Finland as attempted to stimulate a startup scene with public money while avoiding too much government intervention. They helped establish some hits. Here's how they did it.
"They come to us and they say to us 'show us how to take over the world'," a VC said over a beer in Helsinki. In the office of cleantech startup ZenRobotics, a meeting room bears the name 'world domination'.
It perhaps shouldn't be a surprise that Helsinki's startups are reaching for the stars: Evidence of the success of one tiny company that sprung out of the local technology university is everywhere.
Where once the tourist shop would have had shop windows crammed with Moomin toys and trinkets, now they jostle with monobrowed birds for tourists' euros.
The presence of gaming company Rovio, which unleashed the Angry Birds franchise on the world in 2009, is inescapable. From the airport to the Helsinki's biggest department store, Angry Birds toys, games, and other tie-ins are everywhere.
The company even opened its own shop, where devotees can cover almost every part of their bodies in Angry Birds themed clothing, knock back Angry Birds energy drinks, go fishing with Angry Birds hooks and moisturise with Angry Birds hand cream.
Over ten years, Rovio has gone from a three person startup to an international games corp, giving Finns an object lesson in how it's possible to turn a startup into a $200m revenue business. Of course, Finland has already had a tech company in the big leagues with Nokia, but Nokia hasn't been a startup for over a century, having started life as a paper manufacturing business in the late 19th century.
Often startup scenes spring up organically, as hard-up small businesses gather in cheap-rent areas not a million miles away from local universities, acting as a centre of gravity that pulls in more and more similar startups. Later, governments wake up to what's going on and may make some token effort to promote it, hitching their marketing wagon to a growth story that got moving without their intervention. Later still, the VCs catch wind of what's going on, bringing with them the desired funds.
In Finland, they did things differently.
In the late 2000s, the country was suffering from the same economic woes as many other developed countries and a reliance on dwindling industries, coupled with the decline of Nokia which for many years was the country's economic motor and at one point the source of one-quarter of its GDP.
And, like many other countries, it had a nascent startup scene, as ambitious graduates and thirtysomethings set to work trying to turn their fledgling businesses into the next software or web giants, or software engineers, having been let go in the intense restructuring that tech companies like Nokia underwent, looked around and saw the tumbleweeds drifting across the jobs market, and thought about going out on their own.
"In the early 2000s and mid-2000s, Nokia was the most respected company in the country. Many of the smartest university kids would rank Nokia together with McKinsey, Boston Consulting or an investment bank on top of their list," Helsinki-based angel investor Moaffak Ahmed told ZDNet.
"But then after 2008, the financial world wasn't interesting, consulting wasn't lucrative, and people also noticed that the big companies couldn't offer safety. The perceived risk of starting your own thing or joining a startup has dramatically diminished — something the smartest kids concluded several years ago."
Nokia wasn't the only company laying off staff during the crash, but as one of the biggest employers in the country, its impact was significant: Finnish headcount at the company reduced by a quarter between 2007 and 2011.
Nokia both deliberately and inadvertently helped foster the growth of the Helsinki startup scene. In the late 2000s, it was able to make workers redundant with a severance package worth having, giving them the wherewithal to start their own operation, and through Nokia Bridge, a scheme designed to finance departing employees' startups with seed capital of up to €25,000 per employee or €150,000 per startup.
While the best known Bridge alumnus is Jolla, the mobile startup expecting to launch its first MeeGo smartphone later this year, but there are many more. It's headquarters is even located in a former Nokia building, an echoey, airy space just outside Helsinki which used to house a Nokia R&D facility.
However, even as more and more Finns were looking to set up their startup, the VCs weren't coming to invest, and few foreign chequebooks ventured north to give the startups the leg up they needed. So the Finnish government decided to step in and do the job itself, and began spending hundreds of millions of euros to fill the funding gap - Tekes, the Finnish funding agency for technology and innovation, is one of the organisations charged with doing so.
"We have done dozens of spinoffs from Nokia — while they're cutting their own activities, we're getting their jewels... The teams start again with a new approach," Jukko Häyrynen, director of Tekes, said.
