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Startups: Finland's ray of light

How the small, risk-conservative nation became a hotbed for startups

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FINLAND’S RAY OF LIGHT: How the small, risk-conservative nation became a hotbed for startups.

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NEW HOPE FOR FINLAND: How the small, risk-conservative nation became a hotbed for startups.

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Maria 01, a startup and venture capital club housing more than 90 startups occupying 10,000 sq m of space in a former hospital in Helsinki.

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Startup Sauna, a co-working space for startups at Aalto University in Finland.

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Slush, a worldwide startup and tech event originating in Finland, was held for the third time this year in Singapore.

WHEN Tanu-Matti Tuominen started Finland's first digital media company called Tietovalta in 1988 in Finland as a university student with friend Jari Tuovinen, armed with a bank loan guaranteed by their fathers, it wasn't easy. Funding was hard to come by, credibility had to be painstakingly earned, and to top it off, there was a bad recession in the early 1990s. His youth also worked against him: the fact that he was a young business owner was not something that found favour. "It was not common that a young professional would found their own company, and rather they'd go work in a big corporation... My mother didn't understand," he quips. He eventually sold his company about a decade later, and is now a venture capitalist investing in intellectual property in digital media, communications and entertainment in Finland. Mr Tuominen marvels at how much things have changed in his country. Back then, he says, "there were not so many startups, not so much knowledge to get funding instruments. Before, people found it weird to not go into a corporation (to work)".

Finland, a tiny nation of 5.5 million people or roughly the same population as Singapore, has in the last decade turned heads for its burgeoning startup scene.

It's spawned the likes of blockbuster gaming companies Supercell and Rovio (makers of the addictive Angry Birds game), and Slush, a worldwide student-run startup and tech event that was held in Singapore for the third time this year.

Starting in the last decade, the tiny nation has seen a surge in talent keen on pursuing the startup life. Commentators point to several factors, including, ironically, the decline of Nordic hero company Nokia's mobile phone business and a groundswell of students setting up local ecosystems.

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This happened even as Finland struggled to shrug off its "sick man of Europe" shroud after the Global Financial Crisis. Only this year will its gross domestic product (GDP) return to its pre-crisis level of 2008, according to the Bank of Finland in July.

What also buttresed growth in startups was Finland's welfare state and the role played by big government. Industry players agree that state support has not only provided funding for those starting out in business, it has also possibly helped to de-risk entrepreneurship.

The progress is impressive for a country where risk-taking is not part of its DNA.

In Finnish, the word entrepreneur translates to yrittäjä, which also means "to try".

As Sini Liu, the director of community at startup co-working space Startup Sauna at Aalto University, explains: "The idea is that, oh, you're just trying."

"It wasn't cool to be an entrepreneur, it was something you did if you couldn't get a real job."

That sentiment harks back to Finland's history and way of life. As Petri Rouvinen, a research director at Finnish think tank ETLA says, it may have to do with the fact that Finnish life has historically been about "a struggle of collecting enough in the summer to survive in the winter".

The deeply agrarian country also had to industrialise quickly after two wars against the Soviet Union from 1939 to 1940, and 1941 to 1944, which caused Finland to lose territory and have to pay reparations to the Soviet Union.

Finland was a closed and controlled capital market up until the mid 1980s, Mr Rouvinen adds. "In that context there was a culture and financial environment of banking that favoured big businesses... small businesses could not get enough capital," he says.

The central bank set the "rules of the game" and savings, cooperative and commercial banks allocated capital.

Between 1985 and 1993, Finland went from quite closed to an almost completely open financial environment, which Mr Rouvinen says allowed small businesses and the self-employed an easier time in accessing capital.

While Finland in the 1990s also saw the infocommunications and technology boom that most developed nations enjoyed, Mr Rouvinen says it was dominated by corporates. This included a certain conglomerate that began in 1865 as a paper mill and later branched out into several products including mobile phones - Nokia.

So ingrained was the aversion towards entrepreneurship that in 2008, a finance professorat the Helsinki School of Economics (which merged two years later with two other universities to form the innovation-focused Aalto University) told his students that being an entrepreneur was the worst thing they could ever do, and they should instead get "real jobs".

