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Nordