KAARI KINK: Smartcap's role in the Estonian fund market needs rethinking

The Estonian fund market is moving towards a critical turning point. Smartcap has an important role in this development.

It is difficult to summarise the six years I have spent in the Estonian fund market, both as a member of the Superangel investment team and as the chairwoman of EstVCA, in one sentence.

On the one hand, record amounts of capital have flowed into funds, over €700 million according to EstVCA. The number of fund managers and mandates has also increased, and the contribution of Estonian funds to the Estonian economy through portfolio companies has more than quadrupled. The local capital market is now experienced and ambitious – funds have brought global capital here and created an internationally competitive industry from the private and venture capital market.

On the other hand, the market has been in constant flux, both economically and geopolitically, and we have survived several crises as an ecosystem. The rapid development of the artificial intelligence sector has also reshaped expectations for company growth and the conditions for portfolio company sales and follow-on rounds. This in turn affects the liquidity and productivity of funds. At the same time, funds such as Change Ventures and Sunly Future Ventures have closed their doors, and others are ending their active investment period.

The coming years will show how the changed market conditions of recent years will affect the success of attracting the next funds. However, the situation in the fund market is complicated by three other aspects, which together could bring about a decisive turning point.

First: a vacuum in early-stage deal flow. It is difficult to say exactly what has caused the slowdown in new company formation. Several changes have occurred simultaneously: the economic downturn, the decline of grassroots initiatives (e.g. Garage48), the decline of angel investor activity. Funds have become more risk-aware, meaning they invest at a later stage.

There has been a somewhat paradoxical situation in the market, where an early stage founder feels that there is not enough seed capital in the market, and an investor complains about the lack of early stage deal flow. Both are correct. There has been a structural shift, resulting in a vacuum where new companies should be born. A fund with a broad mandate can shift its focus elsewhere, but not everyone has that luxury.

Second: narrowing of the mandate. In recent years, more and more specialised funds have emerged for the Estonian market: deep technology, green technology, defence technology, secondary sale , growth phase.

Fund specialisation is a sign of market maturity, but also a signal of where investors investing in funds want to invest. For example, the European Investment Fund, Europe's largest fund investor, invested €14 billion in sectors such as deep technology, dual-use technologies, life sciences and green technology in 2024.

In good times, specialisation can be a strong competitive advantage. However, the narrower the fund's mandate, the more difficult it is to ensure high-quality transaction volume, attract external private capital to the funds, and achieve good performance – especially in a small market like Estonia. Technology is evolving at a breakneck pace, and no public mandate or specialised fund can keep up with it instantly. The result can be an outdated strategy that the fund manager is stuck with for years to come, even though opportunities lie elsewhere.

Third: the geographical limitation of public money. The European fund manager is significantly influenced by the mandate that comes with public money, as around 35% of the capital raised comes from state or public funding. Often these funds are the anchor investor, i.e. they set the main conditions associated with the fund. In contrast, in the US the proportion of public money in funds is six to eight times smaller.

Public money has also had a major impact on the development of the Estonian fund market in Estonia. During their lifetime, most Estonian funds have been launched through Smartcap or the Baltic Innovation Fund, including Tera Ventures, Superangel, 2C Ventures, etc. To date, over €450 million has been invested in Smartcap and over €500 million in the Baltic Innovation Funds. The Estonian state and Smartcap have therefore done a good job in allocating capital to the venture capital sector and launching the market.

At the same time, Smartcap’s funding – and similarly the Baltic Innovation Fund or state funds of our neighboring countries – comes with a narrow geographical mandate, where at least the capital invested by Smartcap must flow through the fund to Estonian companies. If we add to this a sector restriction, which comes with, for example, the deep, green and defence technology mandate (and sometimes additional conditions, e.g. that a portion must go into hardware), then the fund manager is forced into an extremely narrow landscape. If a fund manager with a flexible mandate reviews, say, 1,000 transactions a year and invests in one percent of them, then in Estonia we are talking about a deal flow at least ten times smaller in the case of a specialised fund.

