Northern Lights

What is holding Innovation back in Skåne? Part I.

The majority of tech startups in Skåne, Sweden are small niche players who cater to the B2B world. None of these companies are likely to scale past 1,000 employees let alone past 10,000. With no consumer oriented IT companies to conquer the universe there is not really a magnet company to fuel growth of smaller startups and put the spotlight on the region. Even regional successes such as Qlikview still had to source outside VC capital because the VC’s in the region were too conservative to take the risk.

Why is there a lack of companies that can scale big and reach the consumer market in Skåne?  Is it a tech problem? Do Swedish tech people think too small? Is it a lack of resources or business investment philosophy? From meeting many small tech companies in the region I don’t think it’s the tech people here who are afraid to dream big and take the world on toe to toe. On the other hand, these tech companies have to deal with conservative and backwards investment philosophies that ensure that the mediocre and small grow at a steady pace but limit the ability for any world famous tech companies that go large to be launched from this part of the world anytime soon. Examples:

1. The investment philosophy in Skåne dictates that before a VC invests in your company you should have customers. Google, Amazon, Facebook, Twitter, these big companies did not have customers before they received outside investment. The VC’s that put money into those companies understood technology and take risk. So, if the investment philosophy here is you have to have clients first than you have to ensure you develop a technology of a certain scope and scale…which tends to end up being a niche product…because that is about all a band of 3 to 6 hardy rebels can do without a serious cash infusion.

2. If you go to a VC and are young and its your first startup, in Skåne they are likely to dismiss you as being inexperienced and tell you to come back when you get your third company off the ground. In San Francisco people equate young and first time out of the chute with Google. So the attitude is automatically here in Skåne is to be against the small and young start-up.

To summarize,

Its not a lack of technologically sophisticated people holding Skäne back its a lack of risk taking mentality by those who control the purse strings. Often it’s not a case of the VC’s here not wanting to take the risk they just don’t have the technological competence to really judge if your investment is sound or not. Of course, they will invest in a Planeto with someone who has a solid track record, but that does not help most of the startups out there. If you are a small startup with big ambitions try placing a branch office where the movers and shakers of the world live. In San Francisco, Seattle, Silicon Valley, or London wherever you think the VC epicenter for your technology exists.

Heard and Said…..

I have been told by startups here that it is easier to get a bank loan than VC money in Sweden. VC’s in Skåne should not be allowed to be called VC’s, they should be referred to as banks or limited risk taking capitalists as there is simply no (Ad)venture to them.

Startups have turned to outside VC’s in the US and UK who tell them. Well, as soon as you can find a Swedish VC to partner up with than maybe we can help. Then those companies are caught in a chicken and egg syndrome.  

Startups here are so frustrated with the VC culture here that they some do not want their money no matter what. Why should a startup work with a VC when they were not willing to take a risk in the first place as American, Danish, and UK based VC’s often do?

Peter Sunde, formerly of The Pirate Bay, and now with Flattr posed some interesting points during an interview:  

• That Swedish startup culture has not found its own path. Instead the culture follows a copy of Silicon Valley or San Francisco and that for the startup culture to blossom needs to find its own unique way of doing things. 
  
  
• There is a strong inventor culture here. I would add, on the other hand there is a lack of marketing and business development to support it. The Swedish way of doing business is very different than the way of doing business in the Anglo or Asian worlds. Toe to Toe are Swedish startups competing well internationally within the realms of business development and marketing? You tell me.

I find lots of frustration with the startups in Skåne in terms of finding clients and getting established in Sweden. Perhaps they should think of throwing out the part of the playbook for startups that say’s “Always Begin in the Domestic Market” and look for their first client abroad. We all know that the decision making times are longer in Sweden than most countries, we know that most decisions are made by consensus in companies, and that consensus is usually a conservative decision….that is not a startup friendly attitude to start with… A startup with limited resources needs to be able to walk into a decision maker’s office and get a yes or know within the first 1 or 2 meetings. For a startup a short no is always better than the long maybe….considering that most seed funding marketing budgets here are an afterthought..the long maybe..that is, the decision cycles of Swedish corporate culture can be a killer. A formerly Swedish now Swiss banker friend of mine told me flat out, it takes me 1/3rd the time to do 3 times as much business in Germany or Switzerland than it does in Sweden..his only regret was it took him two decades to find that out!

