Mikko Suonenlahti - Growth Management Ltd

Sisu and Networking the key factors to a successful start-up in Finland? So say our key speakers from the very successful inaugural AmCham FutureMoney event last week.

Some seventy members of the VC ecosystem attended what was a lively and insightful discussion on the state of VC investment in Finland. With presentations from PwC, Dow Jones, Finnvera and myself, we reviewed through the ups and downs of the global VC market after a turbulent year for all investors.

Veijo Ojala from Finnvera started our morning with an overview of Finnvera’s operations.

Matthew Littlewood from PwC talked and reviewed the MoneyTree 09 US data.  After the dotcom boom the level of funds have dropped, VC’s are not going away but the level is lower than before. Silicon Valley clearly dominates in the US, with Finland being comparable as a region and market size to New England. Could Finland look to learn from this growing region? Matthew reviewed the latest Israeli data as an added bonus to attendees. The Israeli market is similar to Finland in many ways, but the level of investment is much higher and the investment structure being more similar to the US.

Matthew went on to present a sector analysis. Biotech for the first time ever was the strongest. A huge market of course, that is profitable, with pharmaceutical companies being cash rich. However patents are running out, so they are looking for new opportunities. Other encouraging news was that first sequence financing was up in the 4th quarter – a good sign for 2010.

Guido Schenk from DowJones reviewed venture investment within Europe. We saw that investment outside U.S. was actually cut in half in 2009; with Europe seeing its worst year of decade. Guido mentioned that optimism in Europe is waning with very low early stage financing, the UK strongest decline, France doing well and our neighbors in Norway are standing their ground.

We were very happy to hear our attendees thought this was a unique and much needed event for Finland. Many thanks to all our presenters and attendees. Please continue to visit us at futuremoney.fi for our ongoing thought provoking and challenging discussions and details of our next event.

Mikko Suonenlahti – Growth Management Ltd

There is no shortage of innovative companies, ideas or individuals within Finland. Finland’s public policy however is another matter. The government has an important role in funding basic research. Without government funding, the diverse pipeline of 300 – 400 start-ups would soon dry up. Clearly government and venture capital (VC) have a symbiotic relationship in bringing new inventions and innovations to market but private sources of VC is rare in Finland

The challenge is building companies from scratch – VC is one of the most risk intensive asset classes in the world with the risk profile increasing or decreasing through public policy. Often the only source of long-term capital (7 – 12 years) are VC companies as the start ups rarely have collateral for loans, few assets or track record. A VC takes on this risk by providing the capital for a minority share of a company.

With the globalization of innovation and the flow of capital, VC funding is increasing outside of the U.S. thus by understanding the effects of public policy on VC and innovative young companies, the government can ensure a vital source of economic growth. Many countries are adjusting their tax and regulatory policies in order to provide the same competitive advantages that U.S. companies have and use to attract the best scientists and entrepreneurs to their teams.

Taking on the long-term risk of business building needs to be adequately rewarded of course. If not, Finland may well lose its investment in 300 – 400 growth companies and a source of future growth. Therefore, tax policy in Finland should reward long-term investment and encourage calculated, entrepreneurial risk taking. Common sense, transparent long-term tax policies are required.

Favourable tax policy is required for capital gains, loss carry forward, options (a driver of the U.S. VC industry, rarely used in Finland) and carried interest for VC funds. Also the government needs to motivate pension funds, family offices and business angels to invest in VC funds.

Small changes in policy could have a huge impact on the balance sheets and risk profiles of the 300 – 400 young, innovative companies we already have. The best of them each deserve further funding of €20 – 30 million.

Without a change in public policy, there will be no venture capital or risk takers for business building in Finland.

Pasi Sorvisto, Venture Explorer, Uniform Venture Partners

Just to give you some insight how important the AmCham FutureMoney mission is, let me share some highlights from the latest GEM (Global Entrepreneurship Monitor) report.

Several weeks ago the GEM consortium published their latest data on entrepreneurship and the financial ecosystems of nations. GEM is the world’s leading research consortium dedicated to understanding the relationship between entrepreneurship and national economic development. It provides comparable data across a large variety of countries on attitudes towards entrepreneurship, start-up and established business activities, and the aspirations of entrepreneurs for their businesses. GEM 2009 is based on more than 180,000 interviews conducted between May and October in 54 countries.

According to the survey, among innovation driven economies, Finland represents little bit below average position in overall entrepreneurial activity. This is not a good result when comparing how much the Finnish government and other public authorities have invested in our innovation and entrepreneurial ecosystem. However, the real challenges are in the high-growth expectations of the entrepreneurs, the international orientation of entrepreneurs, and in the amount of informal investments.

According to the GEM survey among 24 innovation driven economies, Finland has the lowest rate of entrepreneurs with high growth expectation, and in the whole sample – 54 countries – only Mexico has the lower rate than Finland. And when assessing entrepreneurs’ international orientation, on the list of innovation driven economies Finland was number 23 out of 24 countries. These numbers show that something is terribly wrong in our innovation and business ecosystem!

