Benchmarking government support for venture capital: Finland
Table of contents
The development of the venture capital (VC) market in Finland began in the 1990s and has grown steadily, despite drops caused by the dot-com burst and the Great Financial Crisis in 2008. After growing EUR 1.49 billion in 2008, VC investment fell between 2009 and 2012 (Panel A). Since 2013, VC has grown steadily, with the exception of 2015. In 2018, the growth of VC investments accelerated, rising by 45%, and continued a marked growth in the following years. In 2020, VC investment growth was particularly high, rising by 64% and reaching EUR 4.36 billion.
The accelerated growth since 2018 has been a result of significant growth in late-stage VC investments. Panel C of Figure 1 shows that while start-up and other early-stage investments have been relatively stable across the years, ranging from 0.02% to 0.0% as a share of GDP between 2007-2021, the share of late-stage VC investments have increased significantly since 2018, ranging from 0.04% in 2018 to 0.07% in 2021. According to the Finnish Private Equity Association, the increase in the total volume of VC in 2021 was a result of very large investment rounds, with one of the deals being closed for EUR 500 million (Finnish Venture Capital Association, 2022[1]). This trend continued in 2022 but changed rapidly in H1 2023, when the growth of VC deaccelerated significantly, especially when considering mega-funding rounds. Nonetheless, this decline was also experienced in the US and Europe (Finnish Venture Capital Association, 2023[2]).
The significant growth in the Finnish VC market in the last years is also a result of an increasingly important role of foreign capital investors in the Finnish market. According to the Finnish PE Association, in 2023, the share of foreign investors (Limited Partners) in total investments was 43% (Finnish Venture Capital Association, 2023[3]). Since 2018, the share of foreign investment has been more than half. Between 2007 and 2014, foreign investment in the Finnish VC market ranged from 12% to 38%, except for 2014, when it reached 40%. Foreign VC investments are, on average, significantly larger than domestic ones and target late-stage companies. In terms of sectors, ICT tends to be the largest recipient of VC investment, followed by consumer goods and services and biotechnology and healthcare (Invest Europe, 2023[4]).
Note: Data from Panel A and B correspond to investments allocated to Finnish companies. It includes only venture capital investments by formal fund managers, including private equity funds making private equity investments. Investments by business angels, incubators, infrastructure funds, real estate funds, distress debt funds, primary funds-of-funds or secondary funds-of-funds are excluded.
Source: Venture Capital Statistics OECD Data Explorer.
The Finnish government started promoting the Finnish VC ecosystem in the 1990s. In 1995, the Ministry of Economic Affairs and Employment introduced the Finnish Industry Investment Ltd (TESI). TESI is today the main public sector player in the VC ecosystem. As of 2023, it had EUR 2.5 billion of AUM and EUR 108 million of new investments and commitments. TESI conducts direct investments, investments in funds, and investments in funds that invest in multiple other funds (also called KRR funds-of-funds).
KRR was introduced in 2008 to create large enough funds to back portfolio companies in their growth plans with the participation of institutional investors and, at the same time, create an investment market for institutional investors to invest in VC and PE funds. Since its creation, KRR funds-of-funds have been a key part of TESI’s portfolio, rising considerably since 2020, when they reached EUR 632 million (from EUR 406 million in 2019). Since then, the investment volume has been maintained. As of 2023, the KRR Fund has had four iterations.
From 2014 the government began to focus on supporting specific sectors and stages. In 2014, the Finnish Innovation Fund (also known as Sitra) was established to support highly innovative start-ups. In terms of support by stage, Business Finland Venture Capital (BFVC) was introduced to invest in early-stage venture capital funds managed by private management companies. In 2023, the Finnish government introduced the Finnish Angel Co-Investment Fund, aimed at increasing both the quantity and quality of angel investments in Finland. Most recently, scaleup and growth phases have also taken a prominent role
Even with the creation of the abovementioned programmes, it is important to note that the role of the public sector in the capital investment market (measured by the share of public sector investment amounts over the total VC investments) has fallen since 2017. This reflects a higher participation of the private sector, particularly institutional investors such as pension funds.
