Regional Co-investment Funds

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European Regional Development Fund-supported venture capital co-investment funds across Swedish regions addressing equity financing gaps for early-stage SMEs through matching public and private capital on equal terms.
What are the main aims and objectives?

The primary objectives of Sweden Regional Co-Investment Funds are to increase the volume of invested capital in SMEs, particularly early-stage growth-oriented companies, by filling documented venture capital financing gaps where private market supply is insufficient; to promote innovation and commercialization of new ideas by ensuring SMEs have access to necessary equity capital; and to facilitate regional economic development and entrepreneurship by providing risk-taking capital at early development stages. Specific objectives include addressing identified "equity gaps" in Swedish markets post-2008-2009 economic crisis where venture capital investment declined significantly, negatively impacting SMEs' access to growth capital. The funds aim to promote regional economic development by increasing early-stage equity supply to all regions, not concentrating exclusively in capital markets or high-density areas. For the Green Fund specifically, objectives include promoting low-carbon technologies and transition to low-carbon economy by providing dedicated capital addressing CO2 reduction companies' specific capital needs and sectoral barriers. The funds aim to facilitate risk-sharing between public and private sectors through co-investment structures, with private co-investors bringing expertise, networks, and due diligence rigor alongside capital. The funds also aim to create sustainable long-term results including job creation, company growth, and development of regional risk finance infrastructure and entrepreneurial financing ecosystems.

How does the program work?

Tillväxtverket designed Sweden's Regional Co-investment Funds to improve access to finance during a startups early development stages and to support their growth. The program sought to increase the supply of revolving capital and improve regional financing structures in addition to developing the competences of entrepreneurship finance firms and strengthen collaboration among funders.

The 11 (initially 12) funds were established to invest in early stage micro-, small- and medium-sized enterprises (MSMEs). Individual fund capital bases ranged from SEK 36 million to SEK 200 million (approx. EUR 4.2 million and EUR 23.2 million). From the launch of the funds to June 2015 approximately SEK 3.4 billion (EUR 322 million) was invested in 320 portfolio companies. Public funds accounted for approximately SEK 1.4 billion (EUR 133 million) and private funds for SEK 2 billion (EUR 189 million). About half of the public funding was provided by the European Regional Development Fund, the rest was provided by public regional fund providers (e.g. regional organizations, county councils, Almi Invest).

During each investment round, the public sector invested up to 50% and private investors at least 50%. Investments typically ranged from SEK 1 million to SEK 10 million (approximately EUR 110,000 to EUR 1.1 million). Firms with up to 249 employees were eligible for investments. Investments were carried out in different ways. In most cases, companies reached out to the fund. In some cases fund managers actively pursued an investments. In a few cases, private sector investors brought a potential portfolio company to the fund.

The government aimed to complement the market (not crowd-out private investment) by developing a stable and sustainable revolving capital base that did not shrink in the long-term.

What is the overall cost?

The regional co-investment funds for 2014-2020 had a total financial size of EUR 210 million

How was it implemented?

The Regional Co-investment Fund was launched on 1 January 2009 and planned to operate for 6 years (until 31 December 2014). In 2012, the program was extended until 30 September 2015 and follow-on investments in existing portfolio companies were extended to 31 August 2020 after which all shareholdings were divested.

Since 2005, Sweden began using ERDF funds for interventions improving capital procurement for new, innovative and growth-oriented enterprises, with the largest intervention being regional co-investment funds. The funds were established following identification of documented "capital gaps/equity gaps"—imbalances between existing risk capital available in markets and demands of growing SMEs, particularly following the 2008-2009 economic crisis when private venture capital investments significantly decreased.

