Every year, citizens from across the Nordic countries come together for the Democratic festivals, a unique political arena where people of all ages engage in candid debates about the state of their democracy. Nordic Innovation participated together with our project partner, VC Challenge, at Folkemødet in Denmark, Almedalen in Sweden, and Arendalsuka in Norway, to bring about the crucial question to the political debate: How should we finance innovation in the Nordic region?
The right to Innovation
Innovation and entrepreneurship are essential drivers of economic progress and economic growth. Innovation leads to better technology, healthcare, and education, which improves people's lives. Innovative economies create jobs, increases corporate social contribution and reduce income inequality. Innovating keeps countries competitive and relevant in a more global market and provides opportunities for present and future generations. Innovation helps tackle the most pressing social and environmental problems and ensures progress towards a greener and more sustainable future.
Innovation and innovative economies should not be merely a wish or a societal aspiration. Innovation is in essence what drives economies forward. That is the reason why Nordic Innovation and VC Challenge brought the topic of innovation and how it should be financed and supported into the political debate.
We should collaborate to inform and educate stakeholders, such as institutional investors and the public, to secure the best possible conditions for building and investing in startups, and to inspire further investment that will result in both financial returns and sustainable value creation.”
Arne Tonning, Partner at Alliance Venture
Talent, infrastructure and capital markets are drivers of innovation
What really matters for economic success is innovation. And what really matters for innovation is: Talent, Infrastructure and Capital markets.
At each Nordic Democratic Festival, we posed the same questions:
Talent: Are we investing enough in education and development of skills to ensure our workforce remains highly skilled and innovative? Do we provide adequate support for research and development, attracting and retaining top experts in various fields? Are we fostering an environment that encourages entrepreneurship and allows innovators to thrive within our society?
Infrastructure: Is our physical infrastructure, including transportation and communication networks, efficient and well-maintained to support innovation? Do we have a robust digital infrastructure that ensures widespread access to high-speed internet and technology services? Are our research facilities and innovation hubs world-class, enabling cutting-edge research and collaboration?
Capital Markets: Are our financial systems accessible enough to provide necessary funding for innovative projects and startups? Do we have mechanisms in place to allocate risk capital to support high-potential, innovative ventures? Are there attractive exit options like initial public offerings (IPOs) or mergers and acquisitions (M&A) to incentivize innovation investments?
In each country we reached to the same conclusions: While the Nordics has a strong talent-base, infrastructure and research capabilities, it is not the obvious destination for international top talent, it doesn't have a fully developed capital market and is often unable to successfully commercialize and scale Nordic inventions, technologies and innovation.
Nicolai Juel Vædele, Director of Greater Copenhagen, emphasizes this point: “Greater Copenhagen is ahead in sustainable research and development, but we are lacking behind other metropolitan geographies when it comes to attracting venture-capital and unfolding the potential of green patents and innovation.”
The role of Venture Capital in innovation
Venture Capital plays a pivotal role in identifying, developing and commercializing innovation. If you are an entrepreneur with a business idea or a new technology and you need financing to develop it, you have few places to go to.
Traditional Banks: Banks typically require tangible assets as collateral to secure debt financing, and they operate under strict regulations regarding the level of risk they can undertake. This approach may not be suitable for early-stage, high-risk companies seeking innovation capital.
Public Markets: Stock exchanges are highly regulated markets where only a selected few companies meet the criteria for trading. For instance, on the Oslo Stock Exchange, the minimum company valuation is set at a substantial 30 million EUR, excluding most startups and innovation-driven enterprises currently operating in the ecosystem.
Entrepreneur’s Family and Friends: Entrepreneurs own money and their friends and family money often play an essential role in the early phases of a company. They provide initial capital and support. However, it is an inherently unfair source of funding as it does not guarantee the same opportunities for everyone, and these resources may fall short when it comes to financing sustained growth and development.
“The system for VC funds as well as other parts of the financial system is structured within each Nordic country, which makes it difficult to set up a Nordic fund that serves the whole region."
Tarja Berg, Fund Manager at Star Impact
Government Funding: Governments also play an essential role in the early phases of a company. They often provide support through programs, grants, and incentives. While it can provide a valuable initial boost, it is typically limited in scale, it is sometimes conditioned to a certain type of businesses and can be subject to fluctuations based on the political climate and short-term priorities of the incumbent administration.
Angel Capital: Angel investors, while valuable, often view their investments as a sideline rather than their primary business. While they can provide essential early-stage funding and expertise, they may not have the scale or resources to support the extensive growth and development needs of innovative startups.
Venture Capital: Venture Capital is a financial mechanism that bridges the gap between government support and the entrepreneurs’ friends and families on one side, and more conventional sources of capital such as credit or public markets on the other side. Venture Capital is professional equity financing that not only provides the necessary funds into innovative companies but also brings expertise, mentorship, network and a shared commitment to developing the company and bringing the innovation forward to the market.
Venture money is therefore a key source of funding for innovation.
