Finland: The early stage nation in need of late stage money

By Dennis Mitzner

The Finnish startup ecosystem has been showing plenty of promise in the last decades. Following Nokia’s decline, the country’s tech prowess has rested on the broad shoulders of the gaming scene, which produced Supercell, Europe’s first decacorn. Behind the gaming giants, a number of companies in a variety of fields are waiting to break out, but for the country to experience a Sweden-like golden era of startups, Finnish entrepreneurs need more local money and late stage maverick investors willing to take risks, coupled with a supportive government eager to facilitate the growth of startups.

Finland has tremendous tech, but where it falls dramatically behind is in access to local financing. Swedish startups can tap into much more locally-led venture funding. To remain competitive, Finland desperately needs larger internationally-minded VCs that can help take local entrepreneurs to global B rounds and beyond
— Jonas Dromberg, a Finnish tech investor

Sami Lampinen, the founder and managing director of Helsinki-based Inventure, an early stage VC fund, strikes a more optimistic tone:

We need more money for entrepreneurs creating the global success stories and exits through IPOS and trade sales. These create experienced entrepreneurs, and VCs as well, with global LP backing. In Venture Capital only - excluding Private Equity - Finland can grow from the current 250 million euros to 500 million in three years, and including late-stage capital we can reach 1 billion. PE brings an additional 1-2 billion, although it’s more volatile due to large one-off buy-out deals.

Comparing Finland to Israel’s early days, Timo Ahopelto, one of the main players in the Finnish ecosystem, is equally hopeful:

Finland is on track for a very good start. Israel raised $3.5 billion in 2015 into 1,200-1,500 tech companies, which probably is what the size of a national ecosystem in a smallish country can create. Finland will be there in five years’ time. The growth path from here onwards is very clear.

The comparison to Israel also reveals structural problems in the Finnish ecosystem. The two countries were competing head to head until late 1980s. Sakari Sipola, whose PhD dissertation compares Finnish and Israeli ecosystems, argues that there are serious structural problems that prevent Finnish startups from gaining international success.

And while acknowledging successes other than gaming, Dromberg believes the comparison to Israel is shaky:

There is much more to Finland than gaming startups, even in places where international investors wouldn’t immediately look. It’s difficult to successfully prop Finnish non-gaming startups on the global stage without local (Finnish) financial risk takers. For riskier ventures, you can’t rely on international later-stage investors alone. Spotify, for example, would likely never have made it without the clout and leverage of Swedish-managed funds. Until we have that in place, putting Finland on par with Israel may seem overly optimistic. Although the entrepreneurial expertise may be there, the local funding ecosystem simply doesn’t currently support that.

Much like Ahopelto’s Lifeline Ventures and Lampinen’s Inventure, most Finnish VC’s are focused on pre-seed or early stage financing. The number of angels is also on the rise, but what is needed is a flurry of investors willing to finance global expansion.

Follow-on investments in Finland are less secure than in Sweden - and London - because there are no local later stage VCs
— Jonas Dromberg

Tekes and the role of government

While typically the best thing for the government to do is to stay out of the way, in Finland, where government is omnipresent, it can play a constructive role. The government’s investment arm Tekes is behind almost every Finnish startup.

The government’s role is always a tricky one, but it could try and encourage the creation of larger VC funds that can better support local entrepreneurs in later stages of the global funding landscape. We need more internationally minded Finland-based managers who have access to relevant global players, but the pool of such candidates is small. While the government has thus far been extremely helpful in creating support for seed funding, it may be time to step up the game by translating that support into later rounds
— Jonas Dromberg

Whether Tekes’ role in the long term is constructive, as opposed to a genuinely free market - with no external entity leveling the playing field -, is debatable, and many disagree with Tekes’ central role in financing the Finnish ecosystem.

Government assistance tends to misconstrue reality on the ground. Funding from the government leads to higher salaries offered companies that receive funding from Tekes, consequently misrepresenting the actual value of a given profession and salary within the startup ecosystem.
— Pavlos Ylinen, CEO of Datafisher

In the Finnish context, with or without Tekes, the government has a big role to play in terms of removing hurdles and unnecessary regulations.

Government needs to secure flexible and low-friction employment laws, attractive taxation for startups and capex driven companies, a very predictable regulatory environment for the VC/PE funds and structures.
— Sami Lampinen

In the tech world, things move fast and companies are born anywhere in the world. I’m able to have an ear to the ground with The Nordic Web - the content is fresh, local, and of high quality, which is exactly what you need as a seed investor.

In fact, it’s through Neil Murray’s newsletter that I first heard about Mapillary. Several months later, I was fortunate to lead our firm’s investment in the Company to help drive the creation of a crowdsourced visual representation of our world
— Nathan Benaich, Playfair Capital