Tekes supports R&D in Finland by funding both companies and academic projects, and that has been financing a segment of Finland's startups it calls 'young innovative companies' (YIC) since late 2008.
Its budget isn't small: €550m for 2013, of which a significant slice - over €100m - goes into investing in the YICs, sometimes in return for equity, sometimes in the form of a grant.
There's up to €1m in funding for each startup, with the money distributed over a period of 18 months to two years when the startups hit milestones they set in accordance with Tekes. There are tens of companies going through the YIC programme at the moment, and of the 70 or so that have completed their stint, around half failed and are no longer in existence, and half have hit the milestones to earn the full €1m.
According to Häyrynen, Tekes is seeing a growing number of startups applying to be accepted as YICs (it sees 3,000 applications a year for funding as a whole), and expects the number of startups it takes on to double in the coming years.
Tekes has been working on getting the fledgling businesses it invests in to fine-tune their teams and work on getting their product ready to go global, and in the future hopes to work with even earlier stage companies.
Consequently, it will be offering its funding in a different way: More investments but in smaller amounts, up to €50,000, used to support promising teams and individuals, perhaps even those without a substantial idea for their company, just some good tech.
The idea behind the YIC side of Tekes' work is for teams to take their idea for a test drive in order to see as quickly as possible if it has commercial potential.
"The 'try quick, fail quick' approach is something we're trying to do... If it doesn't run, forget it. Let's not spend the money," Häyrynen said.
The ethos is demonstrated by Tekes Tempo project. Formerly focused on mobile apps but now broadened out to all industry sectors, Tempo funding is targeted at companies under two years old that can grow at warp speed, getting customers to road test the tech as it develops. "There we don't even expect the company to have a business plan, just an idea where we can believe 'let's try that, let's pivot around that and see what you can reach - see if there's any response from customers'. If there is, we'll do a little bit more."
The mantra that celebrates failure as a stop on the way to a startup's ultimate success is borrowed from Silicon Valley. A trend for going shoeless in startups may be a uniquely Finnish invention, however - it's common for startups both small and large, including Supercell, to leave their shoes at the office door. Enter a Finnish startup, and you're likely to see disguarded trainers aplenty - but why? Socked feet only in the office may be an attempt to keep the snow that clings to footwear during the country's harsh winter being tracked through the building, according to one theory, or just a sign of young workers treating their place of business as a second home.
Having a home that doubles as an office - being based out of someone's spare bedroom or garage - is a fairly common way for startups to start life. Coworking spaces, a staple of many European and US hubs that offer an easy way for young businesses to pick up networking opportunities along with their first office space, however are a relatively new arrival in Helsinki - a few have opened their doors this year, including ArticStartup and NewCo factory's MVO and Helsinki Think Company, joining the odd more established facility, such as those at Aalto University and Hub Helsinki.
Another of the initiatives set up by the Finnish government is the Vigo programme, a series of 10 startup accelerators, nine of which are tech-focused. Created in 2009 and funded by Tekes and Finnvera, Vigo provides both mentoring and cash to new businesses in a country where early stage funding remains scarce.
The job of the accelerators is get promising startups from idea stage to international A round stage in around 18 months to two years.
"It's a new type of fund, because of the time spent with the company," Seppo Ruotsalainen, programme executive at Profict Partners, the coordinating organisation for Vigo, said. "The accelerator managers can take an active, operative role in the company - they are more or less requested to do so."
Between them, the 10 accelerators have tens of startups under their wing. The best known of them is Supercell, the tablet gaming company that makes $2.5m a day and recently landed a $1.5bn investment from Japan's Softbank, but there are also clean-tech, health IT, enterprise software and consumer social companies in Vigo's portfolio.
Since its creation four years ago, the Vigo accelerators have funded startups to the tune of over €45m, a figure that's been more than matched by the private funding the companies have received. However, the number of exits remains in single figures.
Along with Vigo and Tekes, the Finnish government puts money into Finnvera, a financing body which, as well as offering funding mechanisms like loans for small businesses, also acts as a VC business.