Developing a Nordic Venture Market
While Venture Capital is a growing force in the Nordic economy, it remains a relatively small part of it. Currently, an estimated 0.04% of the yearly GDP in the Nordics is invested in Venture Capital, contrasting with 0.36% in the USA and 0.38% in Israel. Furthermore, Nordic Venture is an emerging Venture Ecosystem, with more than 80% of fund managers managing three funds or less, and nearly 50% managing their first fund.
In this sense, Venture Capital in the Nordics has an enormous growth potential and it offers a unique opportunity for the Nordic countries to work together and develop a common Nordic Venture Market.
Here are the key recommendations on how to achieve this goal:
Investor support: As an emerging ecosystem, there is a need to support new and existing investors in the Nordic region with training, best practices and the best venture expertise to increase its competitiveness and attractiveness in the global Capital Markets.
Peter Munch-Madsen, Senior Advisor at Nordic Innovation, highlights the importance of both public and private capital:
"To create the best grounds for innovation in the Nordic region we need to focus on the opportunities resting with infusions of both public and private capital. Where in the value chain does public funding and private capital create the most added value and how can we build a Nordic ecosystem for venture capital supporting a sustainable, gender equal and green Nordic transition?"
Education and knowledge: There is a need to increase the level of awareness, knowledge and education of the innovation economy in the Nordic region and the role that entrepreneurs and investors play in it to attract institutional investors and the public into it.
Collaboration around education is necessary. Arne Tonning, Partner at Alliance Venture, says:
“At Alliance VC we are expanding our presence in the Nordics driven by the opportunity to invest in the many great startups in our ecosystem. This opportunity is clear to founders and startup investors, but may be less obvious from the outside. There is a risk that funding to venture capital, and therefore startups, may dip in the current market conditions. We should collaborate to inform and educate stakeholders, such as institutional investors and the public, to secure the best possible conditions for building and investing in startups, and to inspire further investment that will result in both financial returns and sustainable value creation.”
Unified Market rules: There is an opportunity for Nordic countries to share and combine the best and most successful innovation policies and regulations in each country to develop the best innovation environment in the world.
Bjarne Lie, Partner at Verdane, underlines the importance of combining regulatory features of the Nordic countries:
“Many of the core building blocks of a vibrant ecosystem are already present in the Nordics, but I hope going forward the Nordic governments can transfer best practices among themselves when it comes to issues like, fund regulations, employee ownership, skilled worker visa etc. If we could combine the best regulatory features of each country, the Nordics would be the best environment for innovation and growth to be found anywhere on the planet.”
"Where in the value chain does public funding and private capital create the most added value and how can we build a Nordic ecosystem for venture capital supporting a sustainable, gender equal and green Nordic transition?"
Peter Munch-Madsen, Senior Advisor at Nordic Innovation
Nordic Fund of Funds: The emerging Venture Ecosystem would benefit from a Pan-Nordic Fund of Funds, with the role to support and anchor more Nordic emerging funds investing in Nordic companies and technologies.
Tarja Berg, fund manager at Star Impact highlights this idea:
“The Nordic countries have much in common regarding entrepreneurship and innovation and the first new markets for growing businesses are often within the Nordics. But the system for VC funds as well as other parts of the financial system is structured within each Nordic country, which makes it difficult to set up a Nordic fund that serves the whole region. The Nordic State LPs should also support emerging managers with new funds by acting as anchor investors, in the same way as the European Investment Fund operates on European level. The private LPs would then have easier to join as investor in the new fund. This is crucial, especially in the current macroeconomic environment.”
Nordic Venture Association: The region requires a Nordic-level association, that could serve as a forum for public debate and discussions on the topic of talent, infrastructure and capital markets. That would identify and support policy changes that could benefit the Nordic Venture Ecosystem and that would involve not only established fund managers, but also emerging managers, private investors, public investors, entrepreneurs and policy makers.
A Nordic Venture Model: Last but not least, there is a pressing need for Nordic innovators to revisit some of the principles of traditional Venture Capital, typically based on the traditional American Venture Model, and together develop a distinct Nordic Venture model that aligns with our values and serve our societal and environmental goals.
This model should reflect the unique identity and aspirations of the Nordic countries and should take into account the most pressing social, governmental and enviromental issues. Venture Capital is in essence a financial instrument that if applied correctly, it has the capacity to accelerate growth and development of key industries and key areas of focus for the Nordic region.
In essence, a common Nordic Venture Market should ensure that the Nordic companies that deserve funding, receive the funding they need: That there is enough funding for innovation in the Nordic region. That the market rules and regulations attract, support and reward the risk takers and innovation catalysts - the investors and the entrepreneurs. And that it includes and promotes the principles and values of the society it serves.
Background
The Nordic Venture Capital Challenge is funded under the Circular Business Models program as an initiative to support the development of new venture capital funds in the Nordic region, in order to help funds to become green and encourage funds to have gender diversity in their partnership structure. Since 2021, Venture Capital Challenge has trained over 100 aspiring fund managers from the 5 Nordic countries on the topic of Venture Capital, Fund Management and Startup Investing and has supported over 15 teams launching their first Venture Fund.
