies registered last year, have been with diminished fixed capital. Of all
registered small-capital limited liability companies the vast majority are the ones with
fixed capital of LVL 1 (44.56%), but those with fixed capital between LVL 2 to 10 form
26.85% of all small-capital companies. Collected data over years shows that a smallcapital limited liability company usually is founded by one or two physical entities.
Nearly every second, who has founded a small-capital limited liability company last year,
has never been an owner or a co-owner of a company, which means that an opportunity
to register a limited liability company with a diminished fixed capital has encouraged
people, who for some reason have maybe delayed their business conception, to engage
in entrepreneurship.
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According to Avotins (2011) there are almost no high-growth technology based
companies in West-Latvia region (Kurzeme region) which would be targets of PoC, preseed, business angels’ and risk capital funding. That is related with low concentration of
research and development capacity in the region which is still being developed in
Ventspils University College. Instead there have been companies with high growth
scores in traditional sectors, e.g., supermarkets, woodworking etc. In Mid-Latvia region
the situation is much better where due to concentration of research institutions in Riga
is a potential for development of ‘gazelle’ type (high growth) companies based on
technologies [ II ].
4.1.2 Overview of South-Estonia region
In the framework of this project the region of South- Estonia includes following counties:
Hiiu, Jōgeva, Lääne, Pōlva, Pärnu, Saare, Tartu, Valga, Viljandi and Vōru. There are
located about 27% of newly born enterprises (data from year 2008). Newly born
enterprises by county and year are presented in Figure 2. Comparison data with Latvia
shows that during year 2008 the amount of newly born enterprises is higher in Latvia by
43%.
Figure 2 Newly born enterprises / Source: statistics Estonia
In Figure 3 is given data about dead enterprises in South-Estonian region. The data
shows that in year 2008 there was a sharp increase of dead enterprises.
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Figure 3 Dead enterprises / Source: statistics Estonia
One of the main problems faced by entrepreneurs in pre-seed and seed phase is lack of
available financial resources. This phase for organizations is difficult to overcome, it is
based on fact, that organizations are not able to create enough money when business
development needs investment and costs are higher than revenue. Fortunately, still,
birth rates exceed death rates, although in 2008 the difference was rather small. This
could be caused by the severe global economic crises which influenced also Estonian
economy.
Statistic Estonia provides data on company demographics starting from 2004 until 2008,
unfortunately there has been no particular focus on start-ups with innovative idea so far.
According to the available data, the highest business demography is found in Tartu
County, where in 2008 the amount of newly born enterprises reach 678 and against
that- dead enterprises 550.
Taking into account high concentration of research competence in Tartu city, there is
good soil for development of high-growth technology based companies in South Estonia
region (Avotins, 2011) [ II ].
4.2 Supply and demand for pre-seed funds and support at regional level
4.2.1 Supply and demand for pre-seed funds and support in Mid-West
Latvia region
Table below summarizes funding instruments of Latvia which to some extent address
pre-seed stage funding needs.
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Funding
instrument
Relevance to preseed stage
Description
LIDA preseed
support
instrument
[1]
 Pre-seed support instrument.
 One call for proposals per year planned during
2011-2013
 Funding of government and EU; grant (100%) per
applicant up to 14k EUR; size of instrument per
year 142k EUR, funding on average 15 projects.
Business
incubators
[2-3]
 Eight BIs with branches in 24 towns of Latvia,
including four BIs with branches in 9 cities of MidWest Latvia.
 Funded by government and EU; annual support per
incubator during 2010-2014 is 570k EUR, mainly
being directed to support of nascent entrepreneurs
at start-up stage
 Seed capital fund investing in equity
 Size of fund to be invested until 2013 in Latvia – 3
MEUR, 100% funded by EU and government of
Latvia through JEREMIE initiative of European
Investment Fund
 Investment size in seed stage – up to 100k EUR
 5 seed capital commitments of 100k EUR made
 Loans and related small size grants to nascent
entrepreneurs
 Total assignment for loans and grants during 2010
- 2013 is 23,5 MEUR
 Loan size up to 76,8k EUR per start-up (90% of
costs); 100% grant up to 8k EUR per start-up
 Loans of 6,6 MEUR issued, grants of 2,2 MEUR
awarded.
 Grant program to start-up companies
 Annual call for proposals, 130k EUR available,
funded by Riga city council and Swedbank
 Grant size up to 8,5k EUR (up to 75% of
development costs) per applicant
 Grants to the first 3 places of the competition, total
assignment around 13k EUR
Imprimatur
Capital Seed
Fund
START
program,
Mortgage
and Land
bank of
Latvia [4]
Grant
program
”Atspēriens”
(Take-off)
[5]
Competition
of business
ideas “Ideju
kauss” (Cup
of Ideas),
LIDA [6]
Business
angels
Coinvestment
 2-3 formal networks of business angels in Latvia
 Investing per company up to 50k EUR
 Are perceived in financial market as very early
stage investors, even pre-seed phase
 Seed and start-up risk capital funds to be launched
at the end of 2011
11
Around 55% of
approved proposals
