“Turns out that Scandinavia is more than just Sweden” — quote from international VC investor.
As most people know, Sweden, and especially Stockholm, has been a breeding ground for successful technology startups in recent years, but guess what?! There are other interesting countries in Scandinavia when it comes to aspiring startups. Yes, Denmark is also fantastic (I am Danish btw), but I live in Norway, so this post is about the country of oil, fjords and (what feels like) the most expensive food prices in the world.
Briefly about me and what I wish to share in this post:
My name is Esben, I am Danish, but moved to Oslo from Copenhagen a couple of years back. I am the co-founder and Head of Arkwright X, which is an Oslo-based incubator investing in and working with promising software companies within the B2B space. If you are interested, you can read a bit more about us and see a video of me trying to say something smart here. We are an active part of the Norwegian startup ecosystem and thus I tell myself that it is okay to blurt out my views on the Norwegian startup scene for the world to hear.
I will share my view of the highly interesting and promising Norwegian startup scene and hopefully engage you to become a part of the Norwegian startup ecosystem, if you aren’t already. In this post I will go through:
- Key strengths of the Norwegian startup scene
- Improvement areas for the Norwegian startup scene
A small disclaimer before we start: bear in mind that these are my views, and by no means any universal truths. I have tried to back up my statements with facts and numbers where possible, but some points are simply based on my experience from working with the Norwegian ecosystem.
This article ended up being a bit longer than what I had planned for, so I am listing the key strengths and improvement areas here, then you can decide if you want to read all of them or just jump to the ones you find interesting.
Key strengths of the Norwegian startup scene
- Lots of early-phase capital
- Well-educated workforce
- Strong governmental support
- High digital penetration and digital readiness
- Rapidly evolving startup ecosystem
Improvement areas for the Norwegian startup scene
- Challenging to quickly build a world-class workforce
- Lack of ‘recycled startup talent’
- Inflated early-phase valuations
Key strengths of the Norwegian startup scene
1. Lots of early-phase capital
Norway consistently ranks as one of the richest countries in the world, when measured in terms of GDP per capita.
A majority of the wealth has come from oil and gas, which is estimated to have contributed more than 14,600 billion NOK (~1.7 trillion USD) to Norway’s GDP since the early 1970s (source). A lot of people in Norway have made a decent living from the oil and gas industry and the service industry surrounding it. Additionally, the fishing and real estate industries have been good for a lot of companies and investors (feels like most family offices in Norway have some sort of real estate portfolio).
So, how does this affect the startup scene?
There are a lot of individuals and families with money to spend. We are seeing that many of these people are starting to direct part of their wealth towards startups. Some do it to diversify their investment portfolio, some do it for the excitement of the asset class, some do it for both, and some might have entirely different reasons. Whatever their rationale, the increased availability of capital for early-phase companies is great! (But not all great, I will get back to that later). In addition to the money coming from individual angels and family offices, there are also a lot of accelerators and incubators (like ourselves), providing startups with capital, in addition to mentoring, customer introductions, and a range of professional services like legal and accounting.
I dare to say that, if you live in Norway and have a decent idea for a new tech startup and an above average competent team, you should be able to raise your first 1–2 million NOK (~100,000–200,000 USD). Once you need to raise +3 million NOK (~300,000 USD) it gets significantly harder, but for the first small investment round, that many companies go through, there are a lot of investors to choose from.
2. Well-educated workforce
Norway has a well-educated and highly productive workforce. Norway ranks as number 11 of all the OECD countries when it comes to the share of the population with a tertiary education, which in plain English means people having completed the highest level of education (source). So, not the best in the world, but still pretty good. When it comes to productivity, Norway ranks 2nd of all the OECD countries. Not too bad! (source).
Obviously, having a skilled workforce is positive for Norway overall, but it doesn’t help the development of the startup scene much if most of the talent is working for large corporates, which historically has been the case. Luckily, we are now seeing that more and more people, especially recent graduates, are willing to take the risk and join a startup.
I think there are a few reasons for this:
- Millennials want to make an impact, and often find that this is more attainable in a startup company than in a large corporate.
- Startups and scaleups have become the hottest thing since sliced bread and are getting a lot of attention and media coverage. Many people want to live the dream and hopefully get to experience a unicorn-ride like you hear about in the news and see on TV.
