“The question of how well the EU succeeds in [its] economic and innovation policy will be a decisive factor in Finland’s future success, and Finland must therefore be an active participant and actor in the development and targeting of the EU’s research and innovation policy. By leveraging the opportunities provided by the EU’s innovation policy, we will strengthen and diversify Finnish innovation activities while promoting Europe’s development into a leading knowledge-based economy.”
This quote from Finland’s 2009 National Innovation Strategy to its Ministry of Employment and the Economy (MEE) sums up the reality for a small country in northern Europe – there is only so much a government can do if the wider economy and important trading partners are going in the opposite direction.
But while Finland has been hampered by the recession following the onset of the credit crunch just as it set out its 2009 strategy, as well as a downturn in fortunes for its largest corporation, phone maker Nokia, its innovation policy has remained in place even after two changes of prime minister.
And the resignation of its last prime minister, Jyrki Katainen, in June, is one of the more promising signs for both the country and the EU. The following month, Katainen was elected European Commissioner for economic and monetary affairs and the euro, and in November he became vice-president for jobs, growth, investment and competitiveness at the European Commission (EC) under new president Jean-Claude Juncker.
Katainen had spent the summer preparing Juncker’s plan to invest more than €300bn ($375bn) in infrastructure among members states through leveraging private money with the €21bn European Fund for Strategic Investment (Efsi) announced in December.
Questions remain over how Efsi will find and fund projects, let alone unlock the at-least 15-times leverage it is looking for. However, Efsi remains just one part of the EC’s Horizon 2020 innovation programme to invest in the “knowledge-based economy”.
Finland’s thoughtful approach to refining and building on innovation policies stretching back decades is justifiably well regarded by international peers. Having highly-placed nationals inside the EC has the potential to improve the overall outlook for the EU, in turn feeding back positively to Finland. The country has also been following its 2009 strategy of building links beyond Europe. That strategy stated: “Finland has actively sought partnerships with the world’s leading centres of innovation. Bilateral co-operation with countries outside Europe will be increased, particularly with countries boasting leading technological advances and emerging economies, such as China and India.”
Finland now has “international innovation co-operation” outside Europe with Russia, India, Japan, China, South Korea and the US.
In the shorter term, however, Finland has been grappling with a shrinking economy and the travails of Nokia, which once made up 4% of its gross domestic product at the start of the 2000s, but lost market share and revenues to the Android and Apple smartphones from 2007.
While Nokia’s decline has been a blow as a source of high-paying jobs, the company’s Bridge programme to fund employees €20,000 to leave and set up a business has helped spawn a wave of startups, something government policy had been trying to achieve for years. An international evaluation of its 2009 National Innovation Strategy had identified the relative lack of entrepreneurs coming from established companies and low status for entrepreneurship as important factors. Nokia was regarded by some employees as a job for life, not helped by a tax policy discouraging entrepreneurialism. The evaluation’s review by Gordon Murray, Ari Hyytinen and Markku Maula in the growth entrepreneurship and finance section said tax policy should “explicitly recognise the incentives needed for talented persons to consider an entrepreneurial career choice as well as for potential high-growth entrepreneurial firms to pursue international expansion”.
By late 2013, Nokia claimed more than 1,000 startups had used its Bridge programme, 400 based in Finland.
But two of the best-funded startups since Nokia’s decline, game makers Rovio and Supercell, of which the latter sold a 51% stake for $1.5bn to Japan-based conglomerates SoftBank and GungHo, have no immediate Nokia roots.
Still, Ilkka Paananen, Supercell CEO, in his blog at the time made clear the impact Nokia had had. “It may sound like a detail, but I should also mention that the company that will end up owning 51% of Supercell is incorporated in Finland. This is both exciting and important for me personally. Although our aspirations are global, our roots and future are very much in Finland. Our operations remain in Finland, our management team remains in Finland and in San Francisco, and we continue to pay taxes in Finland. I think more and more people in this country are realising that there is life after Nokia.”
Given that innovation policies, particularly in venture capital, need 10 to 20 years to be evaluated, such rapid changes risk increasing the noise-to-signal ratio and making it harder to judge what is important.
As Reinhilde Veugelers, a professor at Belgium-based University of Leuven and chairman of Finland’s 2009 international evaluation after previously advising the EC on its policies, said: “It is quite possible that Finland currently has one of the best national innovation systems worldwide. Even that may not be enough in an era where the global operating environment is rapidly evolving and the whole concept of a national innovation system has rightly been questioned.
