Reeling in the last decade in Finnish VC

January 2010 - a good time to take stock of what we did during the last decade and to consider what we will do differently for the next one... So here is my effort on the subject (aided by the awesome view here in Amelia Island Florida !).  Sorry for the length, but hard to make any shorter…
 
Looking back to the Finnish start-up environment of the late 90’s, I was trying to figure out the similarities and differences compared to today, and in parallel, the evolution of the VC environment over the last 10 years. What could and should happen in the next 10 years?  While there certainly are a lot of colorful stories, the thing that bothers me is the number of “success stories that got away”.
 
For perspective, what kicked me into this “business” was the study I did comparing Finland and Israel in 1997, published by SITRA (with excellent help from guys like Manu Mäkelä and Kimmo Jyllilä who have ended up being key players in the industry).  The key success factors identified in that report was systematic development with desegmentation of the exit environment, the need for syndication with international VCs, and to learn from the Israeli incubation model.
 
That led me to start an investment banking joint venture between Eqvitec and Robertson Stephens where I began the decade.  I then moved to Eqvitec through 2003, Helsinki University of Technology in 2004, Valimo Wireless 2005 thru early 2007, Conor Ventures for most of 2007, and then Technopolis Ventures from early 2008.  I also participated on boards of more than 15 companies, involved in over 200 million euros in funding rounds and 6 exits (as banker, investor/board member or CEO).  Most of these have been in ICT-related areas, but I have spent some time in other tech fields as well.
 
There are many small lessons from the tens of successes and failures, and then a couple of bigger points that are worth mentioning.  I would like to highlight the points made in the above study given the events of the “‘2000-noughts”.  My main emphasis is on exits, since they are the only relevant measure of success for both growth entrepreneurial businesses or venture capital investing, and this area (exits) is precisely where Finnish companies have had the biggest challenges in my view.  To be clear, company-building, fast growth, internationalization etc. are fundamental to creating great exits, but at the end of the day they are “means to an end” – an IPO or a trade sale.   
 
Around 2000, the Finnish VC industry (as an industry, not just as a bunch of investment companies) was really gaining some strength and cohesiveness.  The key institutional driver was the underlying support of SITRA, both in boldly spinning out Eqvitec, Biofund and Fenno Management, as well as in supporting the nascent FVCA’s emergence as an industry group.  The beginning of the 2000s were promising with some excellent VC-backed exits (i.e. Iobox, Satama, Aldata, BioTie), and major funding rounds in the “late bubble phase” (i.e. Digia (€30m), Solid (€50m), Springtoys/Codetoys (€15m+), OpenMobile, and a host of biotech companies to name a few).  VC deals were typically syndicated between a Finnish VC and at least one international partner.
 
The larger Finnish tech VC funds which had raised first funds pre-bubble were quite successful from an IRR (internal rate of return) perspective, and relatively easily raised new funds in 2000/01/02.  With larger funds and some international mergers, they started to emphasize Nordic approaches (Eqvitec and Capman’s tech funds in particular). The other large established tech player at that point, SFK became 3i and fairly quickly exited the Finnish market.
 
On the other hand, some new funds that were gathered during the height of the stock market (i.e. Nexit, Stratos, Holtron) in 2000/2001 came in the market at a terrible time, and started their fund cycles investing at very high prices, leading to painful adjustment periods later on.  While Stratos did not make it, Nexit and Holtron both have interesting stories.
 
Nexit made a remarkable comeback with some of the best Finnish exits of the decade in BitBoys and Hybrid Graphics, to go along with some excellent exits in their US portfolio.  Meanwhile, Holtron had a small fund and portfolio, much of which went bust quickly. This led them to the classic timing problem in VC: no exits to prove “realized IRR”, and thus no possibility to raise new funds and continue investing.  This story also basically applies to another small fund, Innofinance, which also has several interesting companies remaining even today.
 
