Students running one of the world’s biggest startup conferences in the depths of the Finnish winter seems an unlikely recipe for success, but the now-global phenomenon of tech and startup event Slush, to be held in December in Helsinki, reflects the country’s venturing spirit.
Finland is often considered a role model by EU peers in building a fully functional and balanced socio-economic system. It also has the lowest pay inequality on the continent, and one of the lowest child poverty rates, alongside Nordic neighbours Denmark, Sweden and Norway.
More recently it has grown to be one of Europe’s most prominent venture markets. Last year, Finnish startups raised a record €349m ($406m) in venture capital funding, up from €318m in 2017, according to the Finnish Venture Capital Association (FVCA). FVCA figures also revealed that between 2013 and 2017, Finland was, on average, the country that attracted the most venture funding in Europe proportionate to its gross domestic product (GDP).
Finnish VC firms raised a record €169m of new funds last year, while venture rounds – traditionally focused on seed to series A stages – shifted slightly towards larger stakes. Finnish startups benefited from eight of the 23 €10m-plus rounds raised last year, according to the FVCA.
In a statement accompanying the figures’ release, Pia Santavirta, managing director at the FVCA, said: “The amount of work put into developing the Finnish startup ecosystem by different supporting stakeholders is unimaginable. It is humbling to see that persistent long-term efforts are working in our favour and bringing results, and that Finnish top-tier know-how attracts VC funding.”
Corporate activity
According to GCV Analytics data, last year Finland ranked 28th globally for total corporate-backed funding raised, at $83m, while it was 20th for investment voume, with nine deals.
Such rankings gain perpective when considering the size of the Finnish economy, currently around $252bn. A fairer comparison could be drawn with its Nordic neighbours. In the first half of this year, the country closed nearly as many deals as its Swedish neighbour – whose GDP is twice the size – with six and eight deals respectively. Finland topped the list in terms of total deal value, raising $122m in the first half compared with Sweden’s $106m.
Corporate venturing activity has been fairly steady in Finland for the past four years, with nine deals in 2014, 2016 and 2017, and seven in 2015. The number may rise this year – six deals had already been closed in the first half.
Healthcare and industrials have dominated the market over the past three years, with industrials ranking first in 2016 and 2017, both years featuring three deals. This year there is a more even distribution – one deal in each of the consumer, industrial, healthcare and IT sectors, and two in services.
Corporate funding remains limited relative to the total amount raised by Finnish startups. Last year, this amounted to roughly €71m out of the total €349m – barely a fifth.
Tom Whitehouse, chairman of London Environmental Investment Forum and a contributing editor at GCV, presented a report on CVC activity in Finland at last year’s Slush event. He found that between 2011 and the third quarter of 2017, the most active corporate investors included freight carrier Finnair Cargo, financial company OP Financial Group, investment services group Privanet and car manufacturer Valmet Automotive. All closed one deal over the period.
More active were Fortum, Finland’s largest energy provider, which made two investments, and Nokia’s data networking and telecoms equipment subsidiary Nokia Networks, focusing on multinational data networking, which sealed four deals. Sanoma Ventures, the venturing unit of media group Sanoma, launched in 2012 and dissolved in 2016, invested in at least seven startups during its existence.
But the most active corporate investor by far is global telecoms company Nokia, with 83 deals recorded by GCV from 2011 to date. In 2005, the corporate launched investment arm Nokia Growth Partners, which rebranded as NGP Capital last year. Walter Masalin, partner at NGP Capital, insisted that NGP should not be considered Nokia’s venturing unit. He said: “From the beginning, NGP was founded as an independent financial VC fund with Nokia as its sole limited partner. It combines the financial discipline of an independent investor with the value-add of a close corporate connection. In a way, NGP could be described either as a special structure within the CVC space, or as a special version of a classical financial VC. While we have a collaborative relationship with Nokia and focus on investment areas that are relevant to it, we always approach deals with a financial investor’s mindset.”