Conflict of priorities

This makes it very difficult to achieve competitive returns. The fund manager is left with a situation where the money has to be allocated over the investment period (four to five years), but not necessarily to the best companies, but to those that fit the narrow mandate. However, return is the sole objective of a venture capital fund. This is a clear expectation from private investors (e.g. pension funds), for whom performance must strongly outperform other asset classes to justify illiquid investments for 10+ years.

Here, the priorities of the private and public investors clearly conflict – the private investor expects an attractive return, the public investor expects money to be reinvested in the local economy. As a result, private investors are not attracted, but are pushed away, and the state loses leverage.

In the near future, the Estonian fund market may therefore see consolidation, because if we have not given the fund manager the opportunity to achieve the best returns in the market and they have to go and raise new money, then the risk increases that the next funds will not be raised or that the size of the fund will decrease. This in turn means a decrease in early-stage capital and therefore a decrease in the contribution of local capital to supporting new companies.

The contraction of the fund market also has a negative impact on talent growth – if the number and size of funds becomes more conservative, the environment from which the next generation of investors can grow will disappear.

From a political perspective, the approach of Smartcap and other state funds with a similar approach is completely understandable – Estonian taxpayers' money must be invested in Estonia. At the same time, it is obvious that they are trying to squeeze two different goals into one: that of a market developer and that of a state fund generating a return.

The market developer focuses on ensuring that deficiencies in the local market are covered and addressed or that investments are directed to national priority areas. A Sovereign fund should be interested in yield, i.e. generating income for the state. These goals do not always serve each other, and such an identity crisis harms the development of the fund market.

The current Smartcap strategy clearly favours market development. Unfortunately, however, the fund is not the right method for this, as a long-term strategy is needed to ‘create’ and develop the market. Time that a fund with a four-year investment period does not have. By limiting the ability of fund managers to make the best decisions for the fund, we are also limiting the ability of world-class performing funds to grow from here.

In fact, by managing a return-oriented strategy, Smartcap has the opportunity to become a globally recognised and competitive sovereign wealth fund, which is a significant source of revenue for the Estonian economy.

On the one hand, a progressive, unrestricted mandate would give an Estonian fund manager the opportunity to build a successful fund that helps develop the local fund market. On the other hand, Smartcap does not have to limit itself to Estonia, but can pick the best global funds and build a diversified portfolio, earning returns and bringing new know-how to Estonia

Taking the chains off

Some countries have tried to rationally mitigate the problem of strict restrictions – for example, Sweden, which has produced several successful international venture capital funds such as Creandum, Northzone and EQT. Unlike geographical restrictions, the Swedish state fund Saminvest works on the principle that the state sets the direction, but not an ironclad limit. The fund manager must show that he has done his best to invest in companies there.

To date, these funds have raised several billions in international capital, which has multiplied the original sovereign fund investment many times over.

After all, the biggest competitive advantage of a local fund is its presence. In many cases fund managers are already biased towards Estonian companies, in a good way. If Estonia is interested in growing the ecosystem, then it must create competitive funds that are attractive to private investors and that can return investments many times over.

Here, I see that our sector has an important role in educating the political level and changing the mindset. Since from the perspective of politicians, the current strategy is completely logical and easy to explain to the taxpayer, a similarly simple and understandable counter-offer supporting the fund market must be created. But this also requires the political will to listen and think along.

Estonia's contribution to the creation of a local fund market has been significant. In order for the market to continue to grow and withstand more critical periods, it is necessary to review the initiatives aimed at the fund market and free funds from geographical and sector-specific restrictions. Only in this way will we give the fund manager the mandate to manage the fund at his best discretion and create the conditions for sustainable growth.

This opinion piece was originally published in Estonian on Äripäev.ee on May 15, 2026.