A student movement and the Nokia effect

Those words became the seeds of a growing interest among some university students. They visited US colleges such as MIT and inspired, proceeded to form Aalto Entrepreneurship Society (AaltoES). They also convinced their university president to let them use an old warehouse for their activities - that space is now known as Startup Sauna - and began to build a community with various events.

"This spread like wildfire to all the schools and universities of applied sciences here in Finland, so everyone has an entrepreneurship society in their schools," says Voitto Kangas, who attended Aalto University and is now chief executive of startup hub Maria 01, which is housed in a former hospital in Helsinki.

That certainly played a role in spreading awareness about entrepreneurship through the media and workplaces as well, he adds.

Among other programming, over the years, AaltoES has established Kiuas Accelerator, where startups are coached by venture capitalists, and at one point helped organise Slush.

Today, AaltoES has an annual budget of between 500,000 euros and 800,000 euros (S$782,000 and S$1.2 million ), and gets its funding from the university, public organisations, non-profits and government as well as corporates.

The rise in interest among young people towards startups was accompanied, meanwhile, by the decline of Nokia's mobile phone business around the turn of the decade. Nokia had fallen off the radar of consumers around the world, as it failed to compete with Apple's iPhone and struggled to keep up with trends in the smartphone space.

As engineers became redundant - especially after Microsoft bought Nokia's mobile phone business - several began exploring their own startup ideas.

Nokia, too, helped with a Bridge programme that funded its employees' startups with 25,000 euros per employee. One of them is Varjo, a company founded by employees from Nokia, Microsoft and Intel, which raised US$31 million recently in Series B funding.

Varjo makes virtual-reality headsets that will be launched for sale by the end of the year. Its current available prototype has an effective resolution of 50 megapixels per eye, over twenty times that of consumer devices. And instead of a single display, Varjo's headset also has a high-resolution secondary display and a combiner that allows for a crisper image where the user is focusing his vision, and in the peripheral vision, a blurrer view, mimicking the way the human eye works.

Thus, it was also the country's human and intellectual capital, honed by one of the world's best education systems plus decades of engineering experience, that fed Finland the tech talent for its startups.

Jussi Mäkinen, chief marketing officer at Varjo, told reporters who visited recently: "(It's) thanks to Nokia and Microsoft's history... in Finland we have the world's best technical and optical engineers," he says. "This isn't a software problem but a hardware problem... so by the good luck of Finnish heritage and engineering and Nokia, we have the means of solving problems that others couldn't."

For some, the fall of Nokia's mobile business also had a deep psychological impact. "Everyone knew someone who worked at Nokia or a Nokia supplier," Mr Kangas of Maria01 says.

There was a "big depression of mindset and uncertainty," he says, and "that was when people were inspired to start these startups."

The hand of the state

With talent clearly waiting in the wings, it was strong public financing and support networks for startups that helped kickstart and sustain private risk-taking, say those in the game.

Business Finland, the country's innovation and international expansion agency, now funds about 800 startups a year.

Funding options range from the Tempo grant, providing up to 50,000 euros to comprise 75 per cent of the total project budget for exploring demand for a new offering; to the Young Innovative Company programme, that allows for a grant of a maximum 500,000 euros and loan maximum of 750,000 euros, to comprise 75 per cent of eligible project costs for "the most promising" startups selected by Business Finland.

"In Finland, we understand entrepreneurship drives economic growth, and requires basic investment," says Marjo Ilmari, executive director (for startups) at Business Finland.

"Our whole market is very small so we need to think globally right from the beginning. There's a big risk to go global right from the beginning."

Funding for early stage companies from Business Finland last year stood at 150.8 million euros - about three times that of 2007.

Ms Ilmari also points out that the government's contribution to startup funding overall in the country has decreased with time, as private funding sources have swelled. Foreign business angel and venture capital (VC) funding reached 208 million euros last year, rising by 33 per cent from 2016.

Various Finnish cities have also demonstrated their support for startups. For instance, about five years ago, the city of Helsinki and EnterpriseHelsinki started supporting startups through its NewCo initiative, with programmes such as a public accelerator, though it discontinued most of its startup services a year and a half ago.

"As the ecosystem was developing and more and more service providers started up, there was no need for the city or public sector to provide those services; the rationale from the decision makers was that city services were potentially competing with the private sector and might be slowing down their development," NewCo's development of board practices Teemu Polo says.

