How Stockholm Became a ‘Unicorn Factory’

stockholm

What do Silicon Valley and Stockholm have in common? Spawning billion-dollar tech companies. After Silicon Valley, the Swedish capital produces the highest number of so-called “unicorns” per capita than any other global city. With a population of less than 900,000, Stockholm has birthed prolific global brands like Skype, Spotify, Minecraft and Candy Crush Saga. In fact, American interactive entertainment firm Activision Blizzard has just purchased the makers of Candy Crush Saga for $5.9 billion.

Experts say a number of factors — including the global success of well-known Swedish companies, government foresight and infrastructure planning — have fomented an environment that has fostered 22,000 tech businesses in the city alone. “Sweden has developed a human, social, educational and corporate infrastructure that supports start-ups Twitter ,” notes Wharton management professor Exequiel Hernandez.

The kind of spotlight that Stockholm has attracted is also fueling more investment. In terms of global cities leading the way in deal growth, Stockholm is second only to Beijing, according to CB Insights. Last year, $788 million of venture and growth capital, excluding private equity deals, was pumped into Swedish companies, the research firm notes. Venture capital investments have increased 338% from last year, and Stockholm commands 15% of the total foreign direct investment poured into the European technology sector. For a high-income country that’s comparable to Switzerland in size, the Swedish are doing well in the start-up scene, notes David Hsu, Wharton management professor.

Certainly, American investors are taking notice. “Sequoia Capital; Kleiner Perkins Caufield & Byers; and Google have all invested in [Swedish companies]. It won’t be long before the rest do,” says Tyler Crowley, an American consultant who moved from “Silicon Beach” in the Los Angeles area to develop the Stockholm start-up scene for the city government.

Spotify, a music-streaming service that may be one of Europe’s most high-profile start-ups, reached an $8.53 billion valuation this past year. Swedish telecom company TeliaSonera poured in $115 million, receiving a 1.4% stake. Think of it as the “pensioner meets the teenager,” says Martin Carlsson-Wall, a Stockholm School of Economics accounting professor. “The deal is a way for [TeliaSonera] to build its brand and associate itself with a younger, innovative and faster-growing company. At the same time, Spotify is perhaps too small and can build on the strength of a big company.”

“The notion of the entrepreneur in the garage or the small warehouse is romantic and true in many ways, but that doesn’t happen without a lot of other infrastructure.” –Exequiel Hernandez

Predecessor Swedish tech enterprises have set the pace for successful start-ups. In 2005, Swedish telecommunications company Skype was bought by eBay for $2.6 billion. Microsoft then bought Skype for $8.5 billion in 2011 in the largest takeover acquisition in Microsoft’s history. Swedish software company MySQL was bought by Sun Microsystems for $1 billion in 2008 and is now owned by Oracle.

A Candy ‘Crush’

The recent news about Swedish success is the record sale of King Digital, which developed Candy Crush Saga in Stockholm before the company relocated its headquarters to Dublin, Ireland. Around $3.6 billion of the purchase will be from offshore cash, and Activision Blizzard, makers of the Call of Duty video game series and the Skylanders franchise, would have lost more than $1 billion if the company had repatriated the funds, notes Ian Bogost, Georgia Institute of Technology professor of interactive computing. King Digital went public on the New York Stock Exchange for a valuation of $7.1 billion in 2014 but has struggled to come up with another successful game. “Investors want growth. If you’re a company that has one massive hit … [you have] got to be reaching the limits of what you can do,” adds Kevin Werbach, a Wharton professor of legal studies and business ethics. Selling the company may be the best business solution to appease its backers, while Activision Blizzard gains entry into the mobile gaming space. (Werbach and Bogost discussed the deal during a recent appearance on the on the Knowledge@Wharton show on SiriusXM channel 111.)

Earlier this year, another successful Swedish gaming developer, Mojang, makers of Minecraft, was bought by Microsoft for $2.5 billion.

A few more unicorns are on their way, says Joseph Michael, business development manager at Stockholm Business Region Development, a government enterprise. Audio streaming service SoundCloud started in Stockholm before moving to Berlin, Germany, and was valued at $700 million at its last funding round. TrueCaller is an app that finds phone numbers and blocks spam calls, backed by two Silicon Valley investors, Kleiner Perkins Caufield & Byers and Sequoia Capital. Users are mostly located in India, Lebanon and Jordan, and 200,000 are joining each day.

Recently, mobile payments company iZettle raised $68 million on a $500 million valuation, led by Intel Capital, the investment division for the U.S.-based chipmaker. The Stockholm start-up makes payment card-reading devices that attach to mobile devices. The devices incorporate a secure chip-and-pin technology used primarily outside the United States.

Another company to watch out for is Tictail, an e-commerce company whose employees have used English instead of Swedish in their internal communications since it was founded four years ago. English is the language of tech in Sweden, says Crowley. “All their start-ups are in English. Sweden is small, so entrepreneurs are forced to think in English from the beginning, unlike France, Germany and Poland,” he adds. On the other hand, Carlsson-Wall points out that his students have a difficult time getting a job in Sweden if they don’t speak Swedish.

What Gives?

For a Scandinavian country with a population of less than 10 million, a little more than the size of New York City, Swedish businesses have always had to think outside the country’s borders. Companies like Volvo, Ikea, H&M, Absolut Vodka and telecom company Ericsson have paved the way for global success. A Swedish company typically begins to expand globally within a couple of years of its start. Sweden is so small that internationalization of companies is quite normal, notes Carlsson-Wall.

“The government played a very proactive role early on in shaping the technology ecosystem in Sweden.” Kartik Hosanagar

“Sweden does have the legacy of its Volvos and Ericssons. They realize that start-ups can be successful and diversify their economy,” says Hsu. “A whole spectrum of companies can help a country be resistant in times of downturns.”

