Stockholm’s Startup Secret? An Entrepreneur-Finance-Growth Nexus
The 2010s have seen Stockholm’s ascent as a major European startup up and development of a finance centre perceived as a contender to London. More notably, it has evolved a sustainable entrepreneur-finance-growth nexus (EFG nexus) that offers insights and inspiration for policymakers, investors and entrepreneurial centres globally.
Besides more obvious candidates like Amsterdam — which overtook London as Europe’s top share trading venue in January 2021 — Stockholm and Warsaw have also emerged as unexpected contenders to London’s finance centre crown post-Brexit — with Stockholm in particular developing a reputation as a ‘unicorn factory’ — that could see Stockholm’s stature rise further in the future.
Wharton management professor Exequiel Hernandez notes, “Sweden has developed a human, social, educational and corporate infrastructure that supports startups”. So what are the elements that make the Swedish capital stand out and enable it?
Stockholm finance centre
Cities like New York, Sydney, Hong Kong and London, which also feature finance centres and entrepreneurial economies, share elements of the pattern that Stockholm has established. The former have built and sustained capital markets-economic growth (finance-growth) nexuses, with entrepreneurial economies coming later.
In contrast, Stockholm has seemingly started from the other direction, with its entrepreneurial growth corresponding to the ascent of its finance centre. Sweden, with a population of ~10.2 million people as at 2021, has produced indigenous multinational brands — Volvo, Ikea, H&M, Absolut Vodka and telecoms firm Ericsson among them — with more recent history seeing it produce tech brands like Klarna and Spotify.
Internationalisation is a normal development for the growth of Swedish brands as they expand beyond the domestic Swedish economy into the growth markets of Central & Eastern Europe and further afield.
Even as post-Brexit London contends with Amsterdam, Frankfurt and Paris to be the European European finance capital — securities trading is now dominated by Amsterdam — it’s the growth of the volume of listed companies on the bourses of Stockholm and Warsaw that stands out, rapidly gaining on London and its universe of 2000+ listed firms.
In Stockholm’s case, it thrives on the back of a booming technology sector. Being second only to the UK in terms of new tech firms being formed, Nasdaq Stockholm has been a major beneficiary of this. Fundamentally, Stockholm is emerging — or has emerged — as the centre of a tech-led Nordic economy that encompasses Denmark, Norway, Finland and Estonia.
In September 2021, Sweden emerged as one of the best-performing equity markets in Europe, offering investors the most choice when it comes to picking stocks.
However, more than 80% of these companies are small caps trading under US$1 billion. But this means by sheer volume of listed firms, it outstrips larger European economies Germany and France. Moreover, Stockholm-based asset managers can also fully access European financial markets, unlike London-based asset managers who now face a ‘slow bleed’, with the regulatory directions in favour of EU jurisdictions.
The Financial Times notes: “Brussels is eyeing reforms to clamp down on the use of cross-border arrangements that allow non-EU banks to do business in the bloc, in part because the use of these kinds of national permissions has increased since Brexit. Regulators are also increasingly revisiting bespoke arrangements and grace periods agreed with banks based in London to apply pressure to move more people.”
In an interaction with Bloomberg, Jonas Strom, Stockholm-based chief executive of investment bank ABG Sundal Collier, explained the vibrant market for emerging enterprises as a reflection of a thriving startup scene, centred regulations and a deep investor base. Strom attributed this to a “unique eco-system of investors”, highlighting how in Stockholm, “…there are many smaller professional investors that don’t need a 100-billion-euro transaction but are happy with 50 million euros.”
The other advantages Stockholm shares with Warsaw and London include being outside the single European currency. This means the Sveriges Riksbank, Sweden’s central banks, has greater independence and operational flexibility unlike other countries that subscribe to the euro. This is complemented by its burgeoning entrepreneurial ecosystem, which encourages robust company formation and growth and access to the European single market.
Stockholm 2021 Entrepreneur Ecosystem Dive
Sweden has a positive reputation across a range of domains and a modern history deeply rooted in entrepreneurship and private sector activity. Its more recent modern reputation is of its stature as an entrepreneurial hotspot and leading European centre for private equity (PE) and venture capital (VC) reinforces this. This feeds into its growth as a perceived rival to London as a finance centre.
Sweden possesses a long history of investing that traces back to families like the Wallenberg family and Stenbeck family. Such investment and patient capital has served to boost the economy. Even today, these families have a strong influence on Sweden’s stock market.
The Wallenberg Family-backed EQT has evolved into a European private equity major with international interests stretching from Stockholm to Singapore. Meanwhile, the Stenbeck Family-founded Kinnevik AB maintains holdings across the Nordics, Europe and the US.