What is holding Innovation back in Skåne? Part III.

I have looked long and hard at what is innovative here in Skåne, truly innovative in a Swedish way, something that could have only come from Sweden. This something coming from Sweden that can be as big or even bigger than Google, is already world famous, and at one time was responsible for receiving 50% of the worlds Internet traffic. Its the concept of The Pirate Movement.

The Pirate Movement would have never gotten its start if Sweden did not have such liberal public use laws to begin with.  It’s a movement that at its core is fighting against systems that are holding back the advancement of humanity. It’s common knowledge that oil companies control patents on innovative alternative energy technology, that large corporations collect patents for the primary purpose that if they have 300 patents in the same field and their competitor has 200 that the one with 300 will win in court, traditional media and the copyrights that protect them is the same old repeat of the same old story ; Wikileaks clearly demonstrated that by releasing more classified documents than the rest of the worlds press combined! Wikileaks may not have formal association with The Pirate Party but they are without question The Pirates of Modern day media, liberating secrets that if kept would allow governments and corporations to continue to do bad things.

Look at The Pirate Party within the context of a start-up for a moment. The Pirate Party blends a unique combination of innovation, politics, and economics.

It has branch offices in over 20 countries.
It is by far the most well known political party in Sweden internationally.

They just launched an ISP that is seeking to receive protection for its users under political grounds. Thats innovative and its a business model.

Growth of the Pirate Party within elections causes economic incentives that can help to further innovation. Their customers are the constituency.

The Pirate Party has successfully crowd sourced 10’s of thousands of people worldwide to further its goals.
As a start up the most important point about them is they offer disruptive ideas that benefit the masses.

Lets take a look at The Pirate Party disruptive core “technology”

The majority of wealth in the world is horded by governments, large corporations, and wealthy individuals. The Pirate Party aims to liberalize that distribution via allowing people to add to and modify others work. We live in a world where nothing is new it is only the combination of old things in new ways that are new. Lets consider where innovation comes from… mostly from the culture, individuals or very small companies. Pirate Party politics put the control in the hands of the the people not corporations and in a democracy thats where power should exist. The Pirate Party in many ways is simply an extension of the early years of labor movements…well, labor has now made a lot of stuff..and now we are all consumers. The Pirate Party is some ways is out there protecting consumers and helping consumers to evolve into prosumers… People who produce and consume and can trade with one another directly, peer to peer.

Who invests in The Pirate Party.
Political consumers…It’s crowdsourcing old school.

Let’s take a look at a second investment in a company started by a business inspired by Pirate Bay co-founder Peter Sunde… Flattr. Flattr shares some philosophies of the pirate party although they are not formally associated with one another. Flattr is similiar to the facebook like button but transfers money between users of flattr. Flattr cuts out many layers of middleman and charges a small fee that allows peer to peer payments. Peter described Flattr “As a mashup between capitalism and a socialist planned economy, and that has to come from Sweden”

Who invested in Flattr? Was it the hometeam Malmö VC crowd? Unsurprisingly not. It was Stefan Glaenzer, Last.fm’s first investor and chairman, and Eileen Burbidge, formerly of Skype. Both Last.fm and Skype were/are disruptive technologies in their own right. So, you have investors who have a track record of investing in companies that upset the status quo and take big risks … are there any investors like that here in Skåne?

Being part of the Pirate Party is great marketing internationally.

The Pirate ISP has just launched. Even thought at the time of writing this their website is still in Swedish they have been mentioned by CNET-UK, Fast Company, The Huffington Post, and dozens of other blogs and media outlets. Are there any other startups in Skåne getting that same kind of free press when they are still in the beta phase?  Saplo.com while not at all associated with The Pirate Party attributes their first round of funding to media attention which helped them get the word out.

If you are a startup think carefully…Maybe the best way for you to get the media attention which often leads to funding is to incorporate Pirate Politics into your business model?

What is holding Innovation back in Skåne? Part IV. Incentives

Investor Incentives

A few months ago I asked Professor Hans Landström of The Faculty of Entrepreneurship at Lund University the health of the angel investor community in Skåne. With a wry smile he replied “A bit depressed” the investors here give and give but find little recognition from the government in terms of incentives to do so. I noted the common pattern of wealthy Swedes establishing holding companies outside of Sweden and asked the Professor, wouldn’t, Swedish investors rather keep their money in Sweden and develop the local economy? He replied “Of course”. Universally, money goes where it is treated best, if Skåne and Sweden are going to attract and retain investment capital then there has to be investment incentive to keep the money here.