With over 200 companies invested in over its seven-year history, Finnvera claims to be one of the most active VCs in the Nordic region.
While the organisation is more hands-off than some of its counterparts, it still takes an active interest in its prodigies, reserving the right to attend board meetings, finding business angels for the startups and so on. The organisation was created to address an "unmet need in the market," according to Petri Laine, Finnvera's director.
"After the [dot-com] bubble, the venture capital more or less dried out or in a number of places was cut drastically," said Laine. "The fund was established first with a small amount, less than $20m, to test if there was a genuine demand and supply of good cases. As that has been proven to be the case, the fund has gradually increased to €235m, and will increase at the end of next year to €250m. Then we believe we have a self sustaining fund. We will invest proceeds from exits back into businesses."
It invests in tech companies of all stripes, from B2B IT to clean tech to life sciences, investing between 10 and 25 percent of the company's value in equity and convertible bonds. Those they invest in are evenly split between those with no revenue, those in customer pilots with revenues in the tens of thousands of euros, and more mature, but still new, businesses in the region of €1m to €2m.
"In my view, largeish series A or B funding is much easier than a few years ago. The international VC community is far more aware of Helsinki than before. However, early stage funding - smaller rounds of €100,000 to €1m - is still very hard. There are also far too few angel investments," Markus Pasula, CEO of gaming startup Grand Cru, whose first title is due out this year, told ZDNet.
Grand Cru is in a position to know, having received $2m in seed funding in 2012, and $11m in VC funding earlier this year. It was "a lot of fun and a lot of hard work," according to Pasula. "We were very lucky to have a network of connected and experienced existing investors as well as personal friends and contacts that proved to be very helpful. Thanks to the success of Supercell there were and still is a lot of interest in gaming companies that was very helpful for us."
Early stage funding, whether it be from government or private sources, has added importance in Finland, as crowdfunding - one important source of investment for pre-revenue startups without a traditional pedigree - has struggled to take off in the country.
Last year, Senja Larsen, used international crowdfunding site Kickstarter to begin raising funds for a book, Senja Teaches you Swedish. Due to the wording used by Kickstarter, Finland's National Police Board determined that the project was in violation of the country's money collecting legislation prompting Larsen to return the funds to her backers.
While a handful of crowdfunding initiatives have begun operations in Finland, crowdfunding is far from the norm, meaning seed funding falls to either the sparse private sector VCs or the government-funded organisations.
However, there are those that are wary of Finland's culture of government support for startups, saying that it cossets the startups too much from the realities of startup life.
Steve Blank, lecturer at the Haas School of Business at the University of California Berkeley wrote in a blog after a 2011 visit to Helsinki to meet startups that the country's "government safety net [is] verging on the ultimate nanny state - makes it impossible to fail. You find early stage employees expecting to work normal hours, to get paid a regular salary, and not asking or expecting equity. There isn't much of a killer instinct among the masses". There are also regular complaints that the funding mechanisms involve far too much bureaucracy, though it's a problem
According to Petra Soderling, the co-founder of Mobile Brain Bank - an app development brokering service that brings businesses in the US together with mainly Finnish app developers - Finland has historically focused too much on startups technology, and not enough on the business-building work that goes alongside it.
"If their R&D money was really well spent, there would be investors coming into Finland and investing in these wonderful companies. In my opinion, Finland is only now waking up to the idea that in addition to R&D, they have to fund sales and marketing. They are doing that now, but there were a number of years when Finland was really focused on R&D and technical development and less focused on business development and sales and marketing. It's changing now," she said.
One organisation hoping to help statups tackle the business end of a growing a company is StartUp Sauna, a non-profit supported by the likes of Federation of Finnish Technology Industries, Finnish innovation fund Sitra, Tekes, and Aalto University, whose campus it's situated on.
"There is not much investment, there's no people taking risks, that's basically the problem through the [Northern Europe] region - the startups are very good in what they're doing, like the product itself, but still they lack the skills on how to go to market, the product-market fit - these are very business-orientated and basic problems," Juuso Koskinen, Startup Sauna's head of operations, said.
