Tekes — Funding Finnish Clean Tech Companies. Too Much Capital?

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Finnish entrepreneurs don’t value the difficulties often endured by their contemporaries in the US and Europe in their pursuit of seed capital.During the first day of our tour of Finland’s clean tech companies, we got to meet with Kari Herlevi a Senior Business Advisor recently back in Finland after a tour in Silicon Valley with Tekes, the entity charged with executing the Finish government’s seed investment strategy in technology and innovation. Investing through grants and soft loans, Tekes offers Finnish entrepreneurs a source of capital that a dormant VC and Angel Investing industry fails to provide. Almost invariably, over the course of the ensuing three days Tekes was mentioned as a source of funding for the companies we visited.

I was left scratching my head and pondering the efficacy of this somewhat socialist approach to promoting capitalism. While access to capital, especially in today’s markets, could be referred to as a “fancy problem” to have I would suggest that these funds could be crowding out otherwise willing private investors.  In addition to risk capital these equity investors provide scrutiny, mentorship, discipline and global industry contacts that they are incentivized to share with their portfolio companies in order to facilitate their aligned success.

Over coffee last week, Ville Vesterinen, of Arctic StartUp expressed his concerns that even while Finnish culture does not often honor the efforts and professional choices of entrepreneurs (frankly I think that mothers and spouses everywhere gently suggest and hope that their loved ones pursue finding a “real” job), Tekes’ mandates mean that Finnish entrepreneurs don’t value the difficulties often endured by their contemporaries in the US and Europe in their pursuit of seed capital.

Speaking with Kristian Bruning of Climate Wedge over breakfast yesterday, he echoed Ville’s concern that Finnish entrepreneurs were less respected by their contemporaries and that their business plans were not tempered by the scrutiny of critical early stage equity investors – he also voiced his concern about the large gap between early stage funds offered by Tekes and the high-risk expansion capital needed by companies to pursue opportunities once they achieve some traction.

From my exposure to the support and rigor offered by venture capital investors in the United States and venture networks like Endeavor in developing countries (in my case Colombia), I would propose to Tekes that there could be a more effective, and more sustainable, approach to fomenting successful cleantech entrepreneurs in Finland while deploying the capital they have set aside efficiently. I think that they could do this by:

1. Promoting Venture Networks

2. Funding Business Plan Competitions

3. Becoming LPs in Venture Funds

4. Funding projects in the “Valley of Death”

1. Promoting Venture Networks

By all accounts (granted I had a limited data set of about 10 companies and entrepreneurs), Finland’s entrepreneurs need some help legitimizing their efforts (or just convincing their pals and girlfriends that it was not a stupid idea to decline that offer from Nokia last year). By pooling successful entrepreneurs and professional service firms that cater to entrepreneurs, Tekes could create a traveling forum of selected Finnish role models to secondary schools and universities where budding entrepreneurs will find the confidence they need to move forward with their ideas while their risk averse colleagues will begin to appreciate that the road less travelled is not necessarily a fool’s choice.  This group of thinkers could meanwhile foment best practices and lobby for start-up friendly legislation.  Endeavor has managed to do this effectively in developing nations where the challenges are often very different. There, budding entrepreneurs lack access to successful business leaders, their stories and capital because of stratified social structures or brain drain and the “success-flight” of established entrepreneurs and savvy business people to the United States and Europe.

These networks need not be an overt source of capital, though in time, they will surely become one.  Successful entrepreneurs have a knack for seeing opportunities, and with their contacts and wealth will tap into the markets a new era of entrepreneur is seeking to pursue, this could serve as the beginnings of a resurgence in Finland’s long dormant VC culture.

2. Funding Business Plan Competitions

By funding business plan competitions, Tekes can invite venture capitalists and angel networks from Continental Europe, the US and farther afield to Finland (hopefully in the summer!) to expose them to the country’s tremendously well educated entrepreneurs and their ideas, bridging what has been a funding gap, and subsidizing the travel expense small growing companies have seeking venture capital in Europe and the US. Not wanting to be left out, the entrepreneurs in the “venture network” will likely get their act together and begin to invest in companies that foreign investors have helped them vet.

3. Becoming LPs in Venture Funds

By becoming Limited Partners in local venture funds, the government can at once promote a VC culture and efficiently dispense a considerable amount of capital. By going through a professional investor government, funds can leverage the scrutiny and expertise of fund managers that are financially incentivized and qualified to perform effective due diligence on their investments.  Over the course of time, depending on the success of portfolio companies, this could be a self financing scheme, that could grow as the industry grows or whose profits could fund the next item, the so called “Valley of Death.”