However, Holtron protected the MySQL investment as best possible with its small fund, and ended up having probably the most successful fund in Finnish history from a rate of return perspective.  It is interesting that Holtron “fathered” both Inventure and Conor, two of the most active investors in the early stage market today, but each of those only raised funds in 2007/2008. Things could have been very different if Finnish limited partners could have foreseen the success of the MySQL exit and enabled a new fund a little earlier.  The total lack of seed VC during the middle of the decade really hurt the market and led to the situation where there are very few “maturing”, well-funded companies in the market today.
 
I put together the below exit table from publicly-available information, along with some educated judgment (which is not necessarily exactly right, but at least logical).  There are a few things that stand out:
 

• There has been no IPO market for the second half of the decade – zero, notta.  It is certain that there will be no serious and sustainable VC market in Finland until either a local tech IPO market emerges (unlikely but not impossible), or we find good channels to Sweden, UK or US (simply a matter of concentrated effort). Trade sales are fine, but the pricing of the deals cannot reach their potential unless there is a credible threat for excelling companies to go public.  Many of the Finnish companies that have listed have struggled mightily to keep reasonable market value and necessary liquidity.

• There are a number of small but profitable exits (by international standards) that have given good payback to founders and VCs, but very few blockbusters.  And none in the last few years.  There is a great presentation/study by Creandum and Argentum published in 2008 highlighting how Sweden is the only Nordic market with real blockbuster exits, almost totally explained by their willingness to embrace the consumer internet).

• It is also important what one compares to.  The HEXOMX index is down 33% from its level in JAN 2000, and Nokia (its main component) is down significantly as well. In other words, while there are a few VC-backed success stories, investing in Finnish public tech stocks has been no picnic.  Thus moderately successful private company exits may actually be pretty good relative to alternative investments.

• In the mobility space, startups like Iobox, Smartner, BookIt, Firsthop and of course Nokia pioneered the mobile email/ messaging space, but have relatively little market value creation to show for it today.  RIMM and several others now dominate from mindshare (and stockmarket) perspective.  RIMM’s stock is up 850% over the decade.  Similarly, 10s of other Finnish innovations in mobility have come so early (i.e. Smarttrust, Valimo in mobile identity, MyOrego in rich browsing, etc), but value creation happens elsewhere – look at Apple and Google, both stocks up 1000’s of percent during the decade (especially when weighted with the US dollar’s depreciation).

• In life sciences, initial good starts with the listings of BioTie in Helsinki , and Inion and Ark Therapeutics abroad, have turned to struggles to stay afloat.  Cerebricon was an excellent recent exit (2009) to the US company Charles River Labs, and seems to be really growing in size and respect.  It is widely agreed that there is really only one active Biotech fund in Finland , Inveni Capital, which splits its relatively small fund between Finland and Germany .  Much more connectivity to European VC funds and corporate is necessary to see a profitable outcome to Finland’s massive R&D investment in the life sciences field – capital appreciation through customer revenues is still far in the future for most of the companies.

• It is alarming that there was only one significant international VC investment in the second half of 2009.  Only 2 investments in 2009 came from out of the Nordic Region (Tempo Capital to SILECS and Index Ventures to Imbera).  The international syndication track record needs to improve quickly – international investors almost always require the certification effect of local investor interest.

• Institutional investors, like pension funds and insurance companies must not be forgotten.  They rightfully only care about exits.  No exits, no new Finnish funds, that’s for sure!  In this light, the institutions are actually the backbone of the Finnish innovation system, and must be considered as such.  They should be educated to make sure that they help to realize the true potential of the Finnish innovation ecosystem by investing in both VC funds and in future public stock offering of tech companies.

• Finally, it is cliché at this point, but still worth mentioning: Linux was born in Finland , yet Finland has not benefited in terms of market value creation at all from its growth.  It is interesting that it looks like Google will be the first have a Linux-based operating system (Chromium OS) broadly penetrated in the market, and this may generate massive stock market returns over the coming decade.  Two footnotes:
  • MySQL is another GREAT open source story that grew out of the minds of Finn’s – excellent that the entrepreneurs benefitted greatly and are returning their knowhow and capital (ie Open Ocean Capital) to Finland – the biggest investor returns accrued in Sweden and the US however.
  • Sulake/Habbo/IRC Galleria deserves special note.  Social networking companies are accruing HUGE valuations in the US and to a certain extent in Europe and Asia, and Finland again moved very very early, but most of the institutional investment value is accruing outside of Finland .
  • Point here is that always for the biggest stories we need capital from outside Finland (both of these examples happen to involve Benchmark/Balderton Capital), but it would still be optimal for more Finnish capital to go in earlier – a little more risk bearing could result in much greater returns.