- As the Norwegian startup ecosystem has developed, we have seen more and more successful and promising companies, e.g. Kahoot!, Xeneta, Kolonial.no and Spacemaker.ai, to name a few. We are still nowhere near Sweden, but the ones produced thus far have contributed to transition talent from large corporates to startup / scaleup companies by highlighting startups as an attractive job option/alternative.
- As mentioned, the oil and gas industry is very important for the Norwegian economy. In late 2014 the oil price experienced a significant drop, which affected the entire industry. More than 40,000 people are estimated to have lost their jobs in the oil and gas industry and the surrounding service industries in Norway (source).That is a lot of people for a country with a population of 5,200,000! Why do I bring this up? Well, could the oil price dip be for Norway what Nokia’s fall from greatness was for the Finish startup scene?
In its heyday, Nokia made up 4% of the Finish economy, but after the financial crisis in 2008 coupled with the demise of Nokia’s smartphone empire, things started going south (source). Nokia was one of Finland’s largest employers of talented engineers, so after the layoffs of +1,300 Nokia employees in Finland, the country suddenly had a lot of talent with no jobs. A study by the Finish Ministry of Economic Affairs and Employment found that almost 90% of all employees that were laid off found new jobs and became directly involved in founding new tech companies. It is argued that this has helped kickstart and build the foundation for the Finish startup scene (source).
I have no doubt that the oil price drop in late 2014 and the massive layoffs that followed have had a positive impact on the Norwegian startup scene. I have met many highly talented people who have either founded a company or joined a startup after losing their job in the oil and gas industry. Further, I have met many smart engineering students who would previously have gone the ‘traditional route’ and taken a job in the oil and gas industry, but who are now considering joining a startup instead.
So, summa summarum, there is a great pool of talent in Norway, and an increasing share of this pool is moving to startups (but not quick enough, which I will get back to under improvement areas).
3. Strong governmental support
Norway is preparing for the time ‘etter oljen’, which, directly translated into English, means the time ‘after the oil’. This refers to the time when there is little to no oil left to extract/or change in demand and Norway must find new pillars on which to develop its economy. In order to support the development of new economic growth the Norwegian government is pouring a lot of money into the startup ecosystem. A lot of the government resources invested in the startup ecosystem originate from the state-owned company, Innovation Norway. Since 2010 Innovation Norway has contributed with:
- 45,000 grants worth more than 24,862 million NOK (~2.89 billion USD)
- 8,480 loans worth more than 33,563 million NOK (~3.90 billion USD)
The money comes in many different formats. I have briefly elaborated on the ones I find most relevant in the table below.
In addition to all the capital invested, Innovation Norway also contributes to the development of the Norwegian startup scene by offering various services to startups, like mentoring, consulting, events and courses. Overall, a lot of support from the Norwegian state.
So yes, the Norwegian government is spending a lot of money to help grow and develop the Norwegian startup scene!
4. High digital penetration and digital readiness
Norway is a digital nation, scoring 6th on the International Digital Economy and Society Index (I-DESI Index), which is a composite index that summarizes relevant indicators on the EU members’ and 17 non-EU countries’ digital performance and tracks the evolution in digital competitiveness (source).
The I-DESI measures performance in five dimensions or policy areas:
1. Connectivity (Norway rank: 3rd)
2. Human capital (digital skills) (Norway rank: 10th)
3. Use of internet by citizens (Norway rank: 1st)
4. Integration of technology by business (Norway rank: 7th)
5. Digital public services (Norway rank: 11th)
That’s cool, but so what?
Norway is among the countries with the highest digital readiness and digital penetration in the world. Not the best, but still in the very top. This is important as this makes for a great birthplace for new technology ventures. Norway is not the largest market in the world, in fact, it is very small, but it is a great place for getting off the ground and testing the viability of a new technology company, before scaling into the world.
One thing the I-DESI index does not account for, which I think is important to consider when discussing the digital competitiveness of a country, is the willingness for a country’s businesses to work with risky technology startups. I don’t have any numbers to back this up, but I can say that I have been impressed by the Norwegian corporates’ willingness to engage with startups, testing out new products or solutions, and being the first pilot customer. We are still in the early days, but lately I have seen more and more corporates getting involved with startups either as investors, partners, pilot customers, or mentors. Companies such as OBOS, Orkla, DNB, Schibsted and Telia, to name just a few, are increasingly becoming an active part of the Norwegian startup ecosystem.
