Why does Helsinki, Finland, a relatively small Scandinavian city, have such a vibrant startup ecosystem?
With a metro population of 1.4 million, the region is one of the smallest that we analyzed in our Global Startup Ecosystem Report. Yet as a startup ecosystem, Helsinki outperforms many larger places. According to our Lifecycle Model, it has already progressed to the Globalization phase:
The city has a rich entrepreneurial legacy, of course. Nokia, based in the suburb of Espoo, grew into a multinational company and a telecommunications pioneer. Likewise, Linux was first developed at the University of Helsinki. Today, the area hosts a leading technology event — Slush — and is home to some of the premier gaming companies in the world, including Rovio and Supercell. The latter, maker of Clash of Clans, sold an 84 percent stake in itself last year to the Chinese company, Tencent, for $8.6 billion.
But why? What explains Helsinki’s startup vibrancy? And what can be done to sustain it?
Recently, our Head of Policy, Dane Stangler, had the pleasure of traveling to Helsinki and participating in an event about the strengths and gaps of the startup ecosystem there. In a former hospital building, now the Maria 01 startup space, and in partnership with the Helsinki Business Hub, Dane presented highlights from our assessment of the region. This was followed by a panel discussion of local investors and entrepreneurs, and roundtables focused on specific topics.
The strongest feature of the Helsinki startup ecosystem is its Global Connectedness, which has helped open up global markets for local startups (see chart). In our analysis, Global Connectedness is not measured by airport flights or LinkedIn connections. Rather, with our survey, we try to uncover significant and meaningful relationships between founders in different ecosystems. In particular, connections to the top ecosystems are important. Overall, Global Connectedness is strongly correlated with other performance factors, and this helps explain Helsinki’s advancement to the Globalization phase.
Venture funding has increased in recent years, and Helsinki has a relatively high level of early-stage funding per startup. According to those who served on the event’s panel, more non-Finnish VCs are investing in the ecosystem (and more Finnish VCs are investing outside the country).
Despite its entrepreneurial heritage, several people noted that culture change was still important in Finland. When the panel discussed the need for more exits in the city and country, one investor observed that it was the first panel he’d been on in years in which “exits are a positive subject.” For years, he said, exits have been treated as a bad thing in Finland. Now, that seems to be changing.
The strength of relationships within the startup community was also cited as a major asset for Helsinki. One founder said that, at least among gaming startups, there is a high degree of information sharing. Because the gaming cluster started as friends playing and then making games, the culture of sharing has persisted and created a close-knit community. (This is precisely the type of Local Connectedness that is currently not well measured in startup ecosystems — we at Startup Genome are working on developing it into a performance factor in our model.)
Finally, several people mentioned sisu, the Finnish concept of grit or perseverance, as helping explain why such a vibrant startup ecosystem has developed in a city on the geographic fringe of Europe.
Nevertheless, gaps remain. In general, Helsinki needs to increase its number of startups (Startup Output), and generate more, larger exits to drive attraction of resources such as engineering talent.
As a small city, Helsinki has a high density of startups, but its overall Output is lower than other ecosystems at the Globalization phase.
One place to start is the financing environment. Despite the apparent increase in venture funding available in recent years, several people noted that there aren’t really any big investors in Helsinki — those that can inject large amounts of capital and keep startups located there. As a result, fast-growing companies look elsewhere for funding and, when they do exit, the returns also go elsewhere. (This is a phenomenon not unique to Helsinki, as we discuss in our Global Report.) In the roundtable discussions, some people wondered how big companies and pension funds in Finland could be encouraged to get more active in startup investing.
Tekes, the national innovation agency, was praised by many at the event for its catalytic role in funding and assisting startups. At least one founder, however, observed that there are too many restrictions attached to the loan and grant funds available from Tekes, perhaps limiting the potential effectiveness of the agency. This is a common issue across government programs in many countries meant to help startups.
Large Finnish companies could also play a more constructive role in the acquisition market. Corporations in Finland “haven’t figured out how to manage and acquire the guys in the hoodies.” They don’t know how to acquire startups, said several participatnts. As a result, the culture of startups is killed, limiting the entrepreneurial recycling that could sustain the ecosystem’s momentum.
The biggest opportunity for Helsinki’s continued growth as a startup ecosystem appears to be in attracting and retaining global talent. Despite its high level of Global Connectedness, Helsinki’s levels of Resource Attraction show plenty of room for growth.
According to many at the event, one place to look to improve Resource Attraction (and raise the level of Talent Accessibility) is to the thousands of foreign students who study at Finnish universities. This became a major point of discussion in one of the roundtables.
One person claimed that approximately 80 percent of these foreign students do not stay in Finland — not for lack of desire to stay, but because there are no good ways for them to stay and work, let alone start companies. Several people expressed the view that Finnish companies (the larger and older ones) are reluctant to hire foreign students as employees, in part because of a bias toward speaking Finnish. It’s not clear if this is empirically true, but compared to OECD countries, Finland does have lower rates of employment among its foreign-born population and the fifth-highest rate of unemployment among its foreign-born workers (see chart).
Likewise, Finland’s foreign-born population and immigrant inflow are among the lowest across the OECD. In our research, we found Helsinki to have a comparatively low share of immigrant founders among its entrepreneurs (see chart).
A new International House Helsinki is up and running, intended to be a “one-stop shop for immigrants,” and apparently a new visa program is in the works at the national level. It remains to be seen if these and other efforts can move the needle on keeping foreign talent, and enabling that foreign talent to fully participate in the startup ecosystem. This is as much a cultural issue as it is a policy one, but it is also an area where policy can lead cultural change.
Helsinki’s startup ecosystem is clearly well-positioned. It has a strong base of talent and startup experience, and several recent success stories. To continue and accelerate its growth, however, the region needs more startups and more exits, which will increase the flow of “inorganic” resources to the ecosystem. This will also raise the level of startup experience and funding, thereby reducing “leakages” from the area.