A large problem is that there is a mismatch between startups here and the VCs.

(copied from FB discussion) From the article: "The “sweet spot” of venture capital target fundraising seems to be in the 2-3 million euro range, with “fallback survival options” around 300,000-500,000 euros."

This is in direct contradiction with what most startups need. This year forced us to become more cost efficient, and require less money to operate.

In my opinion, this means that most startups will not be able to deliver a case that will meet the requirements of VCs nowadays, as they won't fit their investment bandwidth. This may explain why there are so few VCs investing in the large amount of startups out there.

Ramine,

That's exactly right. VCs need a certain level of upside potential to achieve a required ROI for their LPs (and a hefty management fee for themselves) and most consumer web startups won't have the required upside and potential for revenues that scale, and never will have.

So there is structural equity gap, which is very hard to fill because the overhead you have to manage a fund that invests only some tens or perhaps hundreds of thousands of euros just does not make economic sense. This gap is filled many times by angels or Y-combinator types of operations, neither of which in my mind make much financial sense given the lengths those people go to get even a decent return. So most of the times there's something else in play when it comes to the later two players, like a desire to help young companies or just be close to the exciting startups.

To fill this equity gap, here's Finland's answer http://www.arcticstartup.com/2009/07/24/government-backed-accelerators-chosen-march-on-finland/

I'm up beat about Vigo, even though I'm not sure how that will build a healthy market driven base for the years to come, but time will tell. I'm sure we know much more after a year or two.

...and perhaps most importantly, the equity gap you talk about is not only present in Finland. It's a problem wherever you go.

Very interesting stuff Ville! I wrote about a similar report on the Swedish activities for 2008 (don't have the Swedish 2009 H1 figures yet) here: http://vcperspectives.com/wordpress/2009/08/some-stats-from-swedish-vc-market/

I am really happy to see that the Technopolis Online database is taking off, this is an area which have been lacking in transparency. Preferably it will be possible to gather more of a Nordic perspective in the future, since many people outside our region don't really distinguish between our individual countries anyway.

As for the comment about the equity gap, I agree that it is hard for many startups in an early phase to get VC financing although the figures seem to suggest that there is an ecosystem of angels, domestic VCs and eventually international VCs where domestic VCs are investing also smaller sums (€200-300k to €1.5m).

However, I think one of the problems is that the ecosystem is not as well developed when it comes to exits meaning that early investors don't get liquidity until the final exit. And with longer holding periods, usually more capital is required and thus tied up, and also the exits needs to be bigger to compensate for the longer holding period.

One way to combat this is to do what e.g.Y-combinator does, put small sums in lots of startups and don't spend too much time with any of them. However, the Finnish (or even the Nordic) market may not be large or good enough to support this kind of model (and unfortunately it is still not financially proven either).

Another way to go about it is to provide at least part-exits for early investors by later-stage investors. This enable the ecosystem of various investors (founders, angels, early-stage VCs etc) to get liquidity and hopefully reinvest the money in additional startups. For me this approach indicates a more mature ecosystem and hopefully we are heading more and more towards this direction.

Daniel,

Thanks for the insightful and lengthy comment. I'm with you regarding the Y-combinator type operations.

Your second idea is interesting regarding the part-exits. It's almost like giving entrepreneurs 'fuck you money', so they won't sell the company and will have the patience to stick with it. Do you know any instances where this has worked or have been done?

Hi,

Thanks Ville for the visibilty and starting good conversation!

I think Daniel's comment is mostly about getting the seed investors some cash so they can show their LPs that there is light at the end of the tunnel - not a full exit, but perhaps money back plus something to show the time value of money (in a very good case obviously) and leaving them with shares to get upside.

There are good examples, but in Finland perhaps the classic is that Holtron guys were tied up with MySQL paper value so long -- even though it was really valuable to some, LPs got tired and made it so it took a lot longer for them to raise a next fund (which actually bred both Inventure and Conor at the end of the day, in fact a nice but late result ;). If they could have raised money earlier, they would have been pumping money into the early stage scene a lot earlier. And then if you take that farther to the entrepreneur level, you could have had Open Ocean earlier as well. This is mostly my own interpretation of the facts, but hopefully the players would agree.

I totally agree with Daniel that this is all about exits, partial or total. We got to see a lot more of those here in order to get the huge coffers of Finnish pension funds back into the VC asset class, and to bring more international players in. Its either a vicious circle like now, or a virtuous circle hopefully soon in the future. As Ville says, Vigo's are hopefully significant gap-fillers.

As for TechnopolisOnline, we have 5 guys working night and day (it seems!) just on uncovering and validating, we hope this is going to add something to the ecosystem. And as I have said before, our approach is really complimentary to Arctic Startup, which is clearly at the forefront of in-depth research on companies in your segments.

Thanks for the great example Will. Would be interested to hear similar war stories from others, where the dominant VC model has led to suboptimal results. I start to like Daniel's idea about partial exits if it can be engineered into the Term Sheets. Would be good to hear what some of the angels have to say.

What comes to getting the huge coffers of Finnish pension funds back into the VC asset class, I'd be happy to see them back in the game, but without some of the speed blindness that went on earlier (I hate to see clean tech becoming the new biotechnology). A gradual and educated entering, where they know exactly what they are getting into instead of a mad gold rush, which further dilutes the returns in the long run since statistically everybody can't hit home runs when more and more money tried to chase potential startups, which leads to a loss of reputation for the whole asset class. A balanced growth of both: a quality startup base where serial entrepreneurs create exponentially new serial entrepreneurs through new successful companies (which act as entrepreneur grad school for the employees), and a steadily growing investor confidence (of pension funds and the actual agents of those intstitutions) which is based on real returns and where there is a healthy competition between domestic and international VC funds.

Yes, good job with TechnopolisOnline at least based on the study. Looking forward to seeing the actual product.

Actually there is one company that already has functional business angels webpages... Ours.

We launched our website (www.businessangels.fi) in June and it has been a good success in these first few months. So far, we have gathered companies that seek for funds in a total sum of 6 million euros.

We try to keep our service simple and effective. Companies that need capital can place an add on our webpage and investors can invest straight to them, no third parties. Fund seeking companies can be from any business areas and look for funding of any size. We also want to help companies which are in a early stage of development to find funding. Moreover, we want to encourage smaller investors and experienced entrepreneurs to invest on new companies also in smaller amounts, no need to be millionaire. Sometimes 10.000 can be enough in a right place and right company. And when there are enough small investments, altogether they can create a nice total capital.

We don't pre-select companies that can leave the add (as long as it's appropriate). We leave the selecting process for investors, who can decide by themselves if the fund-seeking company has potential or not. Furthermore, our prices are very reasonable and accessible for any small enterprise or investor: we keep it simple, no bureaucracy, which allows us to keep prices down.

[...] minority owner. Masdar invested in WinWinD last year a whopping 120 million €, which is a lot in Finnish standards. The Finnish government owned Industry Investment is another minority owner, and additionally some [...]