The Ineffective Finnish Innovation System Needs Redesign
While Finland has been one of the countries publicly to be noted for its gracious innovation support systems, many have wondered how all these investments and expenditures can be afforded. The simple truth is - we can't. The private Research Institute Of The Finnish Economy, Etla, has published a set of essays from the sharpest economists Finland has, that demand drastic changes to the way innovation is currently financed. While it is the lifeline of startups and growth companies, I'd argue many if not almost all would agree.
While I have no passion to run for politics, I do realise the overall picture and how Finland is unable to sustain it. Finland is running into serious financing issues - our expenses have grown over the years, as has our income. However, as state income seriously dropped in the past few years due to the global economic crisis - our politicians have been unable to stop the growth of expenses. Some political parties believe we'll be able to finance the expenses once again as growth picks up, others want to take more drastic changes.
While this is the picture of the Finnish overall government finances - it pretty much applies to governmental corporate support as well. It has grown over the years without critical view into what really works, what should be stopped and in what areas we'd need more resources.
The numbers
Etla published the essays earlier this week with one of them clearly demanding cuts to the current innovation system. Over the years, the amount of public, actually - let's rephrase that (as it's just a way to cheat us all who really pay for it) - tax payer money that is used to finance the innovation ecosystem has grown to 2 billion euros, or about 4% of the budget. Direct government grants are around 600 million euros.
Now money in itself is not the problem here. No organisation would ever blame the amount of money for the problems - it's the methods and mechanisms that are used to invest that money and thus - all that really matter are the results or the return we are able to get for that investment. Before we even go on to talk about the results, let's talk a little more about the ways this money gets burned. One clear area is bureaucracy itself - few understand how many people work with financing the Finnish innovation system.
The numbers vary greatly and that's naturally part of the problem. The Federation of Finnish Enterprises stated in an article by Arvopaperi that the number of people is somewhere around 16500. Etla's figures are lower, but still around 5300 to 6000 people. Some might even argue that the support organisation is larger than the ecosystem itself they are trying to support.
Etla estimates that this large an organisation requires about half a billion of euros, just to sustain itself - that's about a quarter of the money to finance the innovation system. Etla also states that there are about 300 or so incubators and other development companies that also require money.
Choosing the winners
One of the key issues Etla has stated in the way the financing works - is the question that who chooses the winners, ie. who chooses what companies really need financing and ought to be supported. Currently, this is the job of the thousands of people working in the government organisation. Markets have very little to do actually giving signals to the government organisation, although this is changing.
The Finnish accelerator program Vigo, for example, has managed to invest over 20 million euros of government funding into market supported ventures. These ventures are highly assisted by accelerators to find more funding and make it big. Governmental intervention is minimal and already the companies that have received this funding, are some of the most talked and successful cases around. Veraventure also works in co-operation with the markets in its cases. These are very much undervalued methods of financing that should be studied in greater detail.
Furthermore - the government financing system seems to create high dependancies on funding. Etla's essay states that once a company has entered the government financing system, they tend to stay there. One of the sad parts, in my opinion is, that some organisations have even come up with key account strategies and different forms of loyalty programs.
In another publication, a Master's Thesis by Jenni Laakso titled Public R&D and Business Support in Finland (still to be submitted for review), it is stated that while Tekes grants 60% of its support to SMEs - around 40% of its over 600 million budget for 2009 has gone to companies larger than 250 employees. That's over 240 million euros to large companies that are able to sustain themselves financially.
Concluding
I'd argue that anyone who has had something to do with the Finnish government support systems for innovation will state that it needs serious redesign and fast. Money is being invested and honestly, wasted, in so many different ventures that nobody is able to understand how many people are actually required to make all this work, or even understand distantly what the results of investing 2 billion euros annually yields.
I've now seen talks about this issue for about 18 months, more or less. A ton of studies have been paid for and carried out - all stating somewhat similar results. Somehow, no one seems to have the courage to do something about this. While entrepreneurs highly depend on government subsidies - it's not like the fight for financing will become more difficult in the future if some support is taken away - it's a fight nevertheless.
Hannu Kaseva and Jaana Kurjenoja two economists working on the Etla publication commented on the essays in Kauppalehti, and in doing so summed up the overall picture well; "the Finns have it completely backwards - our politicians are looking at how much the private sector should be taxed to support the public sector when instead the view should be how big a public sector is the private sector able to maintain without endangering growth or risk of unemployment."
Finland seriously needs to re-think its approach on governmental support for growth companies.
Antti, I think you are right on the money here. However, the fundamental principle you always need to remember regarding the finnish so-called "innovation system" is that the goal of the system is not to produce any real results, merely just to sustain itself and while doing that to spend all the money available. The only outcome measure used is the costs generated. Therefore the system tries to avoid the risk by spreading the money as evenly as possible without any selection and is also using the above-mentioned 40% to companies who really do not need it. Hell... you can even argue that the worst thing to happen for the system is a successful company growing and re-locating to the global markets. The system would lose a customer.
I fully agree that the Finnish innovation system is overly complex. The ten years that I have been following it, it has not gotten any simpler, the opposite. We tend to get new organizations (e.g. Veraventure, ) and programs/projects (Vigo, Tuoteväylä, Protomo...) launched, but old ones tend to stay. Maybe there should be a rule of closing two down for each new one?
Picking winners is very much about metrics of the organizations. Vigo model is a step towards rewarding for actual performance, but with the high monthly service fee (4-9ke), it is still inclined towards consultation model rather than VC model, in my opinion. If rumours from Tekes are correct, we hopefully see new entrants and maybe some day an open market for business accelerators.
Almost all of the players in the current system are measured by input or simply something other that you can measure today, when focus should be on tomorrow (=results). E.g. business incubation, the field where I have been ten years, is rewarded for taking companies in (rather that measuring the output).
We do follow output, for our own interest and promotion. The young innovative companies funding program (YIC or NIY) of Tekes is generally regarded as right direction. Every third start-up (20/61 as of 6/2010) in levels 1 or 2 has used our incubation services in Otaniemi (either Technopolis Ventures or Spinno) to support and accelerate their launch phase. I think this retrospective measure shows quite a good accuracy on selecting potential winners if this is from a pool of about 120-150 clients in the past 5 years. All the credit for the start-ups who have made it there, YIC is just the first step - real success is reaching growth targets and generating sales.
The unfortunate thing is that probably more of our face time with clients was spent on preparing materials to collect 10-100ke grants and loans from different sources rather than working all of this time on their sales pitch and helping to build advisory board (in which we do help).
Antti, as you wrote, writing status quo reports to collect dust on bookshelves and whining on blogs as such does not change anything.
How about setting up a ArcticStartup pitch contest for next ArcticEvening to hear different persons (you, me, Vigo guys, Kristo, Taneli, someone from Tekes, someone from TEM etc.) not to complain of the past, but to propose how new innovation system should work?
Tuomas, your suggestion is good and we'll think about it for the next event - let's see if we're able to put together something on this front.
Hi, good discussion.
It would be really great to put a line in the sand for 2012. Meaning Finland (well, Helsinki Region, but anyway it is a symbol for the whole of Finland) is Design Capital and European Entrepreneurial Region
http://uudenmaanliitto.fi/?5525_m=7164&l=en&s=7
in that year, and it by definition puts a strong emphasis on the real work that must be done in 2011 to put us in a strong position then. The rest of Europe (and most of the world) really has little clue on what an "entrepreneurial region" would and should look like either, so we could establish leadership. And importantly it is a prospective approach and not retrospective. In the end it is all about how efficiently and how much we can put pyhysical, intellectual and financial capital to work. Nothing more.