NGP has $1bn of assets under management, according to Masalin. Some of its landmark portfolio companies include London-based food delivery platform Deliveroo, Chinese electronics manufacturer Xiaomi and Berlin-based language learning app Babbel. Last year, alongside debt provider Kreos Capital, the firm completed the $1.3bn sale of optical packaging and micro-optics specialist Heptagon to Austrian sensor solutions manufacturer AMS – one of the largest European exits in the sector.
This year energy provider Fortum set up a strategy and ventures team headed by Anne Jalkala, vice-president for startup and fund investments. It is understood the company is preparing to launch its own corporate venturing fund, with plans to “take its investment activity up to new levels”, according to Jalkala. She said: “Corporate venturing is a key building block in the innovation toolkit of a modern company. We are adopting a best-practice approach by building an experienced investment team and an independent venture fund structure, which will focus on future mobility, solar technology and biotech.”
Other Finnish corporates that have jumped on the innovation bandwagon include pulp and paper manufacturer Stora Enso, through its private equity and VC arm Stora Enso Ventures, and lifting equipment and cranes specialist Kone-cranes, which earlier this year launched Konecranes Reach Program, calling on startups to pitch their technologies to the company. In 2012, Helsinki-based software development and design group Reaktor launched strategic investment arm Reaktor Ventures.
A company that has made significant contributions to the venture space is Wärtsilä, which manufactures power sources and other equipment for the marine and energy markets. With a view to boosting smart technology in its field, the corporate recently put launched its “tiered venturing model” consisting of five initiatives – investing in accelerators and incubators focused on the marine and energy sectors, launching the Wärtsilä SparkUp Challenge at Slush to enhance collaboration between startups and universities, establishing strategic partnerships with startups and small businesses, forming joint ventures with corporate partners, and engaging in traditional M&A activities.
As part of its strategy, Wärtsilä last year established a joint venture with China State Shipbuilding Corporation. The company also heads two digital accelerators in Helsinki and Singapore, and earlier this year sealed a partnership with TheDock Innovation Hub, an Israel-based maritime-focused accelerator. Steffen Knodt, digital ventures director at Wärtsilä, recently said: “Corporate venturing and working with accelerators like TheDock are vital forms of collaboration in seeking new growth paths in industries that are profoundly impacted by digitisation. Agile exploration of new technologies and business models with startups is crucial.”
Rise of foreign investment
Even though momentum is building in certain sectors, most Finnish corporates seem to be venture-shy, with a lack of locally-sourced funding characterising the country’s CVC activity. This reticence applies to the entire venture space – of the total €349m of VC funding raised by Finnish startups last year, €208m reportedly came from abroad.
Whitehouse’s report reveals that eight of the nine CVC deals closed in 2016 were funded by foreign investors. Last year, all deals were closed with foreign investment. Analysis of the top corporate investors in Finland since 2011 shows only three of 16 corporates closing at least two deals in the country were Finnish. These were Sanoma Ventures, Nokia and Faurecia Ventures, investment arm of automotive supplier Faurecia. Of the total 16, six were from the US, three from the Asia-Pacific region, two from Canada and the rest from Europe.
Chinese investors in particular have shown strong interest in the Finnish market, including internet groups Alibaba, Baidu and Tencent.
Following a visit to Helsinki in 2013, Alibaba’s chief technology officer Jeff Zhang said: “I always thought Silicon Valley was the epicentre of global innovation. After Slush 2013, I changed my mind.”
Last year, Alibaba led a $27m round for database startup MariaDB – its most notable investment abroad till then. Through its cloud computing subsidiary Alibaba Cloud, the corporate also formed an alliance with Finnish development and operations services provider Eficode to set up a joint innovation centre in Helsinki, aiming to boost collaboration between Nordic and Chinese tech companies.
In 2014, Tencent and the International Game Developers Association co-organised an gaming industry event at Slush addressed by Tencent’s vice-president of business development Dan Brody. The company has made significant local investments too, acquiring majority control of Finland-based games group Supercell from SoftBank.