“Companies have been the primary object of the innovation policy but, as they become increasingly footloose and geographically dispersed, the focus may have to shift to nurturing and attracting creative individuals.”
Rather than being left to sit on a shelf gathering dust, the Finnish government seems to have embraced the questions the report posed. Through the MEE’s admirably clear website, hundreds of pages of data, reports and evaluations of the ministry’s main innovation agencies have been posted over the past five years.
Having stated why innovation and a national strategy matter in providing the resources to fund the country’s standard of living, the national plan said there were four options in attaining strategic goals:
- Innovation activity in a world without frontiers, which means participating and influencing global knowledge and value networks.
- Demand and user orientation, which encourages products to be determined by customers and citizens rather than decided from the top down.
- Innovative individuals and communities, through improving capabilities and incentives.
- A systemic approach of “structural renewal” rather than piece-by-piece change.
Taken together, and in light of Veugelers’ subsequent evaluation, Finland seems to have gone further than most countries in designing a strategy built around individuals and how they can work together.
Dan Breznitz, Mikko Ketokivi and Petri Rouvinen, in their 2009 study of demand and user-driven innovation, said they “urge direct public support for private innovative activity to be impartial as to the source, type and application domain of innovation”.
And that direction chimes with what Tuukka Toivonen, a lecturer in international management at University of London’s School of Oriental and African Studies, in an article in the Guardian, described as “an emerging culture of young entrepreneurship in Finland”.
He continued: “Startup Sauna, a co-working hub, and Slush, a startup conference now said to be the largest event of its kind in northern Europe, are new staples of the Finnish entrepreneurial scene. And thousands of young Finns are beginning to identify themselves as entrepreneurs. Finland is changing.”
Toivonen pointed to the creation of the Aalto Entrepreneurship Society, a student-run entity at Finland’s Aalto University, as a catalyst for change. Aalto, which also runs a highly-regarded centre for entrepreneurship, was formed in 2010 out of the merger of three of Helsinki’s academic centres covering technology, economics, and art and design. Through 2007’s New University Inventions Act, universities have the rights to inventions conceived within their domain.
Aalto’s creation, along with publicly-supported Vigo Accelerators, started in 2009, and funding for ideas by Tekes, the Finnish funding agency for technology and innovation, have concentrated efforts on the early stage.
Such systemic renewal through an economic downturn is impressive. In 2012, the Nordic Growth Entrepreneurship Review (NGER) summarised Finland as weak but having “improved the most in the area of entrepreneurial culture” and defining “the global frontier in the policy area of creation and diffusion of knowledge”.
The review added: “Arguably the most important change in entrepreneurship policy has gone almost unnoticed, even in Finland. With a major overhaul of its strategy a few years back [2004], Tekes shifted its emphasis towards new ventures. As a part of this process, it now has a keen interest in radical, disruptive and non-technical innovation as well as internationalisation. One manifestation of the new strategy is a programme for young innovative companies, which offers €1m [now up to €1.25m] per qualifying enterprise to support preliminary phases of international growth.”
Tekes fits within the MEE’s innovation agencies. The MEE’s budget for 2014 was €3.4bn, of which innovation funding accounted for €740m, the majority through Tekes, the VTT Technical Research Centre of Finland and promotion agency Finpro.
The development of high-growth businesses – sometimes called gazelles – that can support the country’s living standards has also been tackled by the state.
Together with five other public bodies, Tekes participates in and has operational responsibility for Finland’s Growth Track service, which aims to provide a “one-stop shop for companies seeking quick growth and internationalisation”, according to the NGER.
Finnish Industry Investment (FII) and Tekes will be the main state-backed investment vehicles for venture investing, with Finnvera “gradually” giving up venture capital investments “within the next few years”, according to its CEO, Pauli Heikkilä, in its interim financial report to September. Martin Backman took over president and CEO of FII in September.
The NGER’s third highlight from its survey of Finland said: “Finnish gazelles are few in number [92 at the time] but grow faster and become larger than their Nordic peers.”
Given its Nordic peers – Norway, Sweden and Denmark – are some of the most renowned entrepreneurial nations, this is good company to be keeping and the strategy one that others will want to emulate.