When Swedish multinationals became successful in the past, they contributed a lot of tax money to finance infrastructure and entrepreneurship ventures, says Carlsson-Wall. Hernandez explains: “Start-up and tech hubs don’t emerge in a vacuum. Even though we hail the young start-ups, they usually feed on the presence of large and established organizations that provide the technology and human talent required for the next big thing.”

To that end, Stockholm built the world’s largest open-fiber network in 1994 with 100% of businesses and 90% of homes tapping into that infrastructure today. More than 94% of the population is online with the fourth highest usage in the world. Over 91% of the population accesses the Internet at least once a week.

Kista Science Park, where Ericsson is headquartered, is also home to 700 tech companies with enough fiber-optic cable to circumnavigate the Earth 30 times. “The notion of the entrepreneur in the garage or the small warehouse is romantic and true in many ways, but that doesn’t happen without a lot of other infrastructure,” says Hernandez.

Back in the 1990s, the Swedish government even offered a tax break for residents to buy personal computers. “People could pay for computers with pre-tax money and employers would supplement the costs,” notes Kartik Hosanagar, a Wharton professor of operations, information and decisions. “This led to a huge influx of PCs in homes, which led to really high PC penetration. The government played a very proactive role early on in shaping the technology ecosystem in Sweden.” Founder of Klarna, an e-commerce firm that provides online payment services, 33-year-old Sebastian Siemiatkowski says this subsidy helped him become an early technology adopter at the age of 10 when his family couldn’t afford a computer, in an interview in The Independent.

It comes as no surprise the most common job in Stockholm is programmer with 18% of the city employed in the tech sector. University education is free as well, and institutions are starting to foster start-up clusters. Daniel Ek came up with the idea for Spotify during his first year of college at Stockholm’s Royal Institute of Technology, which graduates one-third of the technical expertise in Stockholm.

This kind of government planning has created a whole generation of highly educated digital natives who have grown up with a familiarity with computers and broadband. “The whole mindset has led to a very tech-savvy population,” adds Hosanagar.

According to Hernandez, the Swedish start-up community has built on the strengths that Sweden has to offer, such as a highly educated population, social and political stability, and extremely high openness to new ideas. “One of my pet peeves is that many places are trying to be like Silicon Valley. But nobody can do that because Silicon Valley was the product of unique historical and social circumstances,” Hernandez notes. “That’s usually the genius of a start-up or tech or industrial hub. It can’t be replicated because the founding conditions are idiosyncratic. So the main lesson may simply be to build on existing strengths and focus on what is unique. That will prevent any geographic or local advantage from dissipating when others try to imitate.”

Moreover, work-life balance is integrated into the culture, with the tradition of all Swedes taking a multi-week vacation over the summer. In addition, Sweden has one of the highest female and maternal employment rates in Europe. Day care costs are subsidized by the government, making it extremely affordable. Men normally take paternity leave. “In Stockholm, it would be considered very conservative if fathers don’t stay home with the kids,” says Carlsson-Wall. Marta Sjögren of venture capitalist firm Northzone, who backed Spotify, said in The Telegraph, “The whole freezing-your-eggs thing would never happen in Sweden,” a benefit offered to Facebook and Apple female employees. However, Crowley said he notices that there are fewer women in the Swedish tech scene than the American tech scene. “As progressive as Swedes are about gender issues, they’re a bit behind with female tech engineers,” he says.

“Small innovations with really good user-friendly designs will be important, and Sweden has a really good leg up in that respect.” –Kartik Hosanagar

Overall, the start-up scene is starting to gel and the next generation of Swedish tech companies is beginning to crop up in a “virtuous cycle,” notes Hernandez. Indeed, Skype founder Niklas Zennström went on to start Atomico, a venture-capital firm based out of London that funds many Swedish start-ups.

More to Come?

While Stockholm’s success in the start-up space is impressive, there are a few negatives when it comes to attracting outside talent, Hsu notes. The cost of living is high, in terms of taxes and housing. Also, landlords have to obtain special permits, driving the cost of subletting even higher.

Income taxes are notoriously high, though university tuition and health care is free. Carlsson-Wall says there is proposed legislation to attract expat workers by classifying them as “foreign experts” so they can pay lower taxes. Even stock options, a popular incentive for tech workers, are taxed before and after they cash out.

Gabriel Karlberg, a doctoral student at the Stockholm School of Economics, adds that if a company goes bankrupt and a person has served on its board or as the CEO, the bankruptcy becomes registered in that person’s personal credit rating for life and becomes a personal liability, making it more difficult to get a mortgage or a loan for another start-up where the bank might do a personal credit check as an extra precaution.

“Swedish society in general needs to understand that a bankruptcy sometimes is a necessity and that some firms need to fail and that the persons on the board or the CEO might still be great entrepreneurs,” Karlberg notes. “The risk of getting a bankruptcy on your records makes people more reluctant to launch a company and take risks, since the failure could hurt you as much as the economic losses from the bankruptcy many years after it happened.”

Overall, the Scandinavian start-up scene is still burgeoning, particularly the one in Stockholm. “Stockholm is the only city with a population of less than one million people with any unicorns. It’s a unicorn factory … and they’re not slowing down. There’s more in the works,” says Crowley.

Hosanagar agrees, noting that “there will be more and more coming out of Sweden.” One important reason, he adds, is that future start-ups will be less about tech and more design conscious. In the last 20 to 30 years, Apple, Microsoft and Google have made enormous strides with technology. Sweden has always had a really strong design sense with iconic brands like Ikea and Volvo. These days, success can be measured by how intuitive and convenient it is to use a particular piece of software. “Small innovations with really good user-friendly designs will be important, and Sweden has a really good leg up in that respect,” Hosanagar says.

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