Search engine provider Google continues to grow its datacentre presence in Finland, while telecoms equipment specialist Huawei is expanding its research and development activities around camera, audio and imaging technologies.
Linking Beijing and Helsinki, the Sino Track accelerator program, run by Chinese business accelerator Comb-plus, has helped around 20 Nordic startups expand into China since 2016. A Sino Track Goes Slush event at Slush also aims to help local companies find the right network and support to export to China.
According to Helsinki Business Hub, a regional development agency for the Finnish capital region, the China-Finland Golden Bridge initiative launched in 2011 by the government has brought at least €120m of Chinese investments to Finland. Major deals included the acquisition of an 84% stake in Supercell by Tencent for €8bn, the purchase of silicon wafers maker Okmetic by National Semiconductor Industry Group for €170m, and that of automotive user interface software Rightware by smart device platform technology provider Thundersoft.
In a recent interview with tech website Computer Weekly, Jari Gustafsson, Finland’s permanent secretary of the Ministry of Economic Affairs, said: “For the Chinese, Finland is interesting due to its potential as a product development centre based on its high level of skills and innovativeness, as well as on its geographical position as a gateway to European markets.”
Such partnerships help Finland extend the outreach of a relatively small domestic market, but while their overall economic impact may be positive, they could also be seen as a potential impediment to the growth of the local corporate investor base. Jukka Jokinen, senior venture adviser at Helsinki Business Hub, said: “The government is still heavily involved in the ecosystem’s development in Finland. I guess what we would need is an economy that is more market-based, but for that we also need more market players – meaning more international investors, and also more Finnish CVC units. Many of the investments currently made by Finnish corporates are off balance sheets rather than through dedicated venture arms.”
For Jokinen, it is not the lack of means that prevents Finnish corporates from getting involved in venture, but rather their hesitant attitude. He said: “An underlying issue is that Finland is still slightly conservative towards the very concept of CVC, with some industries operating in a relatively traditional manner. Companies should be more proactive, bolder, but I get the feeling they are in no rush to get involved. For them, there is no sense of urgency or pressure of going to market, as they are doing well either way.
“In fact, their balance sheets are stronger than ever and many of them definitely have a lot of excess capital to invest, particularly in the engineering, energy or IT spaces. But the problem is that they generally lack the necessary knowledge to engage in this activity. Even for the ones who do get involved, there is too often a lack of clear strategy and of persistence.”
Jokinen believes Finnish corporates still need to be educated in the concept and practice of CVC. The Finnish government has been proactive in that respect in recent years.
Government
For over a decade, the Finnish state has been striving to push the country’s venture activity at national level and beyond. As a starting point, in 2008, the Ministry of Economic Affairs and Employment rolled out its Innovation Strategy plan, presenting it as a project aiming to “create an environment that encourages enterprises to engage in bold innovation, renewal and international growth, relying on education and skills as their foundation”. This strategy remains at the core of Finland’s innovation policy, coordinated by the Finnish Research and Innovation Council, an advisory body chaired by the prime minister.
Finland’s tax system is relatively business-friendly. Corporate income tax is 20%, personal income tax between 30% and 34%. Companies engaged in R&D activities can offset costs against tax.
A Science, Technology and Industry Outlook report published by the Organisation for Economic Co-operation and Development (OECD) in 2010 found that since 2000, gross expenditure on R&D in Finland had increased consistently to reach 3.7% of GDP in 2008, while business expenditure on R&D was above average during those years and peaked at 2.8% of GDP in 2008. The report concluded: “Finland’s innovation investment and performance are among the strongest in the OECD area, with venture capital intensity above average and the government’s R&D budget being large.”
In many ways, the government’s consistent investments in R&D and innovation have started to pay off. Erkki Aaltonen, director of venture investments at the agricultural products and chemicals supplying company Yara International, for which he oversees the foodtech and agritech-focused venture arm YaraGerminate, said: “There is some very good support coming from the government. For new technologies in particular, companies can benefit from R&D grants and loans that can cover up to 70% of R&D costs.”