Has big government helped?

While not without its critics, many startups credit public funding for de-risking entrepreneurial pursuits.

That's the case for Max Pecherskyi, a Ukrainian who moved his social media marketing company PromoRepublic from the even tinier Estonia (population 1.3 million) to Finland in 2015.

His company has received about 1 million euros in loans and grants for R&D and marketing tests from the Finnish government. He also went on a trip with Startup Sauna to San Francisco.

By then, his company had received a 50,000 euro grant from Business Finland to prepare for global growth, and in the US he was able to reach out to customers and partners and localise the company's services. PromoRepublic now has its headquarters in Finland, an R&D office in Ukraine, and sales and customer success departments in the United States.

But he and others in the system also acknowledge another interesting dimension about how big government can help startups - they believe the welfare system has actually made it easier to take risks.

After all, Finland also boasts universal healthcare. Schooling is also free from pre-primary to higher education; both are ranked highly internationally.

"Living in Finland, my mind is free from hassles," Mr Pecherskyi says. "Here, everything works. You don't think a lot about this routine stuff... You may pay a lot of taxes but things are settled."

The safety net for taking risks may be even more comprehensive for young people.

On top of not having to pay university fees, students over 18 living alone are eligible for a monthly study grant and a housing allowance, and can take up another monthly loan to finance student expenses. "In the US, if you're going to medical school and you take out a hundred thousand in student loans, you'll stick to your studies and you'll work at the hospital after you graduate. In Finland... you can start a company and you may lose your student aid, but you'll start from fresh ground," says Maria 01's Mr Kangas.

Mike Bradshaw, a Brit living in Finland who is head coach at Sampo Accelerator, points out: "If you want to try something, Finland is super safe. You mess up here, you were a bit poorer than before... the question is only how comfortable you want to live."

But there is another side to the story as well: the worry that Finnish society may actually disincentivise risk-taking. Finland is one of the most equal societies in the OECD, with a Gini coefficient of 0.26 in 2016, as opposed to the US's 0.39 reading.

Mr Bradshaw points out that the robust provision by the government of services such as healthcare and education means that, as he put it, "You really have to work hard to have debt here... It makes life pretty damn comfy, which can make people too lazy, too complacent and too relaxed. You need to be hustling to get things done."

Mr Rouvinen from Etla agrees: "There's less downside but there's also less upside... If I were the same person living in the US, I would try even harder."

While the startup scene might be frothing with activity, much of Finland may still be more cautious. "The core (of Finnish society) may still be risk-averse," Mr Polo says.

"It takes time, and a generation, (to change the mindsets). People who are 50-plus years old, they still believe you have to work in a corporation or government. It's very difficult to still change overall this sort of perception."

There are other factors, including the size of the country - which would make startup expansion harder - and "labour market arrangements that favour the employees as opposed to the employers", Mr Rouvinen adds.

Still, the story isn't over. As Mr Rouvinen puts it: "It's a new era in Finland. We're one decade into that and it probably takes a few decades of good growth before we truly become a hotbed for startups including venture finance."


Sweetening the deal for budding entrepreneurs

WHAT if risk-taking activity in the economy can be lubricated by giving people a lump sum of money with no strings attached?

That idea, as counter-intuitive as it sounds, is in part the rationale for the country's controversial universal basic income experiment which has attracted worldwide media attention.

For two years until the end of 2018, 2,000 unemployed people selected at random have been getting a monthly payment of 560 euros, unconditionally and without means testing.

Under Finland's welfare system, those who are unemployed have to bring documents to the authorities every four weeks for the unemployment benefit to be calculated.

For those unemployed who are starting their own businesses, they are given a four-month runway before the employment office decides if they are to be considered a full-time or part-time entrepreneur, and adjusts their income accordingly.

Marjukka Turunen, director of change management at Finland's social insurance agency Kela, told Business Times Weekend that part of the reason for this experiment is to see if this will increase the incentive to work, including starting their own business or part-time work.

That is because participants would be able to receive the same amount of basic income regardless of the level of economic activity they take up.

Results of the experiment will only be published formally in 2019, but Ms Turunen said: "There are a few people who have said they are considering starting their own businesses, because it's now a lot easier and they can rely on this fixed income... that gives them a lot more security in their financial situation."