nowEurope

It was in 1994 when Jeff Bezoz and his few employees created a web site and database in Bezos’ Bellevue, Washington garage. It was few months later when he approached local venture capital (VC) firms in search for valuable growth capital. None of the venture capitalists invested – they evaluated the idea good, but company not attractive enough for investment. Today, with about 45% stake in Amazon.com Bezoz’s share is worth at least an easy $2 billion, while initial investment he received from business angels totaled marginal $1.2 million.

Ironically, a year later angel and venture capital investments soared and investments were made into virtually everything that went on Internet. Total venture capital investments in the USA increased nearly 15 fold in six years, from a mere $6.3 billion in 1995, to an unworldly $90 billion in 2000. However, the feast did not last long. Everything came back to earth again in 2001, when dot com bubble eventually burst, and when forty-nine out of the Silicon Valley’s fastest 50 lost value, with the majority experiencing market capitalization declines of 80%.

The aftermath of the bubble can be distinctly felt by fast growing technology companies also today, as getting venture capital into the business nowadays is almost as difficult as it was for Mr Bezoz back in 1994. However, by far not impossible, as nowadays the variety of alternatives of attracting money into the company is much broader.

Still, evidence shows that despite of the availability of different private and public funds, start-up companies tend to find themselves in so called “valley of death”, where R&D funds and funds from Family, Friends and Fools have been utilized, but early seed capital to support design, development and early market research is missing. This is the gray zone, where most of the VCs are not operating, while other funding agencies see company being close enough to the market not to intervene. This is the stage where most of the start-ups fail, as things start getting out of hand here.

To overcome such situation in Estonia, where high tech start-up creation has been pretty modest anyway, government is planning to roll out so called national Development Fund for early start-up companies in 2006. Typically the funding will range in the vicinity of 1-2 million Euros, which is invested into company in syndication with private capital. Total amount of the Fund is expected to be somewhat around 30 million euros for 5 years, with an annual spending of 6 mln euros on 10 new companies. The main objective of the fund is to share the risks with private capital in order to stimulate their investment into ventures of earlier phase. Parallels with Finnish SITRA are often used, as the Fund will most probably convene also strategic study units and stakeholder forums.

Well, let’s hope these plans will become reality and we will see some additional success stories besides Skype and very recent Playtech.