This is a great trend which I think is extremely beneficial for the aspiring startups, as this provides an opportunity to get closer to potential customers (mostly for the B2B startups of course). The startups test their products and business model while (hopefully) bypassing some of the bureaucratic hazzle that can come with working with large corporates. I’m sure we will see even more corporates reaching out to startups in the time to come!
5. Rapidly evolving startup ecosystem
In 2017, I attended an investor event in Oslo together with some Norwegian VC investors, a few corporate investors, some Norwegian angels, and a lot of international VC investors. I was introduced to most of the investors from the international VCs (who seemed to all know each other well from either London or Stockholm). I asked many of them what they thought about Norway and the Norwegian startup scene, and remember several of them replying:
“This is actually my first time in Norway, ever”
I found this a bit odd as many of them were ‘covering the Nordics’. How can you ‘cover the Nordics’ but never have been to Norway? I asked a few of the investors exactly this question and the reply was simply that there hadn’t been enough interesting deals to justify a visit, compared to other Nordic countries like e.g. Sweden and Finland. The Nordics, for many of the VCs, primarily meant Sweden and perhaps also Finland for some.
Luckily, a lot has changed during the past two years!
While Sweden is still the Nordic country getting most of the attention from international VCs, Norway is starting to get noticed. I now meet many of the international VCs several times a year in Norway and have regular calls with many of them to update them on the development of various Norwegian companies.
The main reason for this is of course that we have started seeing more promising technology startups emerging from Norway. An example of one such company is Spacemaker.ai, which recently raised a 25mUSD A-round from Atomico and Northzone, among others (Self-promotion alert: Spacemaker.ai is one of our portfolio companies, and one of the very first companies to join Arkwright X). Other examples are Tibber, which raised 12 mUSD from Founders Fund, and Kahoot!, with Creandum, Northzone, M12 and Disney on their cap table.
Generally, we are seeing that the international VCs are becoming a more integrated part of the Norwegian ecosystem. A good example of one such VC is the Danish byFounders, who have chosen to focus less on the more investor-crowded Sweden, and instead go all in on Norway. Make sure to check out Eric Lagier’s post about “Why now is the time to pay close attention to Norwegian startups”, which has a lot of very good points about the attractions of the Norwegian startup scene. Also, you have the well-known Accel Partners, who recently hosted a dinner together with us in Oslo, in order to show their presence, catch up with existing friends, and get acquainted with relevant players from the ecosystem. Inventure, a Finish fund, is another good example of a fund that has been very engaged with the Norwegian ecosystem, hosting various events and dinners.
In addition to the foreign VCs, there are, of course, also the Norwegian VCs. In recent years, we have seen the birth of some exciting new funds, like SNÖ Ventures, Idekapital, Propagator VC and Momentum Partners. Supplementing funds like Alliance Venture and Startup Lab’s Founders Fund, who have been part of the ecosystem for years.
Yes, I know, a lot of name dropping here, but the point is that there is interest from investors, and it seems to be growing rapidly! We are nowhere close to Sweden in terms of the value and number of annual investments — yet. The fact that VC investments in Sweden was ~3x higher than in Norway in the first half of 2019 (source) is to me a clear indication of the great opportunity for growth in Norwegian VC investments.
If we take a look at Norwegian investment numbers from the past few years, we can see that we are on the right path, with amount of capital invested increasing with ~70% from H1–2017 to H1–2018 and number of investments increasing ~76% in the same period (source).
We have the talent, we have the capital, and we are constantly increasing the competence. All the various startups, investors, and other ecosystem players have a golden opportunity to be part of this journey to build a kick-ass startup scene and surrounding ecosystem.
Improvement areas for the Norwegian startup scene
Ok, so you have (maybe) read your way through all the things I find to be strengths of the Norwegian startup scene, now let’s take a look at the things that could be improved. There are many things that can be improved, but I have tried to only list what I believe to have the largest impact on the development of the Norwegian startup scene overall.
1. Challenging to quickly build a world-class workforce
In all the time I have invested in and worked with startup companies, one of the skills I have gained the most respect for, and value the highest, is a person’s/team’s ability to hire great talent. Being able to sell a vision and a dream, convincing talented people, who often have plenty of other opportunities, to take a leap of faith and join your startup/scaleup company, not because of the salary or other benefits, but because you have convinced them of the potential to be part of building something great and impactful.