originated from
business community
being pre-seed cases,
while 45% originated
from scientific
research community
being proof of concept
cases,
Focused on start-ups,
time after time may cofinance development
of entrepreneurs in
pre-seed stage
Focus on seed stage,
including proof of
concept, funding; preseed funding to be
provided exceptionally
rarely
Focus on start-ups,
rarely support to preseed phase projects
(technology nonintensive projects)
Focus on start-ups,
rarely support to preseed phase projects
(technology nonintensive projects)
Grants to pre-seed
stage projects
More focused on startups, investment in preseed rarely
Focus on seed capital
stage expected; rarely
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fund
 Assignment to seed capital investments up to 5
MEUR until 2013; funding of government and
European Investment fund through JEREMIE
 Investment size per investee in seed capital stage
up to 200k EUR
pre-seed stage projects
to be funded as an
integral part of seed
stage
Technology
incubator
program
 Establishment of at least two technology incubators
expected in 2 years in Latvia.
 Potential funding source EEA and Norwegian
financing mechanism where 72 MEUR are to be
committed to Latvia until 2015.
Substantial support to
proof of concept and
pre-seed stage projects
expected, especially to
technology intensive
projects
Table 2. Supply of pre-seed funding in Mid-West Latvia region.
As described above currently the most significant support instruments in funding preseed stage projects in Latvia are LIDA pre-seed instrument and the regional business
incubators. It is expected that also Technology incubators support program (to be
launched in two years) will greatly contribute to funding pre-seed stage projects.
Support within the three instruments is accompanied by expertise (advice, mentoring
and/ or coaching) that contributes to efficient use of pre-seed capital. According to Mr.
Zeps (2011) there does not seem to be excessive unfulfilled demand of high quality deal
flows within the pre-seed support instrument [ VI ]. However, increase in total
assignment (up to 715k EUR per year) of the funds would benefit Latvia because more
nascent entrepreneurs would be encouraged to ’take a chance’, thus, facilitating
entrepreneurial spirit.
According to Zeps (2011) one of the main current drawbacks of the pre-seed instrument
is inconsistency that in turn has a detrimental effect on potential deal flow of business
ideas. Moreover, according to experience in follow-up support to the awardees they
have hard times in attracting next round funding for development. One of the
implications would be that the awarded funds (on average 9,5K EUR per awardee) are
too small to bridge the pre-seed gap to start-up ca pital [ VI ]. Therefore increasing of
pre-seed grant from 14k EUR to even up to 30k EUR per awardee could be considered.
The total current annual supply of pre-seed capital in Latvia from pre-seed instrument
and business incubators, could amount to 150k - 160k EUR.
Apart from the funding opportunities (combined with expertise and advice) described
above there are several advise, mentoring and/ or coaching support initiatives at early
stage business development:
1) SSE Riga business development lab, providing pre-incubation services to students
of Stockholm School of Economics in Riga.
2) SSE Riga Mentor Club, financed by EU through mentoring program administered by
LIDA (on procurement basis). The mentor club is to provide advice to 20-30 business
development teams per year. Experts of the club are mainly graduates of SSE Riga.
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3) “Līdere” (Leader) a network of established business women and business angels
providing mentoring to nascent entrepreneurs - women of Latvia. Operating basically
as mentoring organisation.
4) Centre of Young Entrepreneurs established just in 2010 providing mentoring and
expertise in development of nascent entrepreneurs.
5) Nordea bank business school providing training, mentoring, coaching and matchmaking with potential investors (once per year).
6) JOSEFINE support instrument providing innovative and high growth potential
businesses with funding to buy coaching expertise (100 astronomic hours per
awardee). Open competition organised once per year.
7) Labaca (Latvian American Business Association of California) – business angel
network, representative office in Silicon Valley, business plan screening, mentoring in
capital attraction.
8) OpenCoffee Club Riga - Informal meetings for networking, training in capital
attraction and technology start-up management.
According to Zeps (2011), this kind of expertise is essential in guiding nascent
entrepreneurs in effective spending of the limited development resources (private, preseed instrument, other) to get to the next stepping stone in accessing further pre-seed or
start-up/ seed capital funding [ VI ]. Taking into account the long-list of the expertise,
mentoring and/ or coaching there should be no problems for proactive pre-seed stage
project promoters to receive expertise in questions related to business development.
Currently there are no objective ways to evaluate actual demand for pre-seed funding in
Latvia. However, a speculative demand estimate could be based on an assumption that
at least doubling of average grant per awardee within pre-seed instrument and increase
in total supply of pre-seed funding, by allocating separate pre-seed funding for the
regional business incubators, as well as ontroducing the technology incubators program
is desirable. The overall demand for pre-seed capital in Latvia could surpass supply
around 4 - 5 times, namely being around 700k EUR per year.
Conclusions