In the EU, Sweden’s PE sector trails only Luxembourg in the EU, making it a major hub of risk capital. And it’s boosted the Swedish economy by 4.7% in the 2007–2020 period according to consultancy Copenhagen Economics. Moreover, it supports a strong nucleus of finance jobs, centred in Stockholm, driving the growth of a community of investment professionals.
Despite this robust PE sector, it has bucked the trend of major economies like the US and UK, which have seen negative effects from strong PE sectors. It has shrunk the universe of public firms, generating externalities for national economies, such as reducing citizen-investors’ exposure to corporate profits. This undermines popular support for business-friendly policies, which can “trigger a chain of events that may lead to long-term reductions in aggregate investment, productivity, and employment”.
This is notwithstanding how the Swedish startup ecosystem benefits from being part of a unified regional economy and being in close proximity to the emerging markets of the Central & Eastern Europe (CEE) region, while also being able to access the European Union (EU).
Its startup ecosystem has gained momentum through the 2010s, with the government having played a “very proactive role early on in shaping the technology ecosystem in Sweden” according to Kartik Hosanagar of the Wharton Business School.
The success of Swedish multinationals also contributed tax money to finance infrastructure and entrepreneurial activity, with this diverse range of companies enhancing the resilience of the Swedish economy.
David Hsu, a Wharton management professor, observed: “Sweden does have the legacy of its Volvos and Ericssons. They realize that start-ups can be successful and diversify their economy. A whole spectrum of companies can help a country be resistant in times of downturns.”
Tech startups and other entrepreneurial ventures “feed on the presence of large and established organizations that provide the technology and human talent required for the next big thing” and is an environment that Sweden fosters. In 2017, it was estimated that young Swedish firms aged five years or less accounted for ~55% of all of the country’s businesses.
Second to Silicon Valley in terms of unicorns per capita and termed by some observers as the “Silicon Valley of Europe”, it also operates in an environment where capital gains are taxed at 30% and income tax can reach 60%. University education is free — underwriting a technical talent pool that is multilingual — and many institutions have launched startup clusters.
Notably, Daniel Ek, Spotify’s co-founder, came up with its business concept in his first year at Stockholm’s Royal Institute of Technology. Public policies in the 1990s also cultivated a generation of digitally literate professionals.
The startup ecosystem has been built on Swedish strengths such as a highly educated population; social and political stability; extremely high openness to new ideas; robust government support; and a strong social safety infrastructure.
Counter-intuitively to some observers, Sweden’s ascent highlights the role of a robust social safety net in enabling innovation. Elements such as free childcare, as well as income insurance funds to protect individuals affected by failed businesses or job losses guarantee up to 80% of previous salaries for 10 months translate to less vulnerability for aspiring entrepreneurs.
This is coupled with the work-life balance integrated into Swedish culture; high female and maternal employment rates; and subsidised daycare costs that render child care affordable.
This initial momentum has translated to a virtuous cycle. But confounding factors such as high living and housing costs; substantial income and capital gains taxes; and cultural aversion to bankruptcy — corporate bankruptcies see board members and chief executives registered in personal credit ratings for life — are local challenges.
Sweden has also cultivated a high-trust society, which fosters intrapreneurship. Sweden’s culture fosters significant trust within both individuals; the communities and organisations they inhabit; and the broader society.
Within the private sector, this translates into an autonomy which fosters innovation and collaboration by employees in corporate environments. This attribute, being deeply rooted in Swedish culture, is thus reinforced to the benefit of the private sector and its corporate, small & medium enterprise (SME) and entrepreneurial sub-sectors.
A 2020 Harvard Business Review piece highlights how being intrapreneurial elevates “employee engagement and productivity” and serves to make work more meaningful. Though individuals who’re typically cautious and risk-averse can suffer if their roles become more intrapreneurial. But the key elements
At the societal level, this high-trust has facilitated an environment where a strong social safety net that includes generous maternity and paternity leave makes employees feel more secure at work. This high level of trust also benefits entrepreneurialism, with large established companies trusting small startups enough to collaborate and share knowledge with them.
EFG Nexus & Capital Markets
Stock markets tend to consolidate and concentrate, and this has particularly been the case of Europe and North America through the 2000s and 2010s. Today, Europe is continent dominated by the London Stock Exchange Group (LSEG), Euronext NV and Nasdaq OMX.
While a number of independent bourses continue to operate in Europe, outside of the aforementioned entities, the largest autonomous stock market operators outside of the aforementioned are Deutsche Börse AG— operator of the Frankfurt Stock Exchange — and the SIX Swiss Exchange, which operates Switzerland’s major stock exchange.