Naturally, I appreciate companies with great ideas, but I much prefer a company with an okay idea and a fantastic team, rather than the other way around. A fantastic team will, in many cases, pivot their way to something great, even though the starting idea might just have been mediocre. But building a world-class organization is never going to be easy, especially when it must be done in a matter of a few years. This is the reality for fast growing startup companies.
Yes, dear reader?
Tell me how this relates to Norway!
Thought you would never ask.
In Norway, getting top talent to join your startup/scaleup is overly complicated, primarily due to a set of outdated or misdirected regulations. This is, in my opinion, one of the biggest issues we face on our journey to becoming a unicorn factory.
This is one of the longer sections, so I have split it into two subsections:
I. Acquiring Norwegian talent
II. Acquiring foreign talent
I. Acquiring Norwegian talent
Menon Economics recently did a study on behalf of Innovation Norway to identify and evaluate various characteristics among Norwegian high-growth companies (link to study). In the study, they asked the participating companies about the factors they see as the biggest limitations for the growth of their company. Access to qualified labor came out as the number one factor.
The study further asked about any particular circumstances that has hindered or delayed their recruiting processes. Here, ‘competitive salaries’ came out on top, while ‘issues in offering an attractive option program’ came second.
Alright, there appears to be an issue with salaries and options, hindering or slowing down the recruiting process, but why is there an issue?
Salary levels in Norway are high, on average. Norway ranks among the top 10 countries in the world when it comes to average wages, adjusted for Purchasing Power Parity (link). This also means that the opportunity cost of joining a startup, in terms of base salary, can be fairly high. Startup companies need to manage their burn rate and most often try to keep base salaries as low as possible. But it turns out that the average base salaries of Norwegian startups, are pretty high.
See for yourself in our study of Nordic startup salaries from 2018 here.
This can be an issue as it increases the startup’s burn rate, which means that they might have to hire less people than they actually need and thus scale at a slower pace, or perhaps they might raise money at inflated valuations in order to have sufficient capital for paying high salaries, whilst avoiding complete dilution by external investors.
A way of bringing down base salaries would be to offer options to new hires, but as the Menon Economics study also points out, issuing options has its complications in Norway.
The current regulations around options in Norway:
- Companies fulfilling certain requirements (see below) can postpone taxation on a value gain up to 500,000 NOK (~57,600 USD) per employee until after their options have been converted to shares and liquidated. Any value gain above the threshold will be taxed when the option is converted to shares, i.e. before you have sold your shares.
- Requirements in order to postpone taxation of up to 500,000 NOK (~57,600 USD):
- Company is 10 FTEs or less
- Company has max revenue and balance sheet total of 16 mNOK
- Company is max 6 years old
- The options have a minimum 3-year vesting period (entailing that the employee cannot exercise any of the options earlier, to get more favorable taxation on the resulting shares)
- There are several other requirements and details, which you can find here, if interested (link)
The ordinary rule is that you are taxed immediately for all your value gain when converting an option to shares. So, to be able to postpone the taxation on a value gain of up to 500,000 NOK until liquidation is an improvement. Yet, this is still far from good enough.
First off, it is complicated to fully understand the details of the requirements (I actually had to double check with a lawyer before writing this). Let’s take an example: when do all these requirements need to be met? Turns out that it varies. The requirements about maximum number of FTEs and maximum revenue and balance sheet total need to be met in the accounting year before the option is awarded, while the requirement about the age of the company is based on the same year as the option is awarded. This might not sound that complicated, but I will be honest and say that I had missed this until I spoke to a helpful lawyer and missing such details can lead to expensive mistakes.
Furthermore, the employee might end up in two different tax regimes, one for the first 500,000 NOK gain, and another for the remaining part (which will be treated in accordance with the ordinary rules of option taxation and be taxed as salary upon exercise). A frequent problem is that the employee does not have the liquidity to pay off the resulting taxes upon exercise and might have to sell some of the shares in the startup in order to get the required cash. The 500k regulation solves only a small part of the problem, even if the requirements were less complex.