The state has also launched a fund-of-funds initiative which, according to Aaltonen, has boosted the creation of small and micro-funds of €5m to €10m. “This has had a very positive impact on seed and early-stage funding,” said Aaltonen. “There have been numerous good initiatives over the past 15 years, and even more so over the past five. Finland typically ranks among the top three or five countries in terms of R&D funding in Europe. The government has been investing in many deep-tech projects developed by state-owned research centres and universities, which has helped shape a solid research basis. When you invest big amounts into these things, you usually get some good results.”
Different organs, different goals
Government help in Finland is distributed via several vehicles, the main one being Business Finland, the Finnish funding agency for technology and innovation previously known as Tekes (Finnish Technology Agency) under the auspices of the Ministry of Economic Affairs and Employment.
Business Finland was a result of the merger of Tekes and Finnish trade promotion organisation Finpro earlier this year. Tekes was founded in 1983 as the country’s largest publicly-funded organisation for R&D and innovation funding, focused primarily on early-stage companies. Finpro’s role was to help Finnish small-to-medium enterprises (SMEs) export, and to promote foreign investment in Finland. Finnvera, the state’s official credit export agency and financing services provider for SMEs, also became part of the new entity.
According to Business Finland’s CEO Pekka Soini, the main motive behind the merger was to boost collaboration among research institutes, universities and companies. The entity describes its mission as twofold – enabling global growth for Finnish companies and creating a world-class and competitive business ecosystem in Finland.
A number of smaller entities exist under the Business Finland umbrella. Invest in Finland, for instance, is dedicated to promoting foreign investment in Finland. Business Finland Venture Capital is a fund of funds investing in early-stage VC funds. Growth Capital Program focuses on matching foreign investors – VCs, CVCs or industrials – with Finnish growth companies. Earlier this year, the organisation also launched the Finnish Startup Permit – a program through which non-EU entrepreneurs willing to establish a startup in Finland can apply for a residence permit.
Every year the organisation also organises a competition – Challenge Finland – which aims to encourage interactions between research institutions and the private sector. Last year, the initiative provided total funding of €47m to 33 R&D consortia.
Public-private collaboration has become a priority at Business Finland, which recently announced it would favour research projects run in association with private enterprises. Hanna Rantala, director of health and wellbeing programs at Business Finland, said: “We are trying to create an ecosystem where all actors can combine their efforts and skills to collaborate on key research areas that can benefit everyone, and to think of the best ways of doing business together in a globalised market.
“The fact that certain companies have started working with each other and developing joint projects has created new ways of doing business and opened up new opportunities for VC. We have done a lot of work in-house to promote those types of ecosystems. Now that we have reached a certain level of networking at national level, we are trying to build it up even more and to help our companies become more global.”
Aside from Business Finland, government venturing is carried out through Finnish Industry Investment, commonly known as Tesi, which invests in growth-stage companies either directly or through VC funds, operating as a minority owner within the VC and private equity spaces. Last year, this organisation made €149m of new investments, and helped its international partners invest €72m in Finnish companies.
Other noteworthy government institutions include VTT Ventures, investment arm of the state-owned VTT Technical Research Centre of Finland, focused primarily on university spinoffs engaged in commercialising VTT’s research results. VTT’s spinoffs are usually pre-seed, seed or early-stage tech companies. The group has completed 57 investments and 14 exits to date, according to data provider PitchBook.
The Finnish Innovation Fund, known as Sitra, is an evergreen fund whose operations are funded by returns from an endowment currently valued at €771m and originally granted by the Finnish parliament. The fund functions both as a think-thank and as an investment company, producing research, events and training centred on three core topics – capacity for renewal, carbon-neutral circular economy, and sustainable economy. Sitra is not directly state-funded and is not answerable to the government.
The Academy of Finland is a funding body for scientific research forming part of the Ministry of Education, Science and Culture. Its research funding is currently €444m. There are also small-scale funding initiatives at regional level.