Such concentration offers scale economies when it comes to to trading. But it has seen a decline in smaller national and regional exchanges in Europe and North America, though this has not been the case in the Asia Pacific.
An October 2021 commentary by William Bratton, the former head of equity research, Asia-Pacific, at HSBC, highlighted how a national focus was the foundation of most stock exchanges.
Smaller bourses tend to encounter negative cycles of reduced investor interest, which drives declines in trading liquidity and capital availability. This subsequently discourages new listings, further driving declines in investor interest. This highlights how momentum is critical in an EFG nexus, lest a capital market is caught in a vicious cycle, or “doom loop” as Bratton terms it.
Dariusz Wójcik at Oxford University argues that relative sizes of securities industries determine the finance centre hierarchy. More important centres possess larger, deeper markets that can support more complex capital market activities.
This partially explains the rise of Stockholm, which has gained increasing venture capital (VC) interest and whose innovative economy aligns with the growth of private equity.
The key components that have led to the rise of Stockholm’s equity markets is the positive perception of Sweden’s listing authority and their role in the promulgation of best practices.
A report, “Primary and secondary equity markets in the EU”, published by Oxera Consulting LLP in November 2020 and commissioned by the European Commission, highlights the regulatory factors at play and the best practices adopted by Swedish, UK, and Warsaw authorities.
According to the report, “listing rules in general do not appear to be a primary driver of whether to list”, but these rules influence the listing decisions of issuers.
This is expressed in a preference for where listing authorities maintains a ”clear, timely and smooth process, and a good understanding of the firm’s language (which supports a home bias), specific needs, and expertise” for issuers to conduct share sales.
With listing rules in the European Union largely harmonised, the differentiator is flexibility around regulations in IPO markets within the EU. This is borne out in Sweden, which despite having a relatively small economy, is a leading market in terms of equity prospectuses (i.e. IPO prospectuses ) produced, eclipsing much larger economies like the Netherlands, UK and Germany — and most other EU economies — in terms of equity prospectus approvals.
This is attributed to the regulatory simplicity and liquidity of Swedish securities markets. And overall, issuers prioritise rapid and reliable processes to access equity capital markets, whether private or public.
In Sweden , it is the relevant exchanges, rather than its Financial Supervisory Authority (Swedish term: Finansinspektionen) that approves listings. The Swedish FSA approves exchanges’ listing rules and supervises them, while exchange operators oversee listing and admission to trading.
Other best practice cases cited include the UK Listing Authority help desk for issuers, which enables complex issues to be discussed and agreed prior to document submission.
Regulatory waivers are an additional factor. An example is the agreement between the Oslo Børs, now Euronext Oslo, and the Singapore Exchange (SGX) to limit regulatory obligations on issuers obtaining a secondary listing in Singapore.
Based on the 2020 report, in Sweden there is a “good relationship between the regulator, exchanges and advisers, and they are in broad agreement that the Swedish IPO process is working well”, with heightened transparency perceived as a “benefit rather than a burden” and a robust equity culture.
The equity culture shift is attributed to the investment savings account (ISK or ‘investeringsparkonto’) launched in in 2012. Designed to promote households’ savings and investments in stocks/securities and meant to streamline and simplify taxation around such activities.
With no tax on profits, interest or dividends through the ISK, this renders securities investment a causal process for Sweden’s household sector and boosted stock holdings by households.
Role of Swedish Pension System in EFG Nexus
The Swedish pension system plays a role in the entrepreneur-finance-growth nexus of Stockholm and the success of its equity capital markets and entrepreneur ecosystem. The Swedish pension regime consists of three components: a national public pension from the state; an employer occupational pension; and individual savings.
The Swedish Pensions Agency oversees the national public pension Income pension. Most Swedish workers also receive an occupational pension from employers. Finally, there are individual retirement savings, which can be private bank savings or through insurance companies.
Examples of long-term retirement savings are the allocation of funds to an investment savings account (ISK), or saving funds in an endowment insurance policy. The major pension providers in Sweden are AP1, AP2, AP3, AP4, Alecta and AMF.
2020 data from Statista indicates the total value of equity and investment fund shares owned by pension funds in Sweden amounted to roughly four trillion Swedish kronor (US$436 billion), while asset held in debt securities reached a ~1.23 trillion Swedish kronor (US$134 billion).
Notably, domestic equities boosted the returns of Swedish pensions through 1H 2021, with one report highlighting how the AP1 Swedish equities portfolio “…generated returns of 19.6% for the first six months of 2021, being the third-best-performing asset class after private equity funds (22.8%) and hedge funds (17.1%)”.
