Nordic Startups Are Immune to the Next Financial Crisis
Now that’s a bold statement from an early-stage investor only two years into his third career. But let me explain why I think so. It’s really quite simple.
First, the digital revolution is leading to a paradigm shift in the corporate ecosystem. The boldest proponents are forecasting a 75 percent replacement rate in the S&P 500 index components within the next ten to 15 years. That would mean that of the first ten, alphabetically, 3M, Abbott, Accenture, Actavis, Adobe, ADT and Aetna would be replaced by current or future startups. As a precursor to this, e-commerce platform Alibaba made a splash last year by becoming the biggest IPO ever.
Second, early-stage investing is becoming a safer asset class. Not only as a result of the above, but also because risk levels are mitigated for both private and institutional investors as the increasingly collaborative global economy will more effectively produce a product/market fit for new products and services. For example, the demand for a product can be screened pre-production by crowdfunding channels. This deleverage of risk will help more risk-averse institutional investors invest into venture capital and early stage startups.
On the flip-side of this development, some leveraged industrial firms surviving in the current low interest-rate environment would be toppled, meaning that the digital economy would eventually become the regular playing field also for the world’s largest private equity houses. Permira, for example, already holds the world’s top digital ancestry platform.
So why are these a boon for the Nordics? Thanks to the region’s rich history in technology, consumer products and design, the Nordic region is looking to leverage heavily on the above megatrends. Periphery will no longer be a key risk component, neither in product validation nor money flow.
A recent study by one of the region’s leading venture capital firms shows that every tenth billion-dollar startup has been seeded in the Nordic region. That would mean that a tenth of the predicted 375 new entrants of the S&P 500 index would be Nordic, occupying 8 percent of the benchmark.
Of course, that includes a bucketload of assumptions, but the bottom line is simple. The best startups will weather the coming financial crises. While Nordic startups wouldn’t of course be entirely unaffected by another crisis like that in 2008, they would stand a better chance to survive and prosper through such an event.
To better depict the strength of the Nordic startup ecosystem, let’s spell out the numbers again. Of all the billion-dollars startups in the world, 10 percent are created by a region that has only 0,4 percent of the world’s population. And with more than half of Europe’s billion-dollar startups coming from the north, the probability of a Nordic renegade building a successful startup is 30 times higher than that in the rest of Europe. These are incredible ratios and can only be matched by the hardest core of Silicon Valley and Israel.
It is also unlikely that this ratio will abruptly drop in such a reputation-oriented market as early-stage investing. On the contrary, it is more likely that more international early-stage investors will start investing directly into Nordic startups and venture capital funds because of this effect, and balloon it further.
What’s more, U.S. investors aren’t lured into the Nordics just because of its propensity of creating billion-dollar startups. Recent reports by former colleagues at Bloomberg show that venture capitalists are looking into Europe for better value as U.S. pre-IPO valuations balloon past levels that the stock market can absorb. In Europe, the tiny Nordic region creates more than half of the continents billion-dollar startups at a fraction of the cost in Silicon Valley.
As Accel Partners’ Fred Destin recently put it, “our favourite kind of European unicorn is also the rarest. It can only be spotted in the remotest regions, like Finland.”
This favoritism is further amplified by the steady stream of early successes, such as Inventure-seeded Detectify which last month won the best international startup award at the world’s premiere launch event in San Francisco.
If you’re not yet invested in Nordic early-stage startups, you should. Especially if you are investing with U.S. dollars.