Another mentionable point is that all the requirements related to options, listed above, can (in some cases) work for small startups, but they do not work very well for fast growing scaleups that need to hire a lot of people fast. When you have proved your business model, you have convinced the investors to back you and you are ready to hire top talents to help you scale your company, that is when you need flexibility in your hiring process and, in particular, the compensation package you can offer. With the current regulations, these companies are very much limited and find it hard to compete for the best talents. Norwegian startups compete with both the large corporates, who can offer high base salaries, and startups from other countries.
One alternative to options, which can also help to keep your base salaries at a reasonable level, is to offer your new hires the opportunity to purchase shares at a discount. This can work for some, but as it requires capital to purchase shares, this excludes people who don’t have extra money to spend, e.g. like many recent graduates.
A definite first, and very important, step to improve the hiring process for Norwegian startups and scaleups would be to increase the maximum value of the postponed taxation and adjust the maximum number of FTEs and the maximum revenue and balance sheet total. But there are other issues as well, like the current regulations around hiring of foreign talent, in particular talent from outside the EU.
II. Acquiring foreign talent
From working with many different startups and scaleups, we have experienced that these companies often struggle to find enough talented people in Norway, within a short period of time. Even though we see an increase in talent switching from the safe corporates into the risky startup world, the vast majority of Norwegians still find it too risky to make the jump. One reason for this could be that the average Norwegian is quite risk averse. Compared to the average Dane and Swede, Norwegians are about twice as risk averse. This is documented by the famous Geert Hofstede who came up with the cultural dimensions theory, which compares differences in cultures. (source).
And even if a startup can find enough talent in Norway, it can still be beneficial to bring in people from other countries, with other cultures and other perspectives. Diversity is good for performance, as documented by McKinsey & Company (source).
BUT, getting foreign talent to Norway is not that easy.
One reason for this is the issue related to compensation, as described above. Another reason is the fact that if you want to hire someone from outside the EU, things get complicated. Countries like Finland, Estonia, Lithuania, Italia, France, and the UK have special setups for foreign startup labor, but in Norway this is treated like any other foreign worker. This typically means that everyone from outside the EU, who wants to work in Norway, must have permanent employment which guarantees minimum wage, and this can only be paid in cash. Further, the candidates must have documentation of having completed higher education.
As the world becomes smaller and the workforce is more mobile than ever before, the battle for talent is increasingly global. Norwegian startups need to be able to compete not just against corporates and other startups from Norway, but also against foreign startups, and to do that, regulations need to change (source).
2. Lack of ‘recycled startup talent’
The lack of what I call ‘recycled startup talent’ is arguably less of an improvement area, but rather a natural part of the startup ecosystem’s development. Norway needs more successful first-time founders going back into the ecosystem, either to start a new company, to become advisors to other startups, to invest in startups or perhaps to take a leading role in a fast-scaling startup. We do have some, like for instance Johan Brand, co-founder of Kahoot!, who is now both advising and investing in startups. Another good example is Geir Førre who founded and led Chipcon and Energy Micro, from inception to exit. He is now an active investor and board member in several Norwegian startup/scaleup companies.
In addition to the founders, the ecosystem also needs the people who have been early hires in successful startups — people with first-hand experience with what it takes to build and scale a great company. We need these people back in the ecosystem. Taking another quick look at our Swedish neighbors, it becomes clear how many of their current success stories and their most promising startups where either the founders or key employees can be traced back to successes such as Spotify, iZettle, King, Klarna, etc.
This takes time. First, we need more successes. Luckily, we are seeing more and more promising companies emerging from Norway, so I expect that in 2–3 years’ time, we will start to see the first couple of companies founded by people who have been early employees of companies like Kahoot!, Xeneta, Remarkable or Spacemaker. Exciting times!
3. Inflated early-phase valuations
Valuations of Norwegian early-phase startups are in many cases too high. Yes, I know, I am an early-phase investor, so of course I am going to say that, but hear me out. I am not stating this just to boost my own investment return. In most cases, the startups eventually find out that having a fair valuation in their early round(s) is in their own interest as well.
We meet a lot of fantastic companies, but, unfortunately, we experience that quite a few (not all, of course) have unrealistic valuations. Some are willing to listen to input from the potential investors, and adjust, while others are not.
