Timely and good statistical research!

This is pretty ironic. Just today, Kauppalehti reports that the Finnish government had so much trouble defining the term "business angel" that they decided to drop the development of the tax incentives for business angels.

http://www.kauppalehti.fi/5/i/yritykset/yritysuutiset/?oid=2009/11/28094

This is pretty incredible and very, very sad.

Antti, you raise some good points.

I wrote a big response, so I decided to turn it into a blog post, here: http://ramine.net/2009/11/23/the-fundamentally-broken-finnish-funding-system/ . I'll write a counterpoint post about what's good later :)

Here's a copy of my reply:

I read earlier today a blog entry by Antti Villponen from ArcticStartup, which raised an interesting point about growth entrepreneurship in Finland. Only 3% of businesses in the country are growth businesses (eg +10% growth per year). This is insufficient to drive an economy.

Earlier, I might have said that Finland needs more access to capital to help entrepreneurship. However, since my recent Silicon Valley trip, I’d have to say the problem does not lie there.

Finland has plenty of capital. For example, public efforts from entities such as Tekes and VeraVenture pour several millions in projects. Consider that Y-Combinator has invested in ~150 startups, for a total sum of less than $3M since its creation.

So the issue is not so much the lack of money, but how it is spent. For a fraction of the money spent in Finland, YC has been able to create Reddit, Dropbox, Disqus, Parakey (sold to Facebook), Justin.tv. You can find a list of Y-Combinator startups and successful exits here.

Why is that? I think we should blame both startups and the government.

Decisions from Tekes are often made by people who have not been entrepreneurs or CEOs themselves. Their experience is very generic, and usually only in Finland. In addition, the application process is very tedious, as it can take up to weeks to simply apply for this money. Lastly the process involves having to plan very detailed processes for several months in the future, which, in the age of lean and adaptive startups, is rather counterproductive. So this process creates a strong mismatch between the funding side and what the startups need.

Of course, Tekes is not a specialized entity, unlike YC is. While I understand the value Tekes for R&D of large projects, it is an inadequate tool for stimulating growth entrepreneurship. The Vigo program seems like a step in the right direction, though I deplore the lack of an Internet-focused accelerator.

Another large problem we have is internationalization. Not enough startups are aiming to be international from day one. Not enough have international team members, or experience dealing with foreign cultures. Alarmingly, most startups here are reluctant to look for funding in other European countries, let alone the US.

There is this underlying idea that starting in Finland is a safe way to test the market. I disagree. Finland is not a test market for growth businesses. The efforts that need to be made here, the barriers to reach the consumer, are equally high if not higher than to reach users in another Western country. To put it differently, if your business has an international scope, you should be international from day one, not just “maybe later”.

Lastly, I would like to stress that funders do not have enough access to information about the startups in the country to make decisions. There is too little public information about the business angels here and how to reach them. There are very few business angel networks, and they are too difficult to reach. There are too few international VCs scouting the market. It would be helpful to see efforts to bring more of them at regular events here, the same way VCs go to Y-Combinator to find their next Google.

I sincerely hope we can make the system here more efficient. If we don’t, it would mean that most companies will either lack proper chances to succeed, or have to move abroad. In any case, the biggest loser will be the Finnish economy.

Finland on my own opinion has so many mushrooming start ups and with recent research showing that many will not last beyond five years and at least 40% will fold in coming decades.there were so many reasons given for this but for sure Finland start ups are among the most fortunate in Europe when it comes to funding.This is not an issue at all.the problem is workable business plans on both mid and long term and how best the cash is spent.from the word go business angels should not have been exempted from taxation at all.most of them deserve but some unscrupulous people have taken advantage of it.

Ramine,

I'd be very careful to draw comparisons to Y Combinator and even more careful to hint that we should have one in Finland. Y-combinator is unique in many ways.

The successful startups they have created are the best ones filtered from the 350m strong market of talent ie. they have chosen some of the best raw(!) talent US can provide and because of their strong brand visibility the best talent has applied to get it.

