The Nordic Spring, will it continue?

The Nordics have become a main tech and startup hub in Europe. It has been a breeding ground for many unicorns like Rovio, MySQL, King, Spotify and Skype, to name a few. The Finnish gaming startup Supercell made a $10,2B valuation exit in 5 years. More than half of the European VC backed companies valued at above $1B come from the Nordics while it represents less than 10% of the European population. These success stories have further fueled the development of the start-up and investment ecosystems and Helsinki is soon hosting again in November the unarguably biggest and most important European start-up and venture capital event Slush which has turned into an international movement. The Finnish Business Angel Network FiBAN has been elected the most efficient and sophisticated business angel collaboration organizations in Europe.

Everything seems to be coming together with the increased influx of capital, more successful exits, and a new developed breeding ground and support ecosystem for serial and new entrepreneurs to start businesses. The influx of capital supports all this with the money and number of VC investments in the Nordics expected to surpass the UK for the first time during 2017.

While 10 years ago London and Berlin were on the VC spotlight the Nordics was more viewed as the region of big tech corporates. Companies like Spotify, Supercell, Rovio and Klarna were just in the makings. But they have all benefited from the strong tech legacy especially in communications and mobile and the top talent recruitments from tech corporates like Nokia and Ericsson.

There are various explanations for how countries as small as Finland and Sweden with high taxes and government spendings have become so vibrant for young businesses. One theory is that the high level of taxes provides a strong social safety net whereas the downside of becoming an entrepreneur and failing is limited. If the start-up falls apart the entrepreneurs still have their health coverage and no student-loan that still needs to be paid off. The education system in Finland has been recognized by PISA as the most efficient in the world with both software coding and language education being on the top of the list. The Nordic countries are relatively small which forces the companies to think globally and pursue international customers and markets from the very early stages. The Stockholm and Helsinki tight-knight communities share a culture of trust whereas successful entrepreneurs share knowledge and networks between new startups which can make them more productive. Moreover, the Finnish government technology funding agency Tekes and the Swedish equivalent ALMI provide sponsored loans and grants to startups which allows them to take a jump start without founders being diluted with external investors.

The regional exit ecosystem has evolved also with notably 2 Finnish gaming companies Rovio and NextGames filing IPOs during the past 2 months. In the first half of 2016, Nasdaq OMX (Nordics) recorded more IPOs both in volume and value than London’s. According to The Nordic Web, Sweden recorded 17 VC-backed exits in the first semester of 2017. This is the second highest in Europe, only coming behind Germany that recorded 26 exits. Going public is not the only exit route as the world’s biggest tech giants have started to buy Nordic companies like Tencent (Supercell), Facebook (Pryte, 13th Lab), and Apple (Indoor.io, Beddit). All these have occurred during the past 2 years.

During the past 5 years the biggest drivers for successes have been in social and mobile. While the Nordics continue on its strong gaming heritage an additional wave is being built around fintech with companines like Klarna, iZettle and Alphasense. The strong culture of engineering and data and the rise of deep data machine learning and artificial intelligence is now on the core of many new ventures and in many use cases like in marketing tech and cloud communications. And as Europe becomes and identifies itself as a dominant deep tech hub the Nordic countries are fundamentally well positioned to be paving the way; the Nordics countries have one of the highest number of both engineers and patents filed per capita. Unsurprisingly and once again in 2017, all Nordics countries are among the top 10 most innovative countries in the Bloomberg Innovation Index.

This overwhelming Nordic entry into the startup and venture capital scene over the past decade, can it continue? There is no reason to believe it will not as notably the fundamentals described above support it. However, it is important to observe which potential roadblocks may limit the success seen so far.

Probably the most important and tangible obstacle for successful Nordic companies to grow is attracting talent. Finland alone would need 7,000 programmers immediately. At the current rate, the shortage is expected to reach 15,000 developers by 2020. The 2016 Hays Global Skills Index ranked Sweden as the top country with the highest labor market mismatch which is a strong indication of how difficult it is to fill qualified candidates for certain positions.

Finland and Sweden are known for bureaucracy. The process of hiring skilled foreigners is very time-consuming for both the employer and employee. This often deters the employee from considering relocation to the Nordics altogether. As a comparison President Emmanuelle Macron initiated in just a couple of months in office a startup visa to make it easier for growth companies to hire talent and for entrepreneurs to start their business in France. A similar attitude and approach to support local tech ecosystems should be adopted in all Nordic countries.

The overall cost of living and taxation is exceptionally high in the Nordic countries. Particularly housing prices in capitals like Copenhagen, Helsinki and Stockholm have become almost inaccessible for many young startup entrepreneurs and employees. Stockholm specifically has a clear as they call it “housing crisis”. The co-founders of Spotify have recently published an open letter and threatened to move their headquarters and thousands of jobs out of Sweden unless corrective measures are taken to ease the situation.

According to the 2016 Global Startup Ecosystem study 46% of Finnish startups provide stock options to all employees, which it to the 7th place in global comparison. The option gains are treated as income though which taxation is often 60%. Same applies to all Nordic countries. More equal taxation schemes are needed for entrepreneurs and top leaders that are being recruited during the super growth phases. Denmark is the only country in the Nordics that has partially solved this by implementing a 3 years’ flat 25% income tax on qualified leaders joining from overseas.

Additionally, the region should take example of notably Germany and France whereas entrepreneurs and business angels can deduct at least partially or defer private capital gains taxes if re-invested in new entrepreneurial activity within a certain time frame. Notably in the US this has proven to be a tremendous incentive to put more experience and smart money to work. This is currently totally being unutilized in the Nordics.

Now that the Nordics have established itself and recognized as one of the leading tech hubs in Europe it is important that any obstacles hindering the continued success is eliminated or diminished. If right solutions and measures are taken to foreign talent attraction, reducing or at least harmonizing taxation for startup recrutements and angel investors there is nothing preventing the good development and even accelerating it to faster and bigger success stories and exits.

Tero Mennander

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