“The government has been very active in supporting the ecosystem,” said Jalkala. “But innovation is not a one-man job – it requires the participation and involvement of all parties. In that sense, the strong role it has played in the education sector has been key. By supporting high-quality research and universities, it has contributed to producing and educating top talent that will make the entrepreneurs of tomorrow.”
Universities
In Finland perhaps more than in other countries, the role of universities within the venture ecosystem seems fundamental. Finland is home to a well-educated population. With 10 multidisciplinary and six specialised universities, the country was ranked sixth out of 46 by the OECD for the level of tertiary education attainment among 46 to 55-year-olds (38.5%), and 10th for 25 to 64-year-olds (44.3%) in 2017.
In a 2008 interview with Finnish technology online forum Hightech Finland, Esko Aho, prime minister between 1991 and 1995 and a former head of Sitra, said: “Finland’s excellent record in education cannot be emphasised enough as a fundamental factor in Finland’s competitiveness and technological excellence.” Ten years on, this statement is still valid.
Many innovation initiatives can be attributed to university students. One of the most important is Slush, which has become a landmark event for the startup and VC community worldwide. Dubbed the “true embodiment of Europe 2020” by the Wall Street Journal, Slush describes itself as a student-driven non-profit movement originally founded to change attitudes toward entrepreneurship. Over the past 10 years, the event has grown from a 300-person gathering to a global community, with 75 events and an estimated 40,000 attendees globally.
Slush has been exported to Shanghai, Tokyo and Singapore, with “each city and each community adding its own local flavour to the global network”, according to its organisers. Fortum’s Jalkala said: “Slush is a great example of the type of startup activity that has been developed by students in Finland. It is one of the largest events of its kind worldwide and has benefited us in many ways as a great platform to meet new startups and co-investors. It really shows how students, companies and government can work together to pull off something truly valuable for the ecosystem.”
Another student initiative is the Helsinki Challenge – a science competition in which teams from 10 Finnish universities develop projects in line with the UN’s sustainable development goals. Last year, the competition was hosted by University of Helsinki. Jalkala added: “I have seen a major rise in popularity of entrepreneurial spirit and culture take place over the past 10 years. The mindset towards entrepreneurship has radically changed and it is now seen as a proper career path. A real trend has shaped up, with millennials and digital natives being eager to join or form a startup, having been inspired by some national success stories. Conditions for entrepreneurship are very favourable in Finland, and I have very high hopes for the future.”
Tech transfer
A key change for university venturing came in 2009 when the government introduced the Universities Act, modifying the legal status of universities and enabling them to make financial commitments, own property and do business. Universities also benefit from funding provided by a Business Finland branch, New Business from Research Ideas Funding. The funding aims mainly to help projects prepare for commercialisation. Business Finland can fund up to 70% of the project’s costs.
While most universities in Finland have some form of innovation or venture activity, two stand out – University of Helsinki and Aalto University, respectively ranked first and second by Times Higher Education this year.
University of Helsinki is home to Helsinki Innovation Services (HIS), a tech transfer office that, in the words of its CEO, Jari Strandman, is “very similar to Oxford University Innovation [University of Oxford’s tech transfer office]”. The unit’s primary role is to evaluate research ideas and match them with researchers who can develop them to commercialisation. “We essentially need to prove the case in a commercial setting,” said Strandman. “We prepare it from the laboratories all the way to market stage, so that it is easier to present to investors and entrepreneurs. After the commercialisation process, which is still at university-level, we spin the project out if we think it could be a promising company.”
Strandman said the difficult task was finding the right entrepreneur, usually from outside the university. “Our typical company founders are entrepreneurs who already have some experience under their belt, having perhaps founded a startup or two before,” he said. This is perhaps the main trait that distinguishes HIS from Aalto University’s tech office Aalto Innovation Services (AIS). While HIS works mostly with experienced researchers and entrepreneurs, AIS is more focused on student innovation and development.