Secondly, Y Combinators idea in nut shell is the following: With the least amount of capital to create something that works in order to get a market response for the idea. And here the teams work literally 24/7 to achieve ramen profitability. Culture plays a part here, and we should acknowledge that we have a very different work ethic in Finland. So, I'd be very careful to build a exact clone of Y Comb. Vigo is a promising 'mutation' of such an idea and as I have said before, I'm up beat to see what comes out.

" There is too little public information about the business angels here and how to reach them. There are very few business angel networks, and they are too difficult to reach."

Well yes, but just as in many other countries, there might be a reason for this. Many times the angels don't want to list their names in a public directory as they'd be swamped with bad business plans, but get their deal flow from referrals and those who are persistent enough to dig their contact info and get a meeting. Would love to have a comment from a Finnish angel on this. I doubt most of them have too much quality deal flow and would be curious to hear where and how they find their deals.

"There are too few international VCs scouting the market. It would be helpful to see efforts to bring more of them at regular events here, the same way VCs go to Y-Combinator to find their next Google."

VCs go where there are good startups and believe me, the word gets around very very quickly if some place has unusually high number of high quality startups. Things take time and Finland's ecosystem is still young. Give it a little time.

Ultimately to get the startups, the VCs and a thriving ecosystem like in Israel, London and the Valley is challenging or down right unrealistic. Here a right government policy could do wonders, but given the strong social democratic ethos and long tradition of welfare state in Finland it is very challenging to pass a policy that isn't fair to everybody. I don't think such a structure can be equalitarian in nature and this creates problems when the legislation needs to go through our parliament. And after we'd get this right, its a function of size (many say the number of good startups is proportionally fixed to the total # of startups born ie.the bigger overall volume, the bigger % of successes) and a time.

Now, don't get me wrong. I'm not saying we should give up and do nothing. Quite the opposite and we are doing a lot already. What I'm saying is that it might not be the smartest thing to look what's working somewhere else, talk to them once and just replicate it here in the Northern Europe. We should first understand what our society, culture, legislation etc. is build upon and then try to see how we can use our peculiarities and unique strengths (competitive advantages even?) to create something not just similar, but better, to what for example Silicon Valley might have.

Good discussion and an important topic! Almost everything said above can be said about Sweden as well.

There is clearly a startup ecosystem brewing here and there in different parts of Scandinavia but it's definitely not big enough to be on the radar for the big VCs.

However, such a place is lacking from rest of Europe as well. We don't have a Silicon Valley or anything even close to it in Europe, much less Scandinavia. The only way we can possibly make a large enough splash is by working together and building the ecosystem across borders.

Is that even possible? I honestly don't know.

But we have to try.

Ville, I agree with you.

My point was not that we need a YC in Finland. I want to underline that right now, money is being spent in a very unproductive manner and that there are ways to do this more efficiently.

As you, I'm upbeat about Vigo. It shows a positive change compared with the old way. I hope this will present a solution to this early-stage funding for startups, and make public funding accessible in an efficient way.

Regarding angels, obviously I didn't mean that we should be able to reach angels themselves, of course, there should be some filtering. I heard there were comments from Risto Siilasma in the paper this morning.

One thing you said concerns me: "VCs go where there are good startups". I of course understand you don't mean that there are no good startups in Finland. The big underlying concern is that we do not communicate that there are good ones here. I would agree that this is partially the startups' fault.

My point is not that we should have more Finnish VCs, but that there should be more efforts to invite foreign VCs to invest here, and to facilitate this. This would create a more competitive ecosystem and generate more deal flow.

I think that with a little bit more transparency and internationalization, things can be made to work. But it will take time.

I`ve understood that foreign VCs even the big ones will find you if you have something interesting for them. No matter where you are. For example Sulake, Stardoll and Comeks were funded by the largest VCs in the world. They have eyes and ears everywhere :)

Kai: true, very true. But in order to build an ecosystem and a startup culture the whole value chain must be improved. In fact I think you're very right in that large VCs and super star startups is not the problem, the problem is the small and middle parts of the scale.

Angel funding, seed funding, building a startup culture, viewing startups as a valid and more exciting alternative to a career in LargeCorp etc.