Investments
According to local trade body the Finnish Venture Capital Association, the industry overall saw some 20 initial investments in later-stage companies in the first six months of 2014, with 22 investments made in Finnish early-stage enterprises.
Compared with peer countries, Finnish investment is less than half in venture and only two-thirds in the growth stage, with relatively few initial public offerings, according to an evaluation by the local ministry in 2013.
Finland was seen as having a relatively functioning later-stage private equity market, which made up €4.7bn under management of the total €5.7bn market. Of this, state-backed FII had committed €200m to private equity. It had also committed €400m of the total €1bn in venture. The ministry said there was a gap in €1m to €5m venture round sizes.
According to local trade body the Finnish Venture Capital Association, the industry overall saw some 20 initial investments in later-stage companies in the first six months of 2014, with 22 investments made in Finnish early-stage enterprises. International investors were involved in roughly half of the larger investment rounds of more than €1m.
Funds
In June 2013, the government approved a “Team Finland” network to promote its external economic relations for growing companies made up of Tekes, Finnvera and promotion agency Finpro.
Finnvera
Finnvera, founded in 1999 after the merger of Kera and the Finnish Guarantee Board, is a specialised financing company that provides clients with loans, guarantees, venture capital investments and export credit guarantees. Finnvera has official export credit agency status and its 2012 ministerial evaluation identified its goals as targeting the year 2020.
Direct investment
Finnvera Venture Capital, which backed Traplight Games in October, has 99 companies in its portfolio.
Fund investment
Founded in 2003, Veraventure makes capital investments in regional funds organised as limited companies with €37.7m by 2011. The programme runs until 2017. Seed Fund Vera, founded in late 2005, makes capital investments in innovative enterprises at the early stage and had €77.8m by 2011. Finnvera owns 93% of Seed Fund Vera with state-owned fund Sitra, the Finnish Association of Graduate Engineers TEK, Ilmarinen Mutual Pension Insurance, Elo Mutual Pension Insurance and Fennia Mutual Insurance the remainder. In February 2008, Finnvera launched a service intended for private investors – business angels. Finnvera sold its 63.5% stake in Matkailunkehitys Nordia in January 2014 to private investors – Sitra retained its 36.5% share. Founded in 1989 for tourism-related ventures, Matkailunkehitys had invested €3.3m by 2011.
FII
FII is a government-owned investment company that invests in venture capital funds and directly in growth companies, together with private co-investors.
FII said it had €907m of assets under management at the end of June, having committed to 90 funds, up from 87 in 2009, and invested in 70 growth companies. After the financial crisis, FII’s cumulative investments exceeded returns by €260m. Its interim report for the first six months of last year said its financial position nevertheless continued to be stable after the government approved an increase of €100m in the company’s share capital, for use in an investment programme promoting industrial renewal among more mature companies.
In 2013, FII portfolio companies’ net sales grew by 3%, outpacing growth in gross domestic product. The number of jobs in portfolio companies in Finland also rose by about 3%, whereas the number of people in employment generally declined in the same period by 1%.
According to a 2013 evaluation by its governing ministry, FII had €569m in assets, up from €266m in 2002, two-thirds co-invested or through 69 funds. The evaluation said FII had shifted over the previous decade since the 2002 Murray report to later-stage private equity due to 2009’s €100m stabilisation programme and launching its fund of funds, FoF Growth.
Direct investments had also increased, both through FII’s €20m Start Fund and in other companies, with, in total, €124m directly in 76 companies by the 2013 evaluation. Historically, FII had invested in more but Start Fund was trimmed from 82 to 32.
Over the five-year period 2008-12, FII invested close to €100m a year on average but returns were less than half that, at €42m a year. In this period it made 90 direct investments at an average of €1.8m, half as follow-ons, and committed €266m to 25 funds, with an average 10% of each fund that raised collectively €2.8bn. FII committed €155m to 17 foreign funds that collectively raised €8.8bn and invested in 21 Finnish companies.
In its autumn 2013 evaluation, the ministry said: “Finland’s weak point is lack of a functioning venture capital (VC) market and ecosystem especially in later-stage VC in terms of quality and investment volumes. The key bottlenecks are lack of commercialisation know-how, small investment sizes, large share of public sector and also qualitative in nature.
“Overall, FII has had a positive impact. FII should refocus direct investments. FII initiatives should be temporary and focused on the bottlenecks – later-stage VC.”