In 1995, the Ministry of Economic Affairs and Employment introduced the Finnish Industry Investment Ltd (or TESI for its initials in Finnish), which has been a pillar in the government strategy to develop Finland's VC and PE market. TESI conduct its activities through direct investments in start-ups and innovative SMEs, investments in VC and PE funds that invest in start-ups and innovative SMEs, and investments in funds that invest in multiple other VC and PE funds (also called KRR funds-of-funds). As of 2022, TESI's portfolio is structured with 23% of its assets under management (AUM) in direct investments, 45% in VC funds, and 32% in funds-of-funds. Since 2018, the share of direct investment has always been a minority and quite steady, between 20% and 23% of total AUM, while the share in VC funds has ranged between 41% and 46% and the share in funds of funds between 32% and 36%.
TESI invests in companies under the same terms and return targets as private investors, and investments range from EUR 2 to 20 million with a horizon of 3 to 8 years. Operating as a minority investor, TESI limits its share to 50% of the total funding round, typically holding 10% to 45% ownership in an investee company. Investments are always paired with an exit plan and are not restricted to specific industries. In addition to funding, TESI provides tailored support to investee companies by appointing an industry expert to the board and assigning a TESI team member as a board observer. It also connects companies to a network of external professionals and industry specialists to provide targeted expertise.
The Finnish Angel Co-investment Fund is another programme directly investing in companies. Its main focus is on early-stage firms. The Funds started operations in early 2024 (Business Finland Venture Capital, 2023[5]). The Fund invests together with business angel syndicates. Investment targets are prepared and proposed by business angel groups to the fund. Each business angel group must have at least three angel investors, who should be new investors to the company. A business angel can participate in several groups investing in different companies (Business Finland Venture Capital, 2023[5]).
The fund invests a maximum amount corresponding to the investment of the business angel group in the target company. The tentative investment range is EUR 50 000 – 600 000, with a maximum initial investment of EUR 300 000. Investments are made on the same terms as the business angel group (pari-passu principle) (Business Finland Venture Capital, 2023[5]).
As mentioned above, TESI also fosters the VC and the PE market in Finland via direct investments in funds that invest in high-growth companies and via investments in funds that subsequently invest in other funds (funds-of-funds). These two activities make an important part of TESI’s portfolio (Niemi, 2023[6]).
In terms of investments in funds, TESI operates as a limited partner (LP), providing capital to fund managers under market terms and alongside private investors such as institutional investors and family-owned companies. TESI's role is to complement private market activity, supporting funds with strong management and strategies that align with its objectives. Investment decisions are made by TESI’s board of directors, whose members are elected for one year. Finland’s Ministry of Employment and the Economy is responsible for the ownership steering of the company and for proposing the composition of the board in the annual general meeting (TESI, 2022[7]).
TESI collaborates with various business financing operators, including Business Finland Venture Capital (BFVC), Finnvera, Business Finland, and ELY centers. However, a 2023 evaluation by the Ministry of Economic Affairs and Employment found that these organizations operate independently, leading to fragmented solutions and inefficiencies in the market due to a lack of coordinated guidance. Nonetheless, the evaluation highlighted TESI's significant impact on the Finnish capital investment market, particularly through its involvement in most newly established funds. TESI has been instrumental in supporting new and early-stage funds by providing a "quality assurance" label that attracts private investment.
On the other hand, TESI’s investments in funds-of-funds (also called KRR funds-of-funds), introduced in 2008, address two specific needs. The first is to create sufficiently large funds for supporting portfolio company growth, requiring the participation of institutional investors as limited partners, and the second is to provide a controlled-risk investment market for institutional investors interested in VC and PE funds. As of 2023, KRR has had four iterations1. KRR’s typical investment in an individual fund is capped at 40% of the target fund’s total commitments, with investments ranging from EUR 5 to 30 million (Niemi, 2023[6]). TESI invests on the same terms as other investors, focusing solely on fixed-term limited partnerships.
The 2015-2022 evaluation of TESI’s activities highlighted KRR funds as a successful and crucial instrument in attracting significant investments from pension companies. However, the evaluation mentions that KRR currently does not facilitate private funding for early-stage VC funds, suggesting a need for a fund-of-funds arrangement to channel private financing into early-stage VC investments (Finnish Ministry of Labor and the Economy, 2023[8]).