Getting funding is not cheap but with a working ecosystem it can be cheaper for startups of all sizes.

very rightly said and quite informative. I agree with Kai, the giants in the VC scene are always looking forward to put their money in BIG ideas, they know where to throw the rope and fetch a winner. I just wish this Entrepreneurship sees an explosion where it is still dormant and people are reluctant to implement the idea..

Ramine,

I agree. overall the money being spent could and should yield better results. There's quite a bit being spent and I see best results from those that have lest of it.

On the part that worries you: “VCs go where there are good startups”. Unfortunately I mean exactly that there are not that many VC class startups in Finland that promise the scaling returns that VCs require. There are some, but way too few to justify a lot bigger pool of VCs to set up a shop here. I reiterate what I said above. I believe that in the medium and long run, the number of good startups is proportionally fixed to the total # of startups born ie.the bigger overall volume, the bigger % of successes.

Also agree with Kai and Erik in that the international VCs are here in no time as soon as there is good companies to invest in. That's not to say, we should not have more here locally.

I like what Erik is saying by "The only way we can possibly make a large enough splash is by working together and building the ecosystem across border". I think so too, and its great to see the bridge taking shape especially between Finland and Sweden, as well as Finland and Estonia.

Great post and great comments. I already commented to Ramines great post http://ramine.net/2009/11/23/the-fundamentally-broken-finnish-funding-system/

One part was:

"Also, there is no reason why y-combinator or techStars type of programs/organizations could not be run in Finland. Few of the lessons learned from aaltoes SV visit was that, if such program would be setup in Finland, it should be kept open to anyone from anywhere (no need to limit to Finnish people), for both start-ups & investors. Also for the demo days part of these programs, if the investors can not come to Finland, then startups need to be flown to investors for few weeks. IE to keep demo days in place like San Francisco, London etc."

So to Ville's comment, my suggestion is; let's not limit ourselves to 6M people potential in Finland, we should keep the program open to anyone. That's what they are doing in US as well. The obvious question is "would anyone outside of Finland apply?" - I think that would depend on the program. Another question is, why should we run it in Finland? - maybe half of it (the 6 final weeks) could be run in Valley or London?

In short:
1. Open to start-up from anywhere
2. 6 weeks in Finland + 6 weeks in some HOT City with more established ecosystem
3. 4 programs / year with 4 different cities to end them
4. Only requirement for company to participate, is for company to be registered to Finland (and remain so for x years?)
5. Commit to this for 3 years and evaluate.

I do agree, that Finland have some serious legacy issues that makes it difficult to support the right type of entrepreneurship in general. Taxes being one of the most obvious (not so investor friendly). As well as those other things you mentioned.

Another lesson from Valley (by more than few people there) was to understand, that it’s not really countries competing, than it is cities from different countries competing worldwide, that too kinda have potential to change some of the thinking when trying to find solutions to these issues.

What comes to angels - I know most of them are not getting quality leads, but by "hiding" I know their leads will not get any better. It's simply not possible to limit and have best potential at the same time. I doubt these few well known Angels in Finland really have big problems, because they are visible. I would argue that they get better quality deal flow. Also I would not suggest entrepreneurs to take "money from a stranger".

The best way for Angels to solve it, is to be visible and have personal tools to manage their deal flow more efficient, if they are serious. And if they are not, well then it's not a problem, because then they can invest in random.

What comes to VC's. I agree with Kai, when it's time for them (growth process is in their level and right "goods"), it's not really a problem for them to find you or you to find them.

Whatever the government does, I hope it doest not build anything where one needs to move to Finland to set up her company just so she has to stay here X years. I think it's a horrible and doomed idea that anyone who has the ability to influence policy tries to build something what has been described above. Or fund the building of that if it comes with any checks and balances on how the money is build. This will instantly shape the whole structure and that's where it normally goes south. Hacking such as thing should be left to private actors for them to fail or succeed with it.

Secondly, no Valley VC is going to invest in a firm which has to stay X years in Finland/Sweden/X/Y/C by an arbitrary law.

I think it's a great idea to open door for people from abroad by incentives, but I don't think any Nordic country should force them to stay. That hardly makes them successes.

