Turning $100M exits into $100B exits: The challenges and opportunities facing Sweden as a tech hub

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There was a time when Sweden was one of European tech’s best kept secrets. While London and Berlin had the spotlight firmly shining on them, Stockholm and Sweden were barely mentioned. This was despite companies like Spotify, Mojang, Skype, Klarna and King having been built there over the last ten years.

However, with an influx of venture capital, exits and a coming together of the tech community with the monthly Stockholm Tech Meetups and the annual Stockholm Tech Fest happening this week, the noise coming from the north is no longer ignored, with Sweden now rightly considered one of Europe’s strongest tech hubs.

The money backs it up too. According to The Nordic Web, over the last three years, Sweden has raised $3.1 billion across 588 investments. Naturally, Spotify has accounted for a large part of this capital (50%) but still, over 500 investments between 2014 and 2016 shows that there is a vibrant amount of promising companies, as well as hinting at a maturing investment hub too.

This has led to Sweden easily becoming the main investment hub in the Nordics, representing over 50% of the investments happening in the region. In fact, in Q2 2017, they recorded 56% of the total number of investments happening there. In three of the last five quarters, they’ve recorded their highest ever share of Nordic investments, showing that not only are they dominating, they are still growing their share of the funding pie. This is showing no signs of slowing down either.

This rapid increase in the number of investments has even led to Sweden outpacing Germany across several recent quarters. In the quarter just gone, Sweden saw the third highest investment activity in Europe, only coming in behind France and the UK, representing 14% of the total deals being made in Europe over the last three months.

When you consider that three of the largest funds raised in Europe last year; EQT Ventures, Northzone and Atomico all have strong roots in Sweden, then we can come some way to understanding where the money for these investments is coming from. However, the large majority of investments are still happening at the early stages, and Sweden is blessed with a multitude of very active local investors who are not afraid to back these companies. Sweet Capital, Norrsken Foundation and Nordic Makers have played a pivotal role in driving the investment ecosystem forward amongst plenty of others.

Then there is Stockholm’s now infamous nickname; “The Unicorn Factory”. Spotify is just one of the billion dollar companies Sweden has produced in recent years. As I touched on in the opening paragraph, Mojang, Skype, Klarna and King are all now valued above $1 billion. Our portfolio company Truecaller has also built a hugely valuable company, becoming one of the most used apps in India. iZettle is another who looks set to go public next year around the $1 billion mark.

There are various theories for how a country with a population of 10 million has produced a disproportionate amount of billion dollar companies and while it is important for the development of an ecosystem to be able to produce companies of this size, there is a more important area where Sweden has been outperforming their size; billion dollar exits. In 2015, there were two VC-backed European exits worth over one billion dollars and both had their origins in Sweden, in King ($5.9 billion) and Avito ($2.7 billion), coming just one year after the acquisition of Mojang by Microsoft for $2.5 billion.

It could certainly be argued then that the Swedish exit ecosystem is now even more impressive than the investment one. Since the beginning of 2015, Sweden has seen thirteen venture-backed $100 million+ exits, an impressive feat considering that it is only in recent years that Sweden has seen an increased amount of capital put into it, and even still, lags behind the UK, Germany and France in this regard.

This has meant they are now one of the best performing European ecosystems for exits. Cross-referencing Tech.eu’s and The Nordic Web’s data, Sweden has recorded 17 VC-backed exits in the first half of 2017, the second highest in Europe, only coming in behind Germany’s 26, demonstrating their strong ability to produce returns on investment. Clearly the money that has gone into Sweden’s tech scene over the last five years or so is now beginning to come out, and handsomely too.

In the first half of 2016, Nasdaq OMX (Nordics) actually recorded more IPOs in terms of volume and value than London’s, incredibly replacing it as Europe’s dominant exchange for a time. With Swedish technology exits playing a pivotal role in this. A strong public exchange in the Nordics offers the region’s tech companies a great avenue of going public and achieving liquidity, it’s clear that Sweden’s tech companies have been taking advantage of this, with more than half of the $100 million+ VC-backed exits occurring through IPOs on First North.

And it’s not just the public markets that represent exit opportunities for Sweden’s tech companies. The world’s biggest companies regularly buy Swedish; with Facebook (13th Lab), Microsoft (Donya Labs, Mojang) and Alphabet (Limes Audio) all shopping there over the last couple of years.

These exits are a key part of the puzzle in figuring out how Sweden has managed to scale itself up so rapidly and successfully in recent years and become one of Europe’s most mature tech hubs. However, Swedish tech is now at a crucial crossroads in its progress, as it now has the opportunity to build on the incredible progress it has made in recent years. The question facing it now is how can it begin to turn these $100 million exits into $100 billion exits?

The most high-profile obstacle stopping Sweden and Stockholm from achieving this currently is their housing crisis. On average, it takes nine years to be granted a rented property, rising to twenty years in some of the most popular neighbourhoods. In addition there is a lack of affordable housing, not just in the capital but also in Gothenburg and Malmö, both strong tech hubs in their own right, affecting Swedish tech companies ability to hire and attract talent.

