Venture Capital – Engine of Growth

Venture Capitalists should be experts in seeking and supporting extreme growth. And they actually are.

Numerous academic studies show that VC creates substantial value: faster growth, more patents, new jobs etc.

Major impact on economy

And the value is not only theoretical: the real-life economic impact of VC is phenomenal.

You need some evidence? Let’s have a look at US public companies founded since 1979. The companies with VC-background represent

• 38% of employment,
• 57% of market value, and
• 82% of R&D expenditure

of all companies listed within the last ~40 years.

The Economic Impact of VC in US, Source: standford.edu

The trend holds well even if we look all US public companies – not only the fairly new ones:

• VC-backed public companies account for 20% the total public market value and 44% of the R&D spending
• Global top ten: seven of the most valuable companies have VC background

Out of the Fortune 500 companies in the 1950s, nearly 90% have been pushed out by new growth companies. Almost half of the newcomers have been VC funded. This is massive Creative Destruction in real action.

What about growth in Finland?

The VC industry in Finland is new and small compared to the US and the relative volume of VC has been far below the US levels. Despite the short and bumpy history of VC in Finland, the results are remarkable:

• The largely VC-funded computer games industry paid more corporate taxes in Finland in 2016 than any other industry (Thx Supercell!)
• In Finland, the combined revenue of VC and PE funded companies is roughly EUR 25 Billion.
• These companies employ some 130,000 people, nearly 10% of all private sector labor force.

I am eagerly waiting for the FVCA meeting this week where Tesi will report some of the latest performance data from Finnish VC and PE industry.

How to keep things rolling?

Now, nearly two decades after the bubble, we are in a very strong positive swing:

• The explosive growth of Slush underlines how talented and well-educated Finnish youngsters push hard for entrepreneurship – a big change from the culture of only ten years back
• Investments into Finnish startups hit a new record high at 349M€ in 2017

If these strong positive trends continue long enough, we have good reason to expect similar success stories and Creative Destruction in Finland as we have seen in the US.

To keep things rolling we need to ensure that:

1. The best of the best of the young remain interested in growth entrepreneurship. So far so good.
2. There is enough professional, added value VC funding available to give the best possible support for the growing entrepreneurial activity. Right?

Yes, startups investments hit a new record last year, but the domestic VC funding was just 59M€, a record low since 2010!

Startup funding is very much tied to economic cycles. Cross-border investments tend to disappear fast when the going gets tougher. Entrepreneurs can count on stable long-term support only from established local VCs with a long track record and deep enough pockets – if there are any around.

Still some work to be done 

So, it is vital to have a strong domestic VC industry. And the domestic VC industry needs a strong pool of private investors for their funds.

• Investors, who are in it for the long haul and professionally.
• Investors, who do not bounce back and forth with every swing of the economic cycles.

I can easily spot at least two potential areas of improvement here:

1. Some of the Finnish pension funds have been fairly inactive within the Finnish VC scene. How to get all of them active, investing in building a stronger VC funded economy for Finland?
2. VC and PE asset class should be tax neutral for Finnish non-profit foundations as suggested by the FVCA.

A look in the mirror

Finally the most important question: is the Finnish VC performing well enough to attract new investors?

The European VC track record has already turned positive: returns are very good, almost on par with US VC market as we reported in an earlier blog entry called The hidden truth of VC performance.

So, how about Finland – is the VC performance competitive? Stay tuned – I will write an update after the Tesi presentation mentioned earlier.