Tax policy is a different thing, and I strongly agree with everyone that all the Nordic countries should be braver and radically change the taxation (and much of the other policies) for small companies and the investors alike. I think the country who does this first, will solve most of its 'innovation challenges' and can channel the money that currently runs much of the support functions like Tekes etc. to other uses as they are not needed when people understand the economic benefit of being an entrepreneur and investing in startups. This might not be so easy to see, since Nokia has never been a small company in a way for example HP or Google have been. But in current conditions and reality, it's a precondition for a company to be first a small one before it can grow to be a big one.

What comes to going to HOT city, I believe young startups should go where their customers are, when they are at a stage it makes sence. Here it becomes important what kind of a risk you carry, market risk or a technology risk, because if former you can start testing market right away, but if latter you have a certain R&D to do.

And if you're customers are in Internet, then it should easy. Fire up a browser and you can talk to your customers. You might benefit from tinkering with the active startups in Sweden or Tallinn or Norway more than packing up and going to US the day one. There are exceptions. For example Jaiku could've benefited from earlier traction with the Valley king makers when it was competing head on with Twitter. But I don't think matters much where EVE Online or Habbo Hotel is run.

Once a company is good enough the VCs will come or there's someone to take them to the VCs.

We need to aim higher than another Spotify or Habbo. Not that they're bad companies, not in the slightest, but there should be one of them PER WEEK emerging from this region.

OK, maybe every second week, but still. :)

25 startups at the level of Stardoll and Spotify per year from Finland, Sweden, Denmark, Norway and the baltic countries.

_That_ would make a splash.

Or maybe I'm missing something and these companies already exist. I'm thinking something like 25 new companies each year that reaches a valuation of €100 million and is not older than 5 years.

Are they already out there?

Perhaps it is too many? How many €100 million companies are produced in Silicon Valley each year? Anyone knows?

This list gives some clues:
http://www.businessinsider.com/sai-50-2009#1-facebook-1

25 €100 million companies per year is probably more than even SV generates but they're probably doing about 10-15 which is also pretty amazing.

And of course 2009 was a generally lousy year.

I will add some clarification to my earlier points made. I did not mean that anyone would need to move to Finland, only if they would see the benefit of that (imaginary) program compared to other options available for them and even then only to registering company here - that is different than "moving here" (basically just to pay taxes, but then again, that's pretty much how it already is now, if you apply for TEKES money and most likely there would not be any taxes to pay either).

So the assumption was that this program (if done by government) would not be "shareholder" in that model. - It would be much better if done via shares and freedom, but don't really like the idea of Government being a shareholder either, so naturally "the no stings attached" model would be the best solution overall.

Also no. 5. was for the program not for companies.

One thing seems quite clear, it's really hard to see any direct Government "financial support models" really working in business. All government support should just be done via tax structures and everything else should remain "business as usual" and be left to private sector.

I've read this discussion with great interest and I will jump in with a simple announcement: we've decided to go for it and have just launched Startupbootcamp.

Startupbootcamp is a micro-investment and mentorship program for entrepreneurs who want to turn their ideas into real startups in 3 months. The first program will start in June 2010. We aim to attract entrepreneurs from the entire Nordic region (using a broad definition we include not only Scandinavia and the Baltics but northern Germany and Poland as well).

Those of you familiar with YCombinator and Techstars will inevitably see the similarities. Let me say that we are inspired by them (in fact, we had David Cohen over in Copenhagen last week speaking about Techstars to a full house) but we are not creating a clone. Copenhagen is not Sillicon Valley and we are neither David Cohen nor Paul Graham. However, we do think there is a demand for such a program in Denmark in the Nordics.

I am lucky to be co-founding Startupbootcamp with one of the hottest startup teams in Denmark, Rainmaking (www.rainmaking.dk). We think there are plenty of great businesses that can be created in 3 months, even outside of the web sphere and we're already getting some traction in terms of business ideas coming in.

We are actively recruiting top-notch mentors as well as 'Ambassadors' who can help spread the word. I would also welcome anyone to join the discussion to help shape the program.

Looking forward to your reactions and input.

Best regards, Alex Farcet
www.startupdenmark.dk & www.nordicstartupjobs.com

(www.startupbootcamp.dk the site is under construction - much more coming later, including an excerpt of David Cohen's speech).

We have to talk. Email me erik at startupgarage.se

Erik