This places a very tangible ceiling on how much a Swedish tech company can grow. Despite an outcry from the tech scene, including from the founders of Klarna, King and Spotify, very little has been done so far. With the increase in the number of Swedish companies needing to hire international talent, this feels like a problem where time is of the essence and one vital to the continued success of Sweden as a tech hub.

The other issue heavily impacting attracting talent is immigration. The high profile case of Tayyab Shabbab, a talented developer who eventually had to leave Sweden due to a clerical error from a former employer, has brought this issue to the forefront over the last twelve months. Tayyab’s case is not the only one either. There are multiple incidences of other Swedish tech companies reporting losing talent in this way, with immigrants being forced to leave the country over administrative mistakes.

Bureaucracy for bureaucracy’s sake is in stark contrast to the attitude that Emmanuel Macron has had towards the French tech ecosystem in just his first two months as President; with the headline being the startup visa, intended to make it easier for fast-growing companies to hire foreign talent and for entrepreneurs to set up shop in France. A similar equivalent for Sweden at this stage in its development could be a game-changer and a strong step to building on the progress it has made so far rather than watching it slip away.

It’s not just France’s tech sector that has seen Governmental support with attracting talent from outside their country, the UK has also greatly benefited, with initiatives such as the Tech Nation Visa Scheme. When you consider that not only is Sweden significantly behind in this regard but that it is also actively ejecting talent when it could easily be avoided, then it is easy to see why Sweden’s tech companies may feel a frustration here. It’s important that this frustration doesn’t simmer over into a brain drain, as other ecosystems continue to make themselves more and more attractive to international talent.This would mean that Sweden would not just be disadvantaged in the talent arms race but could also see their existing talent move away to more tempting hubs.

One way to prevent this, and an area that has seen some positive progress recently, is the taxing of stock options for startups. From next year, income tax on stock options will be eliminated for startups, with it now being taxed as capital when they are sold. While this is undoubtedly progress, the limits and definitions imposed on what a startup is means that that the companies that are growing and scaling-up (and where these options will likely end up being worth the most) will not benefit from this rule change. While this may help encourage more individuals to join smaller Swedish tech companies, it doesn’t really help the growth companies attract talent. If the definition can be applied wider and include companies like Spotify and Klarna then this development could really help push the whole ecosystem forward.

Despite wider Swedish society having a higher level of gender equality than most countries around the world, this has yet to truly find its way to the tech scene. At the end of last year Di Digital produced an analysis where they revealed that 82 percent of the investments as of November 2016 that year had gone to companies with only male founders. Only 4 percent had gone to companies with only female founders and 14 percent to companies with both male and female co-founders.

Gender equality is at the core of Nordic and Swedish values and, if similar attitudes and actions can be applied to its tech scene, then Sweden has a real chance of being a global leader in this space and could be in the position to set a best practice example for the rest of the world’s tech communities. Many of the large Swedish corporate giants (who are now among the largest corporate players in the entire Nordic region) are run by women; Kinnevik (Cristina Stenbeck) Ax:son Johnson (Caroline Berg and Mia Brunell) and the next generation of female leaders are preparing to take over in conglomerates like Lundbergs and Schörling. It’s not hard to imagine this soon being the case in the tech community as well.

Deep tech has become Europe’s strength, with the opportunity available for the region to dominate the next wave of tech, inventing the future in areas like artificial intelligence, robotics, VR, AR and IoT due to the strong level of expertise and talent that Europe possesses in these fields. However, despite Sweden firmly establishing itself as one of Europe’s premier hubs, it has largely done so in consumer focused areas, with none of Spotify, Mojang, Klarna, King and Skype falling under the deep tech category.

This provides us with an interesting evolving tension, with Europe becoming the dominant deep tech hub, will Sweden also follow suit, or will it continue to excel in other areas, like Consumer Internet, FinTech, Gaming and Enterprise SaaS? There has certainly been an increase in the number of deeper tech companies that Sweden is producing, with companies like 13th Labs (acquired by Facebook), Limes Audio (acquired by Google) and our portfolio company Mapillary. However, it is still a long way off establishing an identity or reputation as a hub in this space. How this will impact Sweden going forward remains to be seen, but it is certainly a variance to keep an eye on as Europe continues to establish itself as a deep tech hub.

Now more than established as one of Europe’s strongest tech ecosystems, it’s important that the progress that has been made so far and the results that have contributed to Sweden consistently punching above their weight need to be capitalised on and not wasted. If the right solutions can be found to the housing crisis, talent attraction and better stock options, Sweden is strongly positioned to be one of the world’s true tech powerhouses, with $100 billion exits becoming a reality sooner rather than later.

To get more insights like this from Mattias and the rest of the Atomico team, sign up to our monthly(ish) newsletter, The Operator’s Manual, here.