There is considerably high supply of expterise, advice and coaching support in
Latvia for development of pre-seed stage business ideas. Presumably if pre-seed
stage idea holder is pro-active he gets high quality guidance on business
development.

There are two main support structures for funding pre-seed stage projects in
Latvia - Pre-seed instrument of LIDA and business incubators of Latvia. Launch of
Technology incubators support progam is expected to considerably increase preseed stage funding supply.

Follow-up work with Pre-seed instrument awardees suggests that the average
grant per awardee is insufficient to bridge the pre-seed gap to start-up capital and
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that could be raised around two times, leading to the maximum pre-seed grant of
30k EUR per awardy.

Since pre-seed support policy is only developing in Latvia, pre-seed funding supply and
expertise support is fragmented and inconsistent (e.g. LIDA pre-seed funding has been
irregular) in Latvia. Supposedly it has detrimental effect on deal flow.

Regional business incubators in Latvia are often the closest support organization to the
idea holders (also in pre-incubation stage) and they have no funding dedicated to preseed support (development of prototype, initial market validation etc).

According to approximate estimate the demand for pre-seed funding in Latvia
could exceed supply 4-5 times.
4.2.2 Supply and demand for pre-seed funds and support in South-Estonia
region
Table below summarizes funding instruments of Estonia which to some extent address
pre-seed stage funding needs.
Funding
instrument
Ambient
Sound
Investment
[7]
Innovation
voucher grant
program of
Enterprise
Estonia
Business
incubators
Start-up
grant,
Enterprise
Estonia
Relevance to preseed stage
Description
 Risk capital fund (since 2006) investing in equity,
operating also own in-house business incubator
 Size of fund – 100 MEUR; average investment size –
500k EUR
 Flexible, but selective investment policy
 At least 28 investments, including 17 in Estonia
made.
 100% funding for SMEs to buy innovation services
from higher education and research institutions,
patent offices and certified labs.
 Grant up to 3200 EUR per SME
 Total assignment for 2009-2013 – 2,9 MEUR
Prime focus on seed
and growth capital
stages; investment in
pre-seed stage
provided exceptionally
rarely
 Twelve BIs in Estonia, including five BIs in SouthEstonia region.
 Funded by government and EU on annual basis
 Tartu Biotechnology Park incubator stands out
with the approach that it takes equity positions in
their incubatees and thus also invest pre-seed and
proof of concept funding in incubates. The funding
is basically privately backed, however, for very
narrow industry – biotechnologies.
 Grants for investments in start-ups
 Up to 7k EUR per awardee, intensity 80%
 Total assignment 4,7 MEUR
Focused on start-ups,
time after time may cofinance development
of pre-seed stage
projects
14
Can function as smallscale pre-seed funding
to new project of SMEs,
but not to individuals
Focus on start-ups,
rarely support to preseed phase projects.
Co-financing necessary
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Competition
of business
ideas
“Ajajuht”
(Brain hunt)
[8]
Business
angels
 The largest competition of business ideas in
Estonia organized since 2007 (once per year)
 Total assignment for awards in 2011 - 96k EUR.
 Awardees receive 5k – 15k EUR award.
 Competition: 1700 ideas in 2010.
Support directed to
pre-seed and proof of
concept stage projects
 Are perceived in financial market as very early
stage investors, even pre-seed phase. Still relatively
new funding supply segment in Estonia
More focused on startups, investment in preseed rarely
Table 3. Supply of pre-seed funding in South Estonia region.
As described above currently the most significant support instruments in funding preseed stage projects in Estonia are business incubators of the region and national scale
competition of business ideas “Ajajuht”. However, apart from Tartu Biotechnology Park
incubator business incubators do not have separately allocated funding for pre-seed
support. The current annual pre-seed funding supply from these two support
instruments could amount to 140k – 150k EUR.
Below are listed several advise, mentoring and/ or coaching support initiatives to early
stage business development in Estonia:
1) Enterprise Estonia (EE) which is running development centre in each county of
the South Estonia region providing free counseling services for start-up
businesses. Likewise EE is open to individual work in helping nascent
entrepreneurs, int.al. buying expertise of specialized consulting companies
(Advisio, BDA consulting etc.).
2) Connect Estonia is a private initiative-based support network for growth business
providing nascent entrepreneurs with training, investment readiness evaluation
and match-making with investors. Focuses more on seed stage.
3) ETNA non-governmental organization supporting nascent entrepreneurs-women
by training, networking and mentoring.
4) Estonians Start-up Leaders club formed in 2009, sharing experiences and best
practices on managing early-stage start-ups, also inviting experienced guest
speakers in their organized events.
5) GARAGE48 foundation established in 2010 in Estonia, organizing business ideas
generation and development sessions.
Alike in Latvia also in Estonia demand for pre-seed funding could exceed supply 4-5
times or even more. Demand could be higher in Estonia because it has two time more
participants in ”Ajajuht” compared to aggregated number of participants of LIDA Preseed support instrument and the competition of business ideas ”Ideju kauss” in Latvia.
Moreover, there are around 2,5 time more scientists working in private sector in Estonia
than in Latvia, respectively 1986 and 750 (Eurostat, 2011) presumably resulting in more
commercialisation of R&D. Besides entrepreneurial climate of Estonia received an
impacting boost from success story of Skype.
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Conclusions