In preparation for 2014-2020 programming period, Sweden's ERDF managing authority Tillväxtverket commissioned comprehensive ex-ante assessment (2013-2015) including interviews with over 130 private investors, businesses, incubators, and public administration representatives. The ex-ante assessment identified market failures and financing gaps for SMEs in early growth stages, particularly for cleantech companies finding it difficult to obtain financing. Assessment results proposed investment strategy with eight regional co-investment funds, one national Fund-of-Funds, and one national green co-investment fund.

In September 2015, the Swedish Agency for Economic and Regional Growth (Tillväxtverket) signed formal funding agreement with ALMI Invest AB for implementation of seven regional venture capital funds under 2014-2020 ERDF Employment and Growth Operational Programmes. An open call for expression of interest had been launched in Q1 2015 to select implementing bodies for regional VC funds.

In April 2016, the Swedish Venture Initiative (SVI) was formally launched by the European Investment Fund (EIF) in close cooperation with Swedish Agency for Economic and Regional Growth, combining ERDF and EFSI resources into SEK 582 million fund-of-funds structure supporting selected early-stage venture capital fund managers.

Fund managers were selected through structured processes with cornerstone investments from combined SVI and public resources. Selected fund managers received capital and began investing in eligible SMEs from 2015-2016 onward, with progressive capital deployment throughout 2014-2020 programming period.

Experience from first-generation regional ERDF venture capital funds (launched in 2009 during recession) demonstrated successful co-investment fund operations, with documented positive leverage effects. Evaluations indicated that second-generation funds could build on first-generation lessons, refining operational mechanisms and investment strategies.

Monitoring + Evaluation Methods

Tillväxtverket published an evaluation report in 2016 and an assessment report covering the Regional Co-Investment Funds and two other Swedish risk capital initiatives in 2019.

The 2016 evaluation included both quantitative and qualitative data and input from a panel of international experts. The Funds impact on companies was measured by comparing a control group of firms that did not receive investments through the Fund, matched to recipient companies according to standard characteristics (sales, size, productivity, age of the company, industry, etc.).

Companies were asked to report on how they used the investment (e.g. skills acquisition, product development, operating expenses) and to evaluate the impact the investment had on different aspects of their business activities (expansion, future financing opportunity, staff growth, etc.). Companies were also asked to rate their needs for non-financial support and to what extent these needs were met by the fund and private co-investors.

KPIs monitored included the following:

  • Portfolio company characteristics (sector, size, turnover, location, etc.)
  • Portfolio company allotments of venture capital investments
  • Portfolio company assessment of the impact of the venture capital investments on the company
  • Portfolio company assessments of the need for non-financial support and contributions from private and public investors
  • Survival rates by sector
  • Turnover compared to the control group
  • Number of employees compared to the control group
What impact has been measured?

The 320 portfolio firms had the following average characteristics in the year preceding receiving an investment from the Fund:

  • Annual turnover: SEK 6.3 million (EUR 69 million)
  • Number of employees: 6.8 persons
  • Productivity (value added per employee): SEK 334,000 (EUR 36,740)
  • Capital intensity (fixed assets/employee): SEK 801,000 (EUR 88,110)

Compared to a control group of similar firms receiving an investment from other funds, firms supported by the Regional Co-Investment Fund were spread among considerably more sectors.

Overall, about 80% of co-investors were from Sweden (50% came from the same region as the fund and 30% came from other regions). Foreign investors participated in about 6% of deals but they invested in larger amounts, accounting for just over 10% of the total value of investments. It was not possible to determine the location of the remaining 12% of investors.

Tillväxtverket's most recent evaluation highlighted five key findings:

  • Funds were invested in accordance with requirements. Nearly SEK 3.4 billion (approximately EUR 374 million) were invested in 320 companies since 2009 with exits from 45 companies (as of 2016). About 10% of companies went bankrupt.
  • The Funds engaged new actors in the venture capital market. Only about 30% of the total number of investment decisions were made by companies whose primary objective is investing capital. The regional structure of the initiative allowed new segments of recipient firms to access risk capital.
  • It was too early to draw conclusions about the tangible effects for businesses receiving and investment. However, an overall increase in employment was observed these businesses. It is not clear if this was due to widespread employment trends or new jobs being created by a few successful firms.
  • The majority of regions experienced positive capital supply structures but this was not uniform across and within regions. The empirical data did not allow for a causal assessment of the program and structural changes within the regions.
  • The program identified two main pathways, i.e. growth in the number of businesses receiving investments and improving the regional structure for risk finance. There did not seem to be a priority between either. Some regional funds saw themselves as regional development players, while others saw themselves as traditional venture capital investors.