Since the inception of the ISK in 2012 — which is geared towards invidividual investors and exempt from capital gains taxes — a Nasdaq Inc. report , “The Promise of Market Reform: Reigniting America’s Economic Engine”, credited the ISK with boosting the Swedish IPO market and equity investing on the whole.
Individual investors have no cap on their contributions to the ISK and can freely move funds within the account, with investment traded in Sweden or the global marketplace.
The ISK “…attracted approximately 1.6 million Swedish individual investors (approximately 16% of the total Swedish population) to the ISK accounts”, boosting long-term savings and increasing the corporate wealth held by the household sector. It also corresponded to a near doubling of IPOs from 2014–2016, primarily on the First North market, a board geared for small growth companies.
A March 2018 report by Helsinki-headquartered financial services group Norde, “Promoting Longer-Term Investment by Retail Investors”, evaluated European asset allocation. With asset managers finding it a challenge to activate household savings placed in deposits, Sweden’s ISK was identified as a key model to emulate. Additionally, it links the corporate profits of the private sector with the retail investors of the household sector.
Fundamentally, the ISK served to engage and enfranchise retail investors, a crucial investor segment critical to corporate fundraising, whether for individual companies or a the operations of the broader market. The Australian Shareholders Association argues that retail investors “…provide stability to a share register and can be a solid contributor of new capital”, reflecting the rise of a new generation of investors who can wield considerable market influence.
Over the 2020/2021 period, retail investor participation was catalysed by cheaper stocks due to market volatility; online brokerages and zero‐commission trading accounts; as well as limited entertainment options during the COVID pandemic.
Protection of minority shareholders like retail investors implies strong corporate governance and generates market signals which boost liquidity. This is demonstrated in markets as diverse as Thailand, Bangladesh and Australia. In many ways, it appears that Sweden with its ISK regime has been ahead of the curve, through creating an instrument that centres on facilitating retail investor participation.
When coupled with the way its corporate governance operates and the virtuous impact that minority shareholder protections have on shareholder wealth, this also accounts for the rise of Swedish securities.
Conclusion
The finance-trade-growth nexus of the past offers insights into the development of modern startup ecosystems. Finance, trade and economic growth are interconnected, mutually reinforcing each other. Since the late 19th century, financial development has been strongly related to growth throughout the last 130 years, with trade having a more direct effect post-1945.
Evaluating the past for guidance on sustainable growth, the conclusion was: “When financial systems are grounded in the real activity that makes an individual economy an active participant in the world economy, we believe that the potential for robust growth is commensurately enhanced.”
Sweden’s financial system and the capacity of its asset managers to allocate risk capital has successfully positioned itself as a vital component of a sustainable EFG nexus. Other finance centres emphasised banking and stock market development over the entrepreneurial economy.
Sweden with its the burgeoning entrepreneurial economy and PE sector has catalysed the ascent of Stockholm’s finance centre and securities market. But the inequality generated by the COVID pandemic is also testing the Swedish model.
It has managed to mitigate the worst aspects of the privatisations and stock market de-listings that occurred between 2000–2020 as global PE grew in strength. Declines in stock market participation by the household sector affect incentives for business-friendly policies, as the household sector(i.e. retail investors) often lose out in privatisations, which can have broad economic fallout.
Privatisations often mean the exposure of retail investors to corporate wealth creation is reduced, driving deterioration in a pro-business climate over the long run. Sweden’s ISK and the strong equity investing culture it facilitates works to support equity capital markets and the entrepreneurial economy.
Culturally, there are parallels to the Japanese stakeholder capitalist philosophy — “sanpō yoshi” — three-way satisfaction between the seller, buyer and society. It’s an approach where profit for sellers, buyers’ satisfaction and community benefits converged.
Merchants have the imperative to focus on long-term market sustainability for success. And communities had an enlightened self-interest in investing in businesses to share the success and profits.
At a smaller scale and more recently in history, parallels to an EFG nexus can be drawn from the microcosm of the Disney Corporation. An analysis on the potential of Chinese theme parks highlights how international entertainment firm Disney attracts its audience. Its foundation for this strongly leverages its intellectual property (IP).
Operating across five major entertainment sectors — media networks, theme parks and resorts, film and television, consumer goods, and interactive entertainment construct —Disney benefits from a mutually enhancing corporate ecosystem that adds value to its IPs.
On a similar basis, Stockholm has evolving economies of scope and ecosystems. With its mutually reinforcing synergies across inter-linked entrepreneur, PE and pension fund segments, it offers insights for scholars and policymakers. And sustains a foundation to be a serious contender to established European finance hubs and global finance centres.