In response to the lack of indirect investment activities into funds investing in early-stage companies, Business Finland launched in 2023 Business Finland Venture Capital (BFVC) to foster the development of Venture Capital Funds investing in early-stage companies. BFVC uses economic incentives to attract private capital to early-stage funds, such as accepting asymmetric profit-sharing arrangements that allow private investors in a fund to receive a higher share of profits than their proportional stake. This is particularly applicable for a management company's first institutional fund. However, at least 50% of the fund's initial investments must be made in companies registered in Finland.
BFVC’s commitment to a fund is determined on a case-by-case basis, with a cap of 50% of the fund size and a maximum of EUR 25 million. As of Q4 2023, BFVC has invested in 17 funds, totalling approximately EUR 300 million, with private investors contributing EUR 153 million (51% of the total). These funds have supported around 340 companies.
Finland has also focused on supporting VC funds investing in strategic sectors. In 2014, the Bank of Finland and the Finnish Parliament established, with EUR 84 million, the Finnish Innovation Fund (also called Sitra). Sitra tends to focus on early-stage funds investing in sectors with high innovation and societal impact potential, such as clean technology, health tech, and digital solutions. It also works closely with asset managers to influence investment decisions and has the option to divest from funds that fail to demonstrate progress2. As of the end of 2022, Sitra’s investment assets were valued at EUR 941 million (Sitra, 2023[9]). In 2023, about 60% of the funds Sitra invests in have sustainability targets, though only 40% offer direct incentives to achieve them.
References
[5] Business Finland Venture Capital (2023), Angel Co-investment Fund, https://www.businessfinland.vc/en/finnish-angel-cofund.
[8] Finnish Ministry of Labor and the Economy (2023), Finland Teollisuussijoitus Oy’s (Tesi) evaluation, https://tesi.fi/wp-content/uploads/2023/08/liite_6_Tesi_arviointi_11082023.pdf.
[2] Finnish Venture Capital Association (2023), Ventuer capital in Finland H12023, https://paaomasijoittajat.fi/app/uploads/2023/11/VC_Finland_H1-2023-1.pdf.
[3] Finnish Venture Capital Association (2023), Venture Capital in Finland, https://en.ain.ua/2024/04/11/startup-funding-in-finland-showed-record-amounts-in-2023-fvca-study/#:~:text=Venture%20capital%20%26%20venture%20growth%202023%20in%20Finland&text=Of%20the%20total%20amount%20raised,raised%20VC%20or%20growth%20funding.
[1] Finnish Venture Capital Association (2022), Venture Capital in Finland H1/2022, https://paaomasijoittajat.fi/app/uploads/2022/11/VC_in_Finland_H1-2022.pdf.
[4] Invest Europe (2023), .
[6] Niemi, M. (2023), Tesi Private equity and venture capital for startups and growth companies, https://www.eurahoitusneuvonta.fi/49aa33/globalassets/eu-rahoitusneuvonta/materiaalit/20230510_tesi_bioenergy_otaniemi_final.pdf.
[9] Sitra (2023), Sitra as an investor, https://www.sitra.fi/en/topics/sitra-as-an-investor/#what-is-it-about.
[10] TESI (2023), KRR funds-of-funds, https://tesi.fi/en/for-funds/krr-funds-of-funds/.
[7] TESI (2022), Annual Report 2022 / Corporate Governance Statement, https://tesi.fi/wp-content/uploads/2023/03/Corporate-Governance-Statement-2022_final.pdf.
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The full paper is available in English: OECD (2025), Benchmarking government support for Venture Capital: A comparative analysis, OECD SME and Entrepreneurship Papers, OECD Publishing, Paris, https://doi.org/10.1787/81e53985-en
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← 1. KRR I, launched in 2008 with EUR 135 million, attracted 8 co-investors, including pension and insurance funds, and invested in 11 funds from 2009 to 2013. KRR II, with EUR 130 million, involved 4 co-investors and backed 10 funds between 2014 and 2017. KRR III, established in 2017 with EUR 150 million, included 6 institutional investors and invested in 13 funds through 2020. KRR IV, launched in 2021 with EUR 175 million, aims to invest in 10-14 funds between 2020 and 2025, with 6 institutional investors (TESI, 2023[10]).
← 2. Sitra has a comprehensive responsible investment policy. This policy integrates ESG factors into all investment decisions, with asset managers required to actively monitor and incorporate ESG aspects. A key criterion for selecting funds is their adherence to the UN Principles for Responsible Investment (PRI) or having a robust responsible investment policy.