Startup Sauna has its own accelerator program, which it runs twice yearly over five weeks. Those startups accepted onto the programme are given a hand with coping with realities of business - from working out how to monetise a product to how to deliver a killer pitch - from those with experience of startup life behind them.
The pool of business coaches is drawn from serial entrepreneurs, investors, and others. The only criteria for getting involved is that they must have practical experience in business. "We don't take people who have learnt just from books," Koskinen said.
Since the programme was established in 2010, companies included in the accelerator have covered a broad spectrum of tech - from mobile app makers to a startup working on underwater sonar for use in the construction industry.
Like Vigo and Tekes, Startup Sauna reports an uptick in the number of fledgling businesses wanting to join its program though it says this could both be down to growing awareness of its activities as well as expansion of the local startup scene.
Yet, for all the government funding available to Finnish companies, all in the country's startup scene are keen to see the amount of outside investment rise, and Startup Sauna runs the high-profile Slush, the six-year-old startup conference held at the beginning of the Finnish winter and named after the melting snow common on the streets at the time of year.
At the first Slush in 2008, the number of participants was a few hundred, and this year topped 5,000 including investors, companies, and Finland's prime minister Jyrki Katainen. The aim of the two-day event is to get a critical mass of investors together in the region, according to Koskinen.
(Finland is now hoping to further bolster its credentials as a gaming centre in an effort to keep those VCs coming - Ahmed estimates there are a few hundred games companies in Finland today, from well-known Helsinki-based outfits such as Supercell to two-person startups based out of attics in Lapland. Tekes has set up a €70m fund dedicated to the gaming and entertainment industry, while Aalto University has added a gaming strand to its executive education programme, training up tomorrow's gaming chiefs.)
Slush is a microcosm of the Helsinki startup scene: the event has grown at speed, but is still outpaced by the growth in the number of startups themselves. The venue feels like it's struggling to contain the number of would-be entrepreneurs and networkers the city has spawned. There's no doubt of its Finnish roots however: the conference venue came with its own sauna - for older Finns, a place where business was traditionally done and deals were struck.
The perception among those on the ground is that those VCs are turning their attention to Finland, trying to find the next Supercell or Rovio, and that there is at least more interest, if not quite a huge wave of investments that startups and their government backers would hope for.
"They are in daily dialogue with the top tier VCs," Häyrynen said of the Vigo accelerators, "and we are accelerating that effort by having a dialogue with the VCs - we want to hear what they are looking for, and we can say, here's one potential that's coming up. It's in the soil, but it will bloom quickly."
There are also broader efforts to encourage external investment and VC money into the country. Tekes, for example, is seeking to bring in more VC money to the country with an initiative that will start next January to encourage private investors to get involved with early stage funds. Finland's government also brought in tax breaks earlier this year for angels investing between €10,000 and €150,000 in startups.
But for a startup scene's funding to truly take off, be it in Helsinki or otherwise, the country will need those involved in the first wave of big name startups to reinvest their cash back into the fledgling companies that have followed in its wake, rather than leaving it to the government-backed organisations to do the hard yards.
Those behind the public sector initiatives are acutely aware of the impact a government-sponsored startup push can have, both positive and negative. "We don't want to spoil the market, so we're balancing on a knife edge," said Tekes' Häyrynen.
It's a difficult balancing act - nurturing the startups but without cosseting them from the harsher side of business, mandating they're headquartered in Helsinki without inhibiting them from going global, putting money into the market without distorting it. "It's a thin line, we have to not to disturb the market too much - just enough, but not too much," Proflict Partners' Ruotsalainen added.
How long that difficult balancing act will continue isn't definite - the government is putting effort into courting private investors while the likes of the Tekes program come with an expiry date (2015, in that case).
For the government-backed organisations to succeed, they'll ultimately need to bring about their own demise, by fostering a startup scene that no longer needs public sector cash.
"That is our target," said Finnvera's Laine. "We do try to develop the market by fostering angel investment, building a good deal flow so private funds can operate here. We do see more foreign VC investing in Finnish companies which we are very happy about, so I hope in five years' time this type of activity won't be needed."