The evaluators recommended:

  • Reviewing and clarifying of the program goals and developing an intervention logic chart.
  • Streamlining the program to:
    • Focus solely on the business growth with no ambition in respect of structural building, or
    • Adjust the model to allow variation between a strict venture capital instrument and a broader regional development instrument, depending on regional context.
  • Implement supplementary initiatives on both the supply and demand side to construct a more coherent system.
  • Improve the quality of registered investment data to improve monitoring and evaluation.
What lessons can be learned?

The main challenge implementing the program was that the objectives for the making individual investments (either to support a firm with growth potential or to strengthen regional capital supply structures) were not clear. The lack of a logical framework for how the Funds’ investments were to impact capital markets and firm performance resulted in different funds prioritizing different types of investments. This created challenges in evaluating the extent to which investments met the twin objectives. A logical framework was developed midstream to guide assessing program impact.

A second challenge some fund managers encountered related to the broad variation in framework conditions across regions. Industrial structures in some regions led to limited demand: the predominance of large firms, traditional sectors, or a lack of business competencies in firms were identified as factors limiting demand for venture capital. Some regions also had a limited pre-existing supply of venture capital, which made it more difficult for fund managers to identify private sector co-investors.

A third challenge was the limited amount of funding allocated to administrative activities (3%), which restricted the regional funds’ ability to make investments aimed at structural improvements. This challenge affected the various regional funds differently: regions where the funds manage large portfolios with relatively small investments were more affected because such a portfolio structure are costlier. These portfolios are often found in sparsely populated regions where the need for structural development investments is also the largest.

Lessons for other ecosystems:

Tillväxtverket's evaluations highlighted the difficulty of measuring impact of risk capital and business angel interventions because of the uncertain timeframe in which the effects appear. Nevertheless, the evaluators pointed to some key lessons:

  • Evaluations should be able to measure impact over long periods of time, not just in the short and medium terms. This is because impact is expected to occur over a long timeframe, both on individual firms and ecosystems.
  • Policy needs to recognize and adapt to the growing importance of informal capital, including business angels. Informal capital should be considered a potentially important investment source for entrepreneurship and should be targeted alongside formal investors. For example, business angels accounted for more than 40% of private investors in the regional co-investment funds.
  • Policymakers need to design venture capital and private equity development measures as components in a cohesive financing system. Measures to strengthen the supply side should complement measures that improve investor readiness. Similarly, policies that increase the capital supplies must consider exit issues.
  • Policies aimed at affecting individual firms and reinforce capital markets should set clear goals for different activities and assign resources accordingly. Initial program planning documents should include a logic framework detailing expected mechanisms involved from activities to impact. The framework should also include proposed KPIs for each mechanism.
Notes + Additional Context

This entry is an excerpt from the OECD’s International Compendium of Entrepreneurship Policies (2020), which contains 16 case studies from 12 OECD countries. The Compendium examines the rationale for entrepreneurship policy, presents a typology of policy approaches and highlights principles for policy success. Case studies span policies for regulations and taxation, entrepreneurship education and training, advice and coaching, access to finance, internationalization, innovation, and holistic packages for ecosystem building. (OECD Publishing, Paris, https://doi.org/10.1787/338f1873-en.)

CURATED BY

Sarolta Borzasi

Director for Government + Investor Engagement
Embassy of Hungary London
United States