4. Funding projects in the “Valley of Death”

These funds “saved” by promoting a more capitalist early stage equity culture could be directed towards what has traditionally been a tricky point of development stagnation when companies seek to repeat the success they’ve mastered in pilot facilities at full commercial scale.  This “Valley of Death” often implies taking on some technical risk but more importantly considerable operational and adoption/market risk that debt providers are loathe to provide to “first in class” technologies.  By shouldering some of this risk, Tekes as a government entity will be in a good position to lobby to pass legislation or policies that could facilitate adoption for similar technologies.

I don’t mean to disparage Tekes’ laudable efforts and success: Finland’s commitment to education, innovation (in general and clean technology in particular), and it’s entrepreneurs is terrific – I do feel that by fine tuning these investments further the Finns can continue to disproportionately innovate and disseminate disruptive technologies to a World that desperately needs all the help it can get!

[photo credit: Gideon van der Stelt]

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4 Comments

  1. As I read over my post from earlier this AM I think I failed to speak as positively about Finland’s approach to R&D investment and the Tekes concept as I meant to. The country as a whole invests in R&D aggressively, and is 3rd only to Israel and Sweden in terms of R&D investment as a proportion of GDP. Tekes’ mission includes communicating Finland’s companies to foreign investors and funding university projects (223 Million Euros went to Universities of the 518 Million dispensed in 2008); and they are doing a terrific job promoting Finland’s companies to the world – Finnish startups got more VC than any other Nordic country (according to Tekkes at least!) and in 2008 Winwind received one of the biggest investment of the year, 120 million euros from Masdar.

    Keep up the good work Team Tekes – free advice is worth about what you pay for it!

  2. 1. 1. Promoting Venture Networks

    “Tekes could create a traveling forum of selected Finnish role models to secondary schools and universities where budding entrepreneurs will find the confidence they need to move forward with their ideas while their risk averse colleagues will begin to appreciate that the road less travelled is not necessarily a fool’s choice”

    I love this idea. The culture is, in my opinion, the biggest factor that needs to change. Finns are risk averse and afraid of failure (not without reason: people saw a lot of bankruptcies in 90s and 17% unemployment after the eastern trade collapsed at the same time when there was made mistakes in monetary policy which kept interest rates high). Also people value the quality of living (which is not inherently a bad thing) and tend to leave office by 5pm. Since its not a zero sum game (much like in US) a lot of people won’t go to extremes in bootstrapping etc. Here’s a quote from The Economist:

    “If we learn anything from the history of economic development, it is that culture makes almost all the difference.’ You can build as many incubators as you like, but if only 3% of the population want to be entrepreneurs, as in Finland, you will have trouble creating an entrepreneurial economy.”

    …and the change will need to start from the university kids if not a lot earlier.

    “lobby for start-up friendly legislation”

    This is something many successful serial entrepreneurs have and are doing, and it is working to some extent. The Finnish Ministry of Economy and Employment has been very active in pushing new ways to promote entrepreneurship on the gov’t level. That said, there is still A LOT to do regarding the legislation. For example if you bankrupt your firm, you will be 8(!) years on the government black list, which indicates you are not as credit worthy as others. Then there is the issue of rather high (26%) corporate tax rate which does not only concern SME but all corporations.. the list goes on.

    2. Funding Business Plan Competitions

    I think we need to focus first on having those great companies, which can then compete or otherwise draw VCs to see them.

    3. Becoming LPs in Venture Funds

    There some rather promising old and new schemes here.

    For example Finnish Industry Investment Ltd, which is a government-owned investment company.

    It invests the proceeds accrued from the privatisation of state-owned companies in stimulating the growth and internationalisation of Finnish businesses.

    Finnish Industry Investment invests in venture capital funds and directly in growth companies, together with private co-investors. The targets are in all sectors.

    Capital investments are needed for financing the growth of investee companies, and for spin-offs, major industrial investments, and sector and corporate restructurings.

    The investments of Finnish Industry Investment amount to MEUR 600. (Disclosure: I’m on the investment council) See more at http://www.teollisuussijoitus.fi/in_english/

    Then there’s also A Vigo program that the Finnish gov’t has put together. See more at http://www.arcticstartup.com/2009/04/16/vigo-accelerator-only-the-first-part-in-finnish-growth-ecosystem/

    4. Funding projects in the “Valley of Death”

    Interesting idea. How does gov’t choose the winners here, so it won’t create a dangerous market anomaly. see your point about crowding out the private investment?

    Here’s also an interesting perspective on the issue:

    http://www.arcticstartup.com/2009/11/23/the-future-is-in-entrepreneurship/

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