There are two main support structures for funding pre-seed stage projects in
South-Estonia region - business incubators and competition of business plans
”Ajajuht”. Tartu biotechnology park incubator stands out with high support in preseed and proof of concept stage, but has very narrow focus of industry –
biotechnologies.

Since pre-seed support policy is only developing in Estonia, pre-seed funding supply
and expertise support is fragmented and inconsistent. Supposedly it has detrimental
effect on deal flow.

According to approximate estimate the demand for pre-seed funding in Estonia
could exceed supply 4-5 time or even more. The large number of participants in
”Ajajuht” competition suggests that additional or larger scale pre-seed supply
instruments are necessary.
5 Conclusions and recommendations
Conclusions

Since pre-seed support policy is only developing in Latvia and Estonia, pre-seed
funding supply and expertise support is fragmented and inconsistent (e.g. LIDA
pre-seed funding has been irregular). Supposedly it has detrimental effect on deal
flow.

According to approximate estimates the demand for pre-seed funding could exceed
supply 4-5 times in Latvia and even more in Estonia.

The main structures providing pre-seed funding in Latvia and Estonia are rather
similar, namely, business incubators and competitions of business ideas (LIDA preseed instrument and ”Ajajuht”).

Follow-up work with pre-seed instrument awardees suggests that the average
grant per awardee is insufficient to bridge the pre-seed gap to start-up capital and
that could be raised around two times, leading to the maximum pre-seed grant of
30k EUR per awardee.
Recommendations
 To fill the pre-seed funding supply gap in Latvia and Estonia size of total assignment
and size per awardee of the existing pre-seed instruments could be increased. Funding
size per awardee could be increased up to 30k EUR. Besides, additional pre-seed
funding should be allocated to business incubators for supporting pre-incubation
entrepreneurs. As estimated within this research, to fill the pre-seed funding supply gap
government of Latvia and Estonia could consider an annual injection of at least
additional 540k - 550k EUR in each country.
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 The market gap of pre-seed capital supply could be covered by improving these
existing support structures, as well as properly implementing technology
incubators prgoram in Latvia.
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References
Internet resources__________________
1.
2.
3.
4.
5.
http://www.liaa.gov.lv
http://www.vatp.lv/biznesa-inkubatora-jaunumi
http://www.kbi.lv/eng
http://www.hipo.lv/lv/attistibas_programmas/starta_programma
http://www.riga.lv/LV/Channels/Business/atbalsts/grantu_shemas_atsperiens/default.h
tm
6. http://www.idejukauss.lv/
7. http://asi.ee/
8. http://www.ajujaht.ee/english/
Publications, private communications__________________________
I “ALL MONEY IS NOT THE SAME!” (SME access to finance) , Cristian Saublens,
II Avotiņš, Valdis, private communication on 13 May, 2011
III “Regional Scan”, Leonardo Da Vinci transfer of innovation project, Aune Lillements,
2010
IV “Feasibility study on technology incubators and new types of business incubators”, Ltd.
Moveo, Riga,May 2011
V Janevics, Jānis, private communication on 13 May, 2011
VI Zeps, Viesturs and Pujate, Dina, private communication on 14 May 2011
VII Illing, Sven, private communication on 13 May 2011.
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ANNEX - Model of efficient pre-seed instrument
1. Market bottlenecks and model
Since the situation in Latvia and Estonia regarding pre-seed capital supply (size and type of
support) is similar the markets have also similar bottlenecks:
1) Pre-seed capital grant per awardee in competitions of business ideas (Idea cup
(Ideju kauss) and Pre-seed support instrument (Pirms-sēklas atbalsta instruments)
in Latvia and Brain hunt (Ajajuht) in Estonia) on overall is too small, since several
awardees are having hard times getting next round funding. The resulting
implication – some awardees need larger pre-seed grants to get ready for seed
funding stage. An efficient method for awarding larger grants would be two-stage
awarding procedure. The second stage awards would be granted basing on the
successful results of the first stage.
2) Total size of pre-seed capital supply in competitions of business ideas is rather
small compared to the number of applicants implying that the awarding procedure
is rather selective and number of promising ideas may not receive pre-seed support.