The main issue with the high valuations is that we in many cases see that this will limit our, and the startup’s, chances of finding an investor in the next round (assuming the company will raise another round). Raising more money and having less dilution is of course desirable for the startup, but this needs to be balanced against the future funding needs as well. The larger the investment rounds, the larger the share of professional investors, which also means that behind every (most at least) investments is a thoroughly calculated business case. So, if the early-phase valuation is too high, and needs to go up before next funding round (as most startups and their investors hope for), then the business case becomes increasingly difficult to justify for the next round of professional investors.
But why is the valuation so high in the first place?
I have identified three potential reasons:
I. Lots of private capital
As mentioned earlier, there are a lot of people in Norway with extra money to spend, and many of these are directing an increasing part of their wealth towards startup investments. This is good for the startups as it means a larger selection of potential investors, but it can also cause some issues, like driving up valuations.
We experience that non-professional investors, e.g. friends, family and first-time investors, are often less critical when it comes to the valuations demanded by the startup company. There are different reasons for this; some people simply lack the relevant competencies and reference points to make a fair assessment, while others, especially friends and family, perhaps trust that the company (with their friend or relative) is treating them fairly and thus do not do much research on the numbers.
II. Startups lack Norwegian valuation benchmarks
Startup valuation is tricky, no doubt about that. You can find lots of guides to startup valuations online but if you are in the very early days, i.e. pre-revenue, you often need to use benchmark data to set your valuation. Doing something like a discounted cash flow model just doesn’t work for an early-phase startup. There are so many assumptions you can easily adjust to change the valuation by tens of millions. With benchmark data, I mean data that show valuations on which other startups with similar characteristics have successfully been able to raise professional investor capital. But, getting these benchmarks is not easy for a startup, especially in Norway. If you look to the US or UK you can find some data points on this, and we have seen companies do this, but the issue is that both the US and the UK markets are vastly different from the Norwegian market. Thus, you can’t really apply their benchmarks. So, in lack of better local data, we meet many companies who simply have to put out a (high) number, and see how the investors react, and then they adjust from there.
As investors, we meet a lot of different companies, which allows us to collect a lot of data on different valuations for different types of companies. This might be obvious, but we naturally only register the valuations that the companies actually manage to raise a round on, preferably with some new professional investors in the round. With the data we collect, we have at least some benchmarks as a reference when discussing valuations with new investment prospects. We are not unique to have such a dataset, most professional investors do, the issue is that it is not public, so it doesn’t help the startups much in setting their valuation. The reason why it is not public, is that many startups don’t wish to share their valuations, and thus we can’t share it as an investor either.
So, summa summarum, I argue that the second reason for why we see high valuations from early-phase companies in Norway is that there is a lack of publicly available benchmarking data. To that point, we are currently working with other Norwegian investors to see if we can manage to create a dataset for valuation benchmarks with enough useful data, while still keeping the startups anonymous.
III. High burn rate
This last point, is more of a speculation from my side, to be honest. But could it be that one of the reasons that many startups end up on such high valuations is also affected by the salary issues (option limitations and requirement for high base salaries)?
Imagine you are a startup in Norway. You need to hire new people, but your options are limited (get it?!), so you have to pay your new employees a higher base salary than you had intended. Ok, so your burn rate has now gone up, and thus you need more investor money to fund your journey (assuming you are not profitable yet). Assume that you originally had settled on a valuation of 10 million NOK and you wanted to raise 2 million NOK, but now, with your higher than intended burn rate, you realize that you need 4 million NOK. So instead of selling 20% of your company you now need to give up 40%, are you ready for that so early in the company’s life? Probably not, so what do you do? One solution is to increase your valuation to lower the dilution.
Until we have a relevant benchmark on valuation of Norwegian startups ready, my (truly objective) advice is therefore that both the startups themselves and potential investors thoroughly review the valuation of the startup. A fair valuation will benefit all parties in a future round.
Norway has a solid foundation for building a highly successful and thriving startup scene. We are already well on our way and have started seeing the first effects of this as new investors are entering the market. The ecosystem continues to develop and grow, and an increased number of new quality startups are coming into existence. Still, I am looking forward to seeing a few changes, especially the low hanging fruits the government can pick (option and foreign labor regulations) to boost the Norwegian startup ecosystem even further.
I genuinely recommend foreign investors to keep a close eye on the Norwegian startup scene. I can guarantee that you will see that Scandinavia is more than just Sweden.