Ecosystem Deep Dives #13: Sweden - Innovate for Impact
Ecosystem Deep Dives #13: Sweden - Innovate for Impact
Why a discreet Scandinavian country has the second percentage of unicorns per capita in the world.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!
A long time coming
Nestled near the unforgiving temperatures of the polar north, Sweden’s success as a global start-up hub is anything but an overnight success. Now boasting the second highest number of unicorns per capita in the world (behind Silicon Valley), Sweden’s start-up ecosystem is one of the most performant in the world. Household names such as Spotify, Klarna and King (the makers of Candy Crush) all contributed to earning Sweden the nickname of “Europe’s unicorn factory”.
A number of economic, political and social preconditions have led Sweden to success. On a societal level first, government policies aimed at digitizing the country in the 90’s gave rise to an extremely digitally-literate population decades later. The CEO of Klarna, Sebastian Siemiatkowski, said he started teaching himself how to code at age 10, on a government-subsidized computer. Similar to Estonia, digital-embracing government policies put in place more than two decades ago led to Sweden’s brightest minds being ready for the plethora of opportunities the internet would end up offering. Today, more than 3/4th of the Swedish population has access to superfast fiber optic broadband, with 90% of the population using the internet.
Taking a closer look at what makes Swedish founders so prolific, one realizes the paradox between the country’s dynamic start-up ecosystem and its heavy welfare state/taxation policy. The politicization of the economic debate has led most people to see such matters in black and white, namely:
Low taxes, small state = Flourishing private sector BUT little public services.
High taxes, heavy state = A lot of public services BUT slow and heavy private sector.
The fact of the matter is that Sweden, as well as other Scandinavian countries, have proven that welfare state and free markets can co-exist. Better yet, they support each other. For example, many attribute Sweden’s start-up success to the peace of mind its social/health safety net provides to its founders. Free, quality higher education also provides the country with a continuous qualified and multi-lingual talent pool.
I recently read somewhere that one of the biggest French angel investors was government-provided unemployment benefits. As the world starts thinking of how to measure economic growth in more holistic ways, start-up ecosystem thought leaders should free themselves from the false dichotomy of free markets vs welfare states and instead think of how to combine the best sides of both into their policies.
The role of corporations & culture
As stated earlier, the success of the Swedish start-up ecosystem is the result of thirty years of sensible government policies and private sector innovations. Sweden has a tradition of successful corporations, including IKEA, Volvo, H&M and Ericsson just to name a few. The financial success of these corporations provided the Swedish government with the fiscal revenue needed to kickstart its national start-up ecosystem.
Swedish culture has always included high levels of “intrapreneurship” and a less-individualistic approach to success, known as the Law of Jante, which have both made the Swedish population more prone to entrepreneurial endeavors and teamwork. While this so-called “jantelagen” isn’t as prominent today, as the increasing number of successful Swedish founders has reduced the taboo around individual success, this unique Swedish characteristic played an important role in laying the ecosystem’s healthy foundations.
A higher level of trust in the government is also responsible for Swedes’ openness to risk and new technologies. For example, Sweden is the number one “cashless” country in the world, with less than 2% of transactions being carried out using physical money.
In recent years, the exits of many successful Swedish start-ups have given new Swedish founders access to a wide network of rich angel investors looking to invest back into the ecosystem they once thrived in. Given the small size of the domestic Swedish market, Swedish founders have a tendency to think global from the get-go, a necessary pre-condition for creating “exit-able” companies.
More than 50 people have exited startups in Sweden with more than $100m each. This has created a surge in angel investing and serial entrepreneurs with experience of growing in startups which are critical to an ecosystem. - Legacy Ventures.
The start-up ecosystem today
As with many other European countries, the Swedish start-up ecosystem today benefits strongly from governmental support in the form of Start-Up Sweden, supported by Tillväxtverket (Sweden’s economic growth agency). Ignite Sweden, which matches large corporate and the public sector with innovative Swedish start-ups is another laudable initiative.
Far from the government being the only actor however, a number of private and university initiatives contribute to the health of the ecosystem. An umbrella organization, SISP (Swedish Incubators and Science Parks), unites a good number of them. SISP’s network has over 60 members and supports over 5,000 companies.
Some of the most prominent incubators/accelerators include:
As mentioned previously, the Swedish fundraising scene is quite healthy. On top of the many Swedish former start-up founders who reconvert as angels, Swedish start-ups attract many foreign investors. Strong governmental regulations, paradoxically, make some sectors extremely interesting to global-thinking investors. For example, Swedish fintechs have to comply with such high levels of transparency and consumer protection at home that they are well-suited to take on almost any other market in the world.
Some actors of the ecosystem have told me that while the fundraising scene was healthy, early-stage tickets were still small compared to other ecosystems. For example, one person I talked to stated that an idea that could raise $10K in Sweden could raise $1M in London. However, he also insisted that the government and local investors are working hard on providing more liquidity for early-stage tickets.
Sweden has also been in phase with the astronomical rise in start-up funding numbers experienced worldwide in 2021:
[Sweden recorded] a record €7B of VC investment in 2021, more than twice the amount invested in 2020 - Dealroom
A list of some of Sweden’s “all-time” start-ups hall of fame include:
Spotify: A commercial music streaming service that provides restricted digital content from a range of record labels and artists.
Klarna: An e-commerce payment solutions platform for merchants and shoppers.
King: An interactive entertainment company that provides online games for global portals, websites, and other media companies.
Skype: A telecommunications platform that offers free video chat and voice calls to internet-connected devices.
Truecaller: A mobile app that lets you see who's calling and block unwanted calls.
Mojang: A Swedish game developer creating independent video games such as Minecraft.
Tictail: An online marketplace that enables users to discover independent brands.
iZettle: A mobile payments company, offers small businesses with portable point-of-sale solutions and free sales overview tools.
For a broader view of the Swedish start-up ecosystem, including a list of some up-and-coming start-ups, feel free to check out Sweden’s Dealroom profile.
An impactful ecosystem
Another extremely fundamental element of the Swedish start-up ecosystem is the massive importance of “impact start-ups”, or in other words, start-ups that attempt to solve problems related to the UN’s SDG’s (sustainable development goals). In 2020, 43% of total VC investment went towards SDG-aligned start-ups, and total investment in the SDG sector and investment in Swedish impact startups grew from €1.3bn in 2020 to €3.6bn in 2021. The Swedish Innovation Agency, Vinnova, also funds thousands of research and innovation projects with impact in mind. The country’s tradition of social democracy and egalitarian principles is an undeniable cause of this (positive) anomaly.
One of the challenges the Swedish impact sector is currently facing is the necessity to stretch out the “traditional” VC and PE’s (private equity) investment time-horizon, especially relating to climate-focused start-ups who evidently require more time and patience.
Conclusion
The Swedish start-up ecosystem is interesting because it provides a different definition of success. While the USA is still undisputed in terms of pure funding numbers, I don’t know if the American start-up ecosystem is providing as much benefit to its broader population than the Swedish one is. Analyzing how Sweden combines a generous welfare state with a dynamic start-up sector should be a point of reference for countries wanting to develop their start-up ecosystems without falling into unrestrained and “wild” American capitalism and subsequent absurd economic inequality. A middle-ground is possible, and Sweden is a testament to it.
Ecosystem Deep Dives is a weekly series in which I analyze and compare different start-up ecosystems from around the world. If you enjoy and gain value from my work, feel free to share and subscribe!