 
In conclusion to this section, Finnish innovation tends to come VERY early in the value creation cycle, but also tends to anchor the execution of huge megatrends.  There must be strategies to feed in more private capital, and to grow globally faster.  Below are a few random thoughts related to institutions and concepts that can support growth in the next decade.
 

• The VIGO accelerator program has managed to pull in an all-star cast of Finnish entrepreneurs (as well as some very notable tech managers) into 6 accelerator companies .  This is something that the VC industry has not managed to do – while there are a lot of excellent people in Finnish VCs, very few have strong entrepreneurial track records.  I can really see how the VIGOs will be able to add value to entrepreneurial enterprises, but they also need to raise their own funds to be successful.  If they only end up recycling TEKES funding, they will not make a significant impact.  Thumbs are up now!

• Entrepreneurial societies are at a totally new level today compared to 10 years ago.  Both university based (Aalto Entrepreneurship Society and Helsinki Metro Entrepreneurship Association are getting to much younger and energetic demographics, and Software Entrepreneurs are doing great work.  Very good material for the future.  There was nothing close to this level of activity at the turn of the century.

• My top two New Year’s wishes (has been the same for 5 years, has not happened though):

•  
  • Consolidation among Finnish tech startups: It is great to have many companies starting, but they should quickly combine into larger more diverse companies.  VCs, as well as public entities, can affect this by monitoring global markets by investing larger sums into entrepreneurs who are willing to merge together (both nationally and internationally).  These are always tough deals to pull off given the challenges in lining up everyone’s interest, but in my opinion it is the greatest opportunity for creating critical mass in a hurry.  Entrepreneurs can obviously help by bringing prospective business combinations to investors very early.  There are great stories out there ready to happen!

•  
  • Speed and Action: the potential and barriers to growth are obvious right now, and there is no need for further study.  The markets are moving at light speed, there is no opportunity to “wait and see”!

 
The point here is that finding credible catalysts leading to more and better exits are very necessary.  My belief is that this is not just organic growth and company building – it is about getting more visibility into our high tech industry, and then having better strategic (and tactical) work to build key and robust industry pillars.   Fast growth, path to profitability, and industry networking are all critical elements.
 
A few VC-backed companies to watch for potential exits early in the 2000-teens – I am sure I have missed some, but these are all great opportunities with visible exit paths.  (keep in mind that I have left a few out where I have a little more information than I would like to disclose here…)
 

• BlueGiga – reaching revenues near 10m, strong position in Bluetooth radio market.
• Codenomicon – strong revenue growth and excellent management
• CRF Box – very strong revenue growth and profitable in an excellent growing market
• Ekahau – excellent story and team, with revenue starting to reach critical mass levels.  Strong focus in the US :
• Imbera Electronics – global manufacturing base and major contracts in place, large funding round.
• Sanako – global leader in language lab software, revenues growing fast, well-funded by Eqvitec and Nordic Venture Partners
• SILECS – well-funded, global investor base, revenue growth started, ready for the hockey stick.
• Seven Networks/Smartner – clear leader in device independent mobile email market, sales in the 
• Sulake – obvious one, large and profitable now that there has been some downsizing. Poised for exit and even potential IPO (I hope!).
• Supponor Systems – truly revolutionary approved to digital ad replacement.  Very well funded and managed, expect breakthroughs soon!

 
Happy New Year to everyone, hoping for a profitable 2010!
 
Will
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Below is a list of significant exits and a few attributes about them - it is not at all meant to be complete, but I think it catches the majority of key exits.  Thanks to my great colleagues at TechnopolisOnline that have made compiling the data in this article a snap, to the many people who have listed bits and pieces on the net. Any errors and omissions are my own ;)