Archive for December, 2012

Will US VCs come to the Nordics?

My thesis is ‘no’.

At least, not until small regions such as the Nordics can build a credible, sustainable number of exits.  Why the pessimism?

Let’s go back to last Wednesday, when I was having lunch with a friend from a top tier Silicon Valley venture fund.

Madera restaurant at The Rosewood was, as usual, alive with energy.  The Rosewood is a beautifully designed, recently built complex of offices, apartments and hotels tucked on the corner of Sand Hill road and Hwy 280.  Its lunch times are legendary for a super high concentration of Founders and VCs.  Its Thursday evenings are legendary for a super high octane night life.

My gaze was on the menu, but my mind was thinking about the meeting with Fred (not his real name).  After six months of living and working with startups in Finland, the most poignant question I hear is: “why aren’t the US VC funds establishing offices in the Nordics?”  Today, I would try to change that by convincing Fred his Partners were missing out on some extraordinary opportunities by not having a presence here.

Fred arrived on time, as usual.  We asked about our kids, reminisced about meeting Bonnie Raitt backstage, and then got down to the business of investing.  We ended up talking for nearly two hours, and it was going well until he made a thoughtful, but very painful point…

A little background on Fred: he is one of the sharpest and most successful VCs I know, yet with that rare sense of grace and humility.  He has remarkable insights and generously gives time for founders and friends alike.  Unfortunately today’s insight made me shiver for the Nordics.

Venture capital moves towards large numbers,” he explained.  “To high concentrations of startups, businesses, consumers – and exits.” 

“There are definitely some great startups in the Nordics”, he continued.  “And I would love you to send me any that you believe are outstanding.  However the really large numbers just aren’t there.  When I compare the Nordics to other regions such as  China, India and Brazil, it is difficult to make a case for investing heavily there right now.  We need to remain opportunistic.”

The words sank in.  I shifted my salad on my plate, searching for a thoughtful response.  This is the Nordics we are talking about, after all.  The region which is bursting with passionate founders, smart engineers and great startups.  The Nordics is becoming a global leader in sectors such as gaming, mobile business and healthcare.

Take Finland, for example.  It is ‘top of the charts’ in almost every global ranking:  Competitiveness, Education, Engineers per capita, Healthcare, Quality of life, the list goes on.  It has honest, hardworking people who do what they say, who under-promise and over-deliver.  What’s not to like about investing in Nordic startups?

Unfortunately, all four VCs I met on this particular visit to Silicon Valley shared Fred’s point of view.  I was beginning to see a pattern: it has little to do with having a great startup culture and more to do with fundamental economics.

Venture investing thrives in large numbers.  Think regions that have thousands of startups, millions of businesses and billions of consumers.

Venture investing also thrives in environments that foster risk:  entrepreneurs willing to move across their country (or the world) to restart their lives.  Flexible labor laws that allow companies to grow/shrink/adjust on a dime.  Tax rates that inspire – not punish – wealth creation.  And a drive, an insane hunger, for a better life.

These are not exactly the features of the Nordics – or Europe.  At least when compared to China, Malaysia, India, Brazil and the US.

European culture and labor laws do not foster flexible job growth, rapid downsizing, creative destruction or imaginative job-hopping.  The high European tax rates that create a high quality of life, also dis-incentivize entrepreneurs to make their first million.  Or billion.  It scares me how much Monsieur Holland seems to determined to go after successful, wealthy people with a hefty tax axe.  And the hunger for a better life?  Well, life is already pretty darn incredible in the Nordics.

I am sure Fred and his firm will miss some billion-Euro-size Nordic exits, and several multi-hundred ones too.  There have already been some good exits (Skype, MySQL) with more likely to come (Rovio, Supercell, Spotify). But if US VCs are really focusing on large markets, how do talented entrepreneurs in the ‘other markets’ secure access to quantity and quality of capital?  Should they continue to make the pilgrimage to Sand Hill Road, trying every angle to get a meeting with VCs like Fred?  What does this mean for startup centers in Helsinki, Oslo, Buenos Aires and Auckland?

I suggest a solution for these smaller regions is three-fold.  First, build success, one exit at a time.  Nothing speaks more strongly than that.  Prove to the VCs that world class companies sustainably exist here.  Two, build your own ecosystem from within.  Don’t wait for the ‘Silicon Valley ecosystem’ to come to you.  And three, find a category (or two) and dominate them.

Where is this happening in Finland?  Ilkka Paananen, CEO of Supercell, seems like he was beamed straight from Silicon Valley to Helsinki.  He is smart, fast, genuine – and correct.  Peter Vesterbacka of Angry Birds is a marketing machine.  And that silly red, Angry-bird sweater he wears everywhere is… really cool.

Risto Siilasmaa from F-Secure made a fortune from his company’s IPO, and is now giving much of it back by investing in dozens of startups in Finland.   Linus Torwalds (we all know Linux…) profoundly changed the world through sheer brilliance and today he is an tireless ambassador for Finnish innovation.  Marten Mickos from MySQL (now CEO of Eucalyptus) generously gives his time, insights and network to Nordic entrepreneurs.

These are just some of the foundations of a new ecosystem in Finland.   There are many more, and they are creating a new DNA.

Transforming a small region to having steady, large exits and large, local VC funds won’t happen in one year.  Or 3 years.  Think 10 or maybe 20 years.  Is it worth the wait?  Yes.  Silicon Valley began over 50 years ago and is now one of the anchors that will guarantee US global technology leadership for decades to come.

The visit wasn’t all doom-and-gloom:  each of the four VCs took an interest in, and agreed to meet one (different) startup from Finland that I carefully screened and shared.   Nice.

And, Fred promised he would visit Helsinki this Winter.  I am hoping that trip will inspire him to change his mind and hang a ‘Silicon Valley VC shingle’ in Helsinki.

Yes, I am a hopeless optimist.

Chris Vargas, Helsinki, Finland

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