In a report released Thursday, an audit by the National Audit Office (NAO) found the state had allocated nearly €466 million to SmartCap's venture capital funds, but contributions were not aligned with the funds' actual investment needs.

By the end of 2025, €261 million was still available for future investments and expenses, much of it held in fixed-term deposits.

Under the typical operating logic of venture capital funds, investors contribute capital to the fund when it is needed to fulfill a previously undertaken investment commitment. However, the state had transferred funds to SmartCap's funds, for which investment opportunities are only just beginning to be sought.

While this money has been held in a fixed-term deposit pending investment, however, the Ministry of Finance had to borrow to cover State Treasury expenses.

Auditor General Janar Holm said state money should not sit idle while the government borrows to cover its day-to-day expenses.

"The state's support for the development of the venture capital market may be justified, but millions from the state budget should not simply be left pending," he said.

Holm noted that the Ministry of Economic Affairs and Communications must be able to better assess when funds are needed, set measurable goals and establish how results will be evaluated.

"At present, the vagueness of the objectives makes it impossible to assess the performance or the justification of the previous venture capital investments in a meaningful way," he added.

SmartCap said venture capital investments can take years to finalize, with hundreds of potential projects assessed before an investment is made. By the end of 2025, its portfolio included 17 companies and 16 sub-funds, with investment agreements worth €230.4 million and €119.5 million paid out.

No clear targets

The audit also found SmartCap's funds lacked clear targets and deadlines for its goals, which include improving access to capital for innovative companies, developing green technologies and strengthening Estonia's defense industry.

Vague objectives, the audit noted, make it essentially impossible for the state to assess whether the investments made have achieved their targets and whether the management company's performance has met expectations.

The NAO said the ministry's roles as policymaker, investor and overseer of SmartCap's funds also risk blurring responsibilities and reducing transparency. It called for greater disclosure of investment rules and more balanced government decisions that account for risks, costs and alternatives.

The National Audit Office said the Economy Ministry's roles as policymaker, investor and overseer of SmartCap's funds also risk blurring responsibilities and reducing transparency. It called for greater disclosure of investment rules and more balanced government decisions that account for risks, costs and alternatives.

Currently, more than half of SmartCap's investment commitments have gone to foreign fund managers, based on the expectation that larger sub-funds will eventually channel investments back into Estonia.

Ministry official: The money is serving its purpose

In its response, the Ministry of Economic Affairs and Communications said it had updated fund reporting, begun assessing the impact of state venture and private capital investments and was exploring whether SmartCap's unused funds could be held with the State Treasury. It also plans to clarify SmartCap's governance and the division of responsibilities.

Secretary General Ahti Kuningas said that while the ministry has already begun addressing these concerns, the ministry also has to ensure that SmartCap retains enough money to continue making long-term investment commitments and attracting more private capital to Estonian companies.

"Venture capital investments are made over several years, and the money needed for them must be secure regardless of next year's state budget or political decisions," he explained.

"The money held by SmartCap is currently serving its intended purpose," he emphasized, noting that it is needed for existing commitments and future follow-on investments.

He added that the money awaiting investment also earned the funds €9.7 million in interest last year.

Results take time

Nonetheless, he said the ministry agrees the system for holding this money can be improved and is discussing with the Finance Ministry whether more of it could be held in the State Treasury, to be transferred to SmartCap when needed.

The ministry is also working to clarify SmartCap's goals and measure its impact. Kuningas said venture capital results often take seven to 12 years to emerge, but the state still needs clear, measurable targets. An impact assessment of SmartCap's funds is due in November, he added, with new performance indicators also being developed.

SmartCap is a subsidiary of the Estonian Business and Innovation Agency (EIS), with the Republic of Estonia as its shareholder and investor and the Ministry of Economic Affairs and Communications representing the state as owner.

State investment in its funds expanded significantly from 2021, including €100 million from the EU's Recovery and Resilience Facility, €230 million allocated in 2022–2023 and another €100 million for a defense fund in 2024–2025.

Click here to read more about the report.

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