The evaluation added that the public had a “high” share of Finnish VC, with eight of recent funds at that time having on average 30% of their commitments from both FII and its FoF Growth, and “exceptionally high” indirect investment.
Given its importance, the ministry said FII was effectively too passive in funds and direct investment but could be more active after posting similar results in both direct and indirect investing.
Fund investment
FII has sold or terminated 31 funds. Including the investments made by FoF Growth II, FII committed €25m to four funds in the first half of 2014. International commitments last year included Sweden-based Verdane Capital VIII, $9.4m to UK-based Balderton Capital V’s $305m fund, and €3m to UK-based DN Capital’s Global Venture Capital III’s €80m fund.
FoF Growth I, which was set up in 2009, by the end of 2013 had committed €127m of its €135m to 11 local VC and growth funds – Inventure Fund II, Sentica Buyout III and IV, VisionPlus Fund I, Lifeline Ventures FundI, Vaaka Partners Buyout Fund II, Power Fund III, Open Ocean Fund Three, Conor Technology Fund II, Folmer Equity Fund I, Nexit Infocom II. Of the commitments, 40% derived from public sources and 60% from private sources, such as pension funds. FoF Growth II, known locally as Kasvurahastojen Rahasto, which is expected to commit its €130m to 10 funds between 2014 and 2018, is also funded by pension funds Ilmarinen, Keva, Elo and State Pension Fund. Last year it committed €15m to Verso Fund II, which had a first close at €50m, and €10m to Sentica Buyout IV, which had an initial close at €125.6m, including another €12m from FoF Growth I.
Direct investment
These total 44, including Mekitec, Meyer Turku, NewIcon, Profit Software and Stella Care in 2014. FII has had 38 exits since 2000, including Incap, Finnprotein (bankrupt) and Altona Mining in 2014. Start Fund has 22 companies still in its portfolio after they were backed between 2004 and 2007, down from a peak of 82, with the sale of Neoxen last year.
Sitra
Sitra, the Finnish Innovation Fund, is an independent public fund which, under the supervision of the Finnish parliament, promotes the welfare of Finnish society.
Sitra’s operating activities are funded from the return on its endowment capital and corporate investments. The yield from invested assets was 12.4% in 2013. At the end of 2013, the market value of Sitra’s endowment capital was €705m, and €64.6m in VC investments.
It had 33 direct investments by the end of April and subsequently backed NaturVention’s €1.1m round, clean-tech Invest’s €1m placement and Sustainable Energy Asset Management.
It disclosed 39 private equity and VC fund commitments in its 2013 annual report, with €81m invested, with a book value of €39.7m, and last year committed to Sweden-based angel fund Spintop II, €2m to InventureFund II and Finland-based LeaseGreen’s NegaWatt Energy EfficiencyFund 1. In 2013, Sitra backed two Finnish funds – Inventure Fund II and Vision+.
Sitra has had a role in building the Finnish business angel network, first through its PreSeed Finance, then building the Easy Network for Early-Stage Investors, and helping launch the Finnish Business Angels Network.
Tekes
Tekes backs research and development (R&D) projects in companies, universities and research institutes, and seeks to be a gateway to technology partners in Finland.
According to its 2012 ministerial evaluation, Tekes increased project funding to €633m from €480m between 2008 and 2010, although this growth stabilised in 2011. Part of the increase was with the rise of the strategic centres for science technology and innovation.
Between 1985 and 2007, Tekes aided 51% of Finnish innovations, whether for longer-term development of information and communications technology, forestry, services or new biomaterials. More than €100m goes to companies less than six years old, and it has helped a third of high-growth companies.
Fund investment
Tekes Venture Capital, which invests in venture capital funds backing early-stage Finnish companies.
Direct investment
Tekes has financed 198 companies with a total of €127m in the period 2007-13. It provides up to €1.25m for “young innovative enterprises”. The support can be in the form of a grant or loan up to 75% of the eligible costs, rather than risk capital as originally allowed. From the start of this year, the funding for young innovative enterprises covers those established less than five years ago when previously the limit was six years. In the new model, a company can be awarded €500,000 as a grant and €750,000 in loans. In combination, the maximum funding is €1.25m. Previously, the funding consisted of a grant of €1m to €1.25m, depending on the domicile of the company. Now, the size of the support is the same for all companies. The requirement for R&D investments is to be reduced from the current 15% to 10%.