Sweden is going through a transformation. The traditional large industries are not carrying the weight of the economy like they used to and the startup companies that need to take up the slack are too few and far between.  Sweden is facing staggeringly high levels of unemployment amongst youth and people from immigrant backgrounds. Within the framework of this paragraph Sweden needs to do some creative thinking and realize sectors of its economy are in the same leagues as former eastern bloc countries or Ireland during in the early 1990’s and take similar measures.

Cut capital gains and corporate taxes down to levels that encourage investors to keep money in Sweden and attract new investment, as an example 12% each. A few percentage points higher than a tax haven is enough to be competitive. On the other hand, reinforce policies to discourage debt accumulation by individuals as in rapidly growing economies this can be one negative side effect.

Business Incentives

Let’s take a look at two companies that decided not to expand or move their operations in Sweden because of lack of incentives.

Malmö’s Massive Entertainment owned by Ubisoft was looking to expand its operations in wherever it could get the best deal. When Ubisoft asked what incentives there are expand in Skåne they were told, well, we have nice bicycle trails and good schools.

On the other hand Montreal Canada was able to offer several financial incentives to Ubisoft and most of the workforce went there or to their Asian operations not to Malmö. In Massive’s case the financial incentives in Montreal are unproductive, they call for continually hiring people and on the other hand they have to let people go, it’s a cycle that does not provide for a stable development studio.

Fortunately for Malmö, Massive is working on one of the largest MMO’s ever to be developed that will take several years to complete. Sweden is a good place to locate companies during the growth or development phase because no profit means little taxes and the labor for game developers here is top notch for the price. In this case, Sweden will most likely come out on top during the development phase and Massive will grow by a few hundred employees in Malmö. My concern is what happens when development is over and the profits start to accumulate, what incentive will Ubisoft have to keep the business side deriving profit located in Sweden?

The second company shall remain nameless but it’s a successful software development company that got its start in Sweden and serves such clients as Volvo and other industrial giants. The company grew to a few dozen employees here in Sweden and at that point the cost of doing business, primarily labor and taxes, were too high and the company relocated to Macedonia. Since its relocation it has grown to over 300 employees, increased its customer base dramatically, and takes advantage of corporate, personal, and capital gains taxes as low as 10%.

The challenge for business development agencies in Sweden is they really cannot offer companies searching to relocate any incentives. Denmark even goes so far to say that giving incentives to foreign companies willing to relocate to Denmark puts domestic companies at a disadvantage. This is true if the company is relocating to produce goods for the domestic market but is largely false when companies are exporting goods or competing in markets the local economy has no real foothold it. Business development agencies in Sweden should be allowed to wheel and deal…to haggle, to make it worth foreign investors and corporations time to look at Sweden as a viable choice for their investment.

Political Incentive

Google was planning on locating a data center to Lund, Sweden that could have employed up to 400 people. In 2008 the “pro business” center right coalition passed the FRA law which is a warrantless wiretapping law that allows Swedish authorities to monitor all data and voice communications leaving Sweden at their will. The Moderate Youth Party communicated to their parent party, one of the backers of the FRA law, that is was the “greatest violation of personal rights to privacy in the history of Sweden”.

After the FRA law passed Google backed out of the data center in Lund. Telia Sonera had to move their servers back to Finland to comply with Finnish Law. The passing of the FRA law sent a clear message to Google, one of the most successful companies in the world and the gem of Silicon Valley.  No foreign company in their right mind is going to move to a country where all of their communiqués have the potential to become business intelligence sold by the Swedish government to the highest bidder or used for potential political currency. This law has to be removed if Sweden is seriously considering attracting foreign investment…it’s a non starter issue. One of the largest recent investors in Sweden is the Chinese company Geely. Apparently Geely has no qualms with Sweden’s wiretapping laws as they are similar to those in their home country. Ironic, that a supposed liberal western democracy is passing laws similar to a country well documented for its human rights abuses.