HIS, focusing mainly on life sciences, pharmaceuticals and medical devices, typically supports around 20 projects at a time, providing funding of €300,000 to €1m each. A separate entity, the University of Helsinki Funds, occasionally offers additional grants to students and researchers.
At Aalto University, AIS is responsible for the management of inventions, intellectual property and tech transfer. It has previously supported companies such as satellite data interpretation tools maker Iceye, which recently raised €13m in VC funding, and surgical drills and tools specialist Surgify Medical, which raised €1.2m.
Aalto also pushes venture in other ways. The Aalto Ventures Program, for instance, is an in-house service helping teaching staff and faculties integrate entrepreneurial elements into educational programs. Another landmark entity at Aalto is the startup hub Startup Sauna. It began as a one-week bootcamp in 2010, and has developed into an accelerator connecting university-born startups with entrepreneurs, investors and industry experts.
A total of 240 startups – 150 of which are still active – from 27 countries have been incubated by Startup Sauna, having collectively raised €240m of VC funding. Earlier this year, Startup Sauna dropped its accelerator activities, limiting its role to co-working space for startups and hosting student societies, events or hackathons. During the summer, it is home to 10-week incubation program Kiuas Accelerator.
Sini Liu, director of community at Startup Sauna and a former Aalto student herself, is proud that the organisation is entirely student-led and created. “The warehouse in which we operate is owned by the university, which covers all costs, but it is students who have turned it into a startup hub, and who to this day run it from bottom to top,” she said
Announcing the closure of its accelerator, Startup Sauna said: “After 16 batches, it is time to hang up the towels and let the wood burn out one last time. Back in the day, we launched Startup Sauna to fix a problem. There were not many domestic investors in our region and the region did not appear on the radar screen of international VCs. The ambition and talent has always been evident but funding was broken, which was holding back the rest of the ecosystem.
“Looking back on our journey, our region is now clearly one of the globally recognised startup hotspots. There are more funds available than ever before – both domestic and international. The region is nurturing new unicorns [companies worth at least $1bn] and we are seeing more IPOs and exits. Thanks to all our startups, coaches and partners, we can proudly conclude that the original mission of Startup Sauna has been accomplished.”
Maybe the Startup Sauna folks were right, and universities really are the keystone of Finland’s flourishing VC market. Yet a key piece of the puzzle is still missing. HIS’s Strandman said: “Corporate funding is a source of funding we have not quite tapped into yet – not because we do not want to. Such collaborations would bring great opportunities and partnerships to our spinoffs. The reason is more that, to my knowledge, corporate investment in spinoffs is close to non-existent in Finland. There may be a couple sources, but they most certainly do not get involved in the early stages of development that we deal with.”
Why are corporates so late to the VC party in Finland, and how can this be changed? Jalkala and Jokinen came up with some answers.
“I believe our market has some strong features that have been overlooked,” said Jokinen. “We have a very transparent ecosystem, in which the government and public sector are heavily involved, but where the resources they provide can be leveraged to create quality businesses, and where you have a large pool of talented and educated people available.
“We have some strongholds and key assets to create a fully-fledged ecosystem, but CVC units need to understand how to use these local strengths to their advantage, and how to attract more talent to the country, rather than invest abroad.”
Jalkala added: “There are not many corporates involved in CVC in Finland yet, but I believe there is growing interest as companies start to understand how essential this is for them in order to remain competitive. Many corporations are awakening to the fact that startups develop and commercialise new technologies faster than them, and that they need to engage with them in a more systematic way.
“But all of this requires more definite and enduring commitments from top management. They need to establish clear strategies and to allocate appropriate resources, in addition to adopting a longer-term perspective. Venture requires patience. Traditional industries such as energy, industrials or forestry, also need to wake up to this.”
At a time when international investors are showing more interest in Finland, will local corporates step up to the challenge and gain their domestic market back? Perhaps the Finns’ legendary “sisu”, a famously untranslatable Finnish term referring to an unshakeable determination and resilience in the face of hardship, will help them through.