Besides the support is irregular. Increase of supply of pre-seed capital could
potentially decrease efficiency of investment but definitely would increase and
improve entrepreneurial spirit by encouraging more authors of ideas to dare and
take part in competition.
3) Business incubators do not have financial capital devoted for small-scale grants in
pre-seed stage, e.g., for development of the first product and packaging sample in
order to test the market or for verifying a specific export market (small scale
research or business visit). As a result development of some ideas may take too
long time or may not survive the ‘death valley’.
Taking into account the main market bottlenecks the following should be the pre-seed
instrument for Latvia and Estonia:
Pre-seed instrument
Support structure
Justification
Competitions of business ideas:
- with two-stage grants (in total
up to 30 000 EUR per
awardee)
- with larger total budget of the
competitions
Existing:
Idea cup and Pre-seed
support instrument in
Latvia;
Brain hunt in Estonia.
Two-stage grants enable more
knowledge intensive ideas to
overcome the pre-seed capital
gap and is efficient way of
investing based on results.
Larger capital supply would
facilitate entrepreneurial spirit
and activity of business ideas
authors.
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Small Innovative Business Support Network / SIB net (EU 31398)
Small-scale pre-seed grants for
pre-incubation services of
business incubators
Existing:
business incubators
Would enable authors of ideas to
get reliable market and
functionality test of the product.
Would speed up development of
ideas.
Technology (risk capital)
incubators
To be implemented in
Latvia in 2 years.
New support instrument
in Estonia, to be
developed in
combination with proof
of concept funding.
Pre-seed grants would be
allocated to high growth
potential companies (gazelles).
Table 4. Proposed pre-seed instruments in Latvia and Estonia
2. Required resources
Pre-seed instrument
Latvia
Estonia
Competitions of business ideas:
- with two-stage grants (in total
up to 30 000 EUR per
awardee)
- with larger total budget of the
competitions
Funding for business
competitions (2nd stage
investments and more
awardees) for pre-seed
projects: 170 kEUR.
Funding for business
competitions (2nd stage
investments and more awardees)
for pre-seed projects: 170
kEUR.
Small-scale pre-seed grants for
pre-incubation services of
business incubators
Around 28 kEUR per
incubator annually.
For 8 business
incubators total around
230 kEUR annually.
300 kEUR per year,
around 10 business
cases.
Around 28 kEUR per incubator
annually.
For 8-9 business incubators total
260 kEUR annually.
Technology (risk capital)
incubators
300 kEUR per year, around 10
business cases.
Table 5. Required resources for pre-seed support in Estonia and Latvia per year
3. Implementation and action plan of the model, promotion of the model
The proposed model of pre-seed funds should be promoted politically by Enterprise
Estonia and Latvian Investment and Development Agency in alliance with business
incubators of the project region. Likewise support from social partners is relevant, e.g.,
Latvian Venture Capital Association. The model should be promoted to the Ministry of
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Small Innovative Business Support Network / SIB net (EU 31398)
Economics of Latvia and the Ministry of Economic Affairs and Communications of
Estonia.
When the ministries would be ready to embark on such initiatives, the standard process of
elaboration and implementation of the support measure is to be taken by the ministries
(preparation and passing of regulations, organisation of procurement procedure).
The model should be planned for mid-term period (3-5 years), thus, ensuring sustainable
and regular availability of the pre-seed capital and having positive impact on deal flow of
business ideas.
4. Efficiency and sustainability of the model, risk assessment
The main factor for efficiency and sustainability of the model will be use of the existing
support structure that have in place the necessary expertise, marketing channels and
experience in work with the nascent entrepreneurs. Another aspect of efficiency would be
awarding of grants in two stages implying that only successful and promising first stage
ideas would get additional funding for further development.
Since the existing support structures would be used no major risks are related to
implementation of such initiative.
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