Sweden has for a long time tried to market itself as a world leader in liberal and modern thinking. In many ways that is true in terms of same sex marriage, promoting gender equality, and offering the average family a high quality of life. However, Sweden gets very low marks in terms of integrating immigrants and accepting people of foreign backgrounds into position of power. In the US we had the civil rights movement, this led to busing of minorities to areas where white kids attended school, it led to affirmative action that established quotas for minorities in the workplace.  These policies were very positive for the society and without them we would not have ended up with Obama as president.

Today in Sweden, 20 percent of all residents are either foreign born or the children to two foreign born parents. I believe Sweden needs to set quotas that 20% of board members, managers, employees, and politicians must come from an ethnic minority. Integration has to be mandated otherwise the invisible wall that exists today will never come down.

Why is integration important for business development? Several reasons.

1. If you want to effectively serve global customers than your business should mimic those customers.

2. Swedish organizations and networks often suffer from groupthink and cliquish attitudes, people work harder at fitting in rather than doing something different, such behavior holds back innovation. The homogenous society worked in the industrial age but in the idea economy diversity, depth and breadth of knowledge, is the key economic driver.

3. If Sweden wants to present itself as a good investment alternative for “the right reasons” then Sweden has to live by those words and start setting positive examples in terms of embracing and emboldening minorities and immigrants. Currently, Sweden in about 40 years behind the USA in this area except Sweden does offer a bit more welfare, but opportunity is what drives the heart of man not bread alone.

Entrepreneur Incentive

Starting a company in Sweden used to require 100,000 SEK in capital and a few thousand kroner in administrative fees.  Recently Sweden reduced the amount to 50,000 SEK in capital no longer requires the company to have an Auditor. The process still takes generally several weeks and has to go through a number of bureaucratic check points.  In America, in most states, a corporation can be opened in about 30 minutes via the Internet and it costs anywhere from 500 to 3000 SEK to do so.

For a young entrepreneur in Sweden coming up with 50,000 SEK can be difficult. The entrepreneur may open a sole proprietorship instead however; a sole proprietorship does not offer the same legal protection of an AB (similar to a C corp). So, if the sole proprietorship fails the entrepreneur can be held legally responsible for any debt.  

Sweden and the US differ a great deal in bankruptcy law. In Sweden it is administered by a central authority known as Kronofogden. On a relative basis Kronofogden has much more power and authority to collect debt than US states and what you can keep is significantly less than what one could in many jurisdictions in the US. A mark on one’s credit history from Kronofogden bars people from renting property, obtaining credit, or sometimes even opening another company. Mentioning Kronofogden to Swedes who have been under their thumb and they often speak with shame and fear of dealing with the agency.  A debt forgiveness plan at Kronofogden lasts 5 years, and in some cases may not be granted at all placing the debtor in a lifelong position as a debt slave.

 On the other hand, in the US, a bankruptcy can be put behind a person in as little as 18 months in terms of buying a house, a car, or obtaining credit, nor are people barred from opening companies due to a bankruptcy. In the US people get a second chance, it’s a system that is inherently designed to give people the opportunities to take risks. 

Sweden should give entrepreneurs the breathing room to fail. Not everyone is a Bill Gates the first time out of the chute; even experienced entrepreneurs don’t always get it right every time. People should not be penalized for taking a risk and failing over and above the loss of the company itself. The best remedy for falling off a horse is to get back on it as soon as possible. The debt collection system in Sweden keeps young entrepreneurs from getting back on that proverbial horse and keeps creativity and talent locked down.

Conclusion

Overall the US as compared to Sweden statistics show there is about 100 times the chance for someone to become a millionaire in USD equivalent. As a personal example, I moved from Norway to the USA with about 50,000 USD in savings and within 3 years I was a millionaire. I have lived in Sweden for 3 years and find nowhere near the opportunities here.  

I started my company in the US and had no support from any government organization or outside investors. The US market and the society offered the freedom and directness to either succeed or fail quickly.  

Here in Skåne they are bending over backwards with bureaucracies to stimulate the growth of the entrepreneur. Most of these bureaucracies are run and staffed by people who have never started their own business…it’s akin to the blind leading those that have vision.

On the other hand, what Skåne does need is incentives and changes in attitude that allows innovation and the business it generates to happen naturally, quickly, and profitably.

Future Articles. What is holding Innovation back in Skåne?

Part V.   Swedish Media
Part VI.  Solutions to driving innovation in Skåne.