When talking about finance, every new venture starts with an “investment” from the founders themselves or from 3Fs – Family, Friend, or Fools. Informal investors are vital to the start-up process; if all of them stopped providing money to start-ups, the global economy would immediately feel the effect with a sudden jump in unemployment. In informal capital investments per GDP Finland was fourth lowest among the total GEM sample. Only Russia, Brazil and Jamaica were below us. In venture capital investments we were better positioned, but if we take closer look into our VC investments, we will find out that the contribution of public investors is quite remarkable especially in early stage investments.

We have an urgent need for building many new high growth, internationally oriented ventures, and well suited financial ecosystem. These should be our national priorities when building our future.

Guido Schenk – Associate Director of Sales EMEA & APAC Dow Jones, FIS-Private Markets

Following yesterday’s publication of our latest Global Venture Financing report, I thought it may be a good time to talk about ”Sisu”.

The Finnish language contains the remarkable word “sisu,” which is difficult to translate., however Wikipedia gives it a try with “the ability to sustain action against the odds.” It seems that Finnish entrepreneurs – like their counterparts all over Europe – will need quite some sisu these days when it comes to securing financing.

The challenges venture capital (VC) firms and entrepreneurs are facing are numerous:

- Liquidity markets, which not only provide returns on companies, but give VCs capital to invest in their next deal, are tight.

- VCs who are fundraising face LPs who are cash-strapped themselves. Without liquidity, many LPs became over-allocated to the asset class. Some are simply    unable to make new investments and others are limited in how much they can invest in the asset class.

- Leverage is always the key to getting a good deal. Right now, LPs have leverage over VCs who face stiff – and increasingly global – competition in the fundraising market. VCs have leverage over entrepreneurs who face a competitive financing environment.

Entrepreneurs can easily find themselves at the end of the food chain. But do they have to? At the end of the day, all investors are looking for lucrative targets and teams that can achieve success in challenging environments. The funding is available – but the appropriate opportunities and teams are few.

In 2010, venture investment may still be slow but some capital will be available and the best companies will get funded. Finns have an edge in this competitive environment because sisu is already part of their culture.

Matthew Littlewood, Technology Audit Partner, PricewaterhouseCoopers

The results of the US MoneyTree Survey by PwC and the NVCA for 2009 are grim.  US venture investing in 2009 was the lowest seen in a decade.  Investment dollars also fell across all industries and almost every stage of development category, except one.  First-time financings fell to the lowest dollar and deal level since MoneyTree began reporting venture capital investing in 1995.

When you consider how dire these statistics sound, you may not know that Microsoft and Hewlett Packard were both founded during economic slowdowns. One study by the Kauffman foundation, found that well over half of the companies on the 2009 list of Fortune 500 companies started during a recession or bear market.

Innovation does not stop during a recession. On the contrary, demand for innovation can increase as potential customers seek out ‘better, faster, cheaper’ solutions.  Recessions can make start ups stronger by making their founders more focused on capital efficiency, increasing availability of experienced workers at a lower cost, reducing overhead costs such as office or research space as well as driving out competition.

From a venture capitalists’ perspective, a recession slows down the deal flow which gives more time to evaluate opportunities.  A recession is a great filter for innovative ideas that have tremendous upside.  If a start up can survive an economic slowdown, how successful will it be during an economic recovery? Most importantly, a recession drives down deal valuations which can improve the long term return on capital for the investor.

Contrarian thoughts such as these, may explain why the MoneyTree Survey indicated a 2 percent increase in seed stage investments.  Fourth quarter investing also indicated increases in the number of first-time and early stage deals completed, potentially marking the beginning of an uptick in investment levels for 2010.

Kristiina Helenius
, Managing Director,
 AmCham Finland

Welcome to our first FutureMoney.fi post. This site is the online presence for an initiative that we at AmCham Finland are driving – helping redefine our national economy. No small task!

As Finland moves into the next decade we need to help redefine what the economic engine of the country is. With the economic turmoil of the last two years, significant reduction in VC funding has occurred in Finland. AmCham Finland and our partners felt it was time to create specific focus on the VC ecosystem.

Given 80 % of global VC investments are in the U.S., one would expect 80% of exits to be in the U.S. However leading U.S. VCs are looking to invest outside of the U.S. Why? According to one of them, more than half of the recent exits that have returned ten times or more are outside of the U.S., but not in Finland.

With its 500+ start up companies, often with world class technology, Finland has the capacity to become a leading global center for VC’s. Our High Tech and Growth Entrepreneurship committee saw a pressing need to create a platform to realize this potential. AmCham FutureMoney was developed in response to this need and exists to provide unique data and insights not just for VC’s but also the entire business ecosystem.

The inaugural AmCham FutureMoney event on Feb. 18, offers a unique opportunity to view and discuss previously unpublished U.S. and European ‘09 VC data, and sets the stage for AmCham FutureMoney to become Northern Europe’s premier quarterly VC event. With exclusive insights from PwC MoneyTree Report ^TM, Dow Jones VentureSource, and commentary from Mikko Suonenlahti – Growth Management Ltd, AmCham FutureMoney allows unprecedented access to the companies and thought leaders spearheading investment into the next decade.

Come back often – we will have postings, articles and links to fresh new content that will help us redefine Finland.

Please, join the conversation…