In terms of R&D grants and loans for growth companies, in 2013 Tekes invested €577m in the projects of companies and research organisations. Of the €349m invested in corporate projects, 67% targeted small and medium-sized enterprises.
The Innovation Mill and Idea circulation projects commercialise business ideas and technology released by large companies. These projects gave rise to 74 growth companies in a period of just over three years. Tekes has provided €19m of finance to projects and companies that have emerged within them. The companies have raised €15m in risk capital.
In projects completed during 2013, 1,270 products, services, or processes, and 1,030 patents or patent applications emerged.
In the period 2009-12, the turnover of small and medium-sized companies financed by Tekes grew 20 percentage points more than in equivalent companies. The increase in jobs was 17 percentage points more. The annual growth in exports was 20%.
The foundation for Finnish Inventions
The foundation, known as Keksintösäätiö, has from the beginning of 2009 been given an explicit role in the pre-incubation phase of the commercialisation of university inventions. To this end, it was given €3m of additional funding by the MEE in 2009.
Business accelerators
The MEE, together with Tekes and Veraventure, set up private investor-run business accelerators, called Vigo. In April 2009, 43 applications were made by potential accelerator teams in a call opened by Tekes as the coordinator of the programme. The aim was to select and establish three to five new business accelerators with Tekes and Seed Fund Vera to invest €45m by 2012. ProFict Partners now manages Vigo’s 11 accelerators:
- Cleantech Investment
- East Wings
- Gorilla Ventures
- Helsinki Ventures
- Innovatum Partners
- KoppiCatch
- Lifeline Ventures
- Newentures
- Royal Majestic Helsinki
- Vendep
- Veturi Venture Accelerator
European investment funds
Europe provides several sources of money to countries out of budgets taken from member states.
The European Regional Development Fund 2007-13 allocated €1.7bn to Finland under its Cohesion Policy, supported by a further €1.9bn from the country itself and another €2bn under the EU’s Rural Development Fund. R&D and innovation took the bulk (€960m) while €345m went to nurture entrepreneurship and €443m to helping smaller companies adapt to change. The EC said this money helped create 28,136 jobs, of which 2,758 were in R&D, and establish 6,251 companies.
For the current 2014-20 investment period, Finland was allocated nearly €1.5bn.
By 2013, the EU’s European Investment Fund (EIF) had invested €170m in Finnish VC and private equity funds and had also trained people who now work inside the country’s investment agencies.
In March 2013, the EIF committed €25m to Power Fund III, a clean-tech VC fund based in Finland. Power Fund III held its final closing at €77m, including commitments from the ERP-EIF Facility – a co-investment by the German Federal Ministry of Economics and Technology and EIF – and the Competitiveness and Innovation Framework Programme managed by the EIF on behalf of the EC.
Sitra’s Nokia shareholding
Despite the fall in Nokia’s market capitalisation over the past few years as the mobile phone maker struggled to hold market share, one share-holder has been able to show market value above the booked cost.
Sitra, in its 2013 annual report, said it still owned €16.2m of Nokia shares at its then market value – before 2014’s share price increase – against a book value of €2.1m.
Not an insignificant win, but Sitra and its Nokia holding have been the source of controversy as to whether it showcases the government’s opportunity to own shares in other companies.
In his critique of Prof Marianna Mazzucato’s influential book, The Entrepreneurial State, Stian Westlake, head of research at UK-based charity Nesta, said: “The Sitra story is also a curious one. The Entrepreneurial State argues that Sitra is a good example of the state ‘retaining equity in the companies it supports’, noting that Sitra ‘retained equity in its early stage investments in Nokia’. Sitra has made VC investments, but the Nokia story is not an example of these.
“Depending on how you define it, Nokia was founded in either 1871, nearly a century before Sitra, or in 1967, the same year as Sitra. Sitra received Nokia shares not because it invested in Nokia’s move into the telecoms industry, but as a subvention from the Finnish government in 1991 – the Finnish government owned the shares because Televa, a state-owned electronics company that had once been the Finnish military radio lab, had set up an research and development joint venture with Nokia in 1977, which Nokia bought out in the 1980s, leaving the Finnish government with Nokia shares in return.
This is not to say that the Finnish government did not support its emerging mobile sector, nor that Sitra has not over the years been a great supporter of innovation in Finland. But when we look at the detail, Sitra’s Nokia stake looks much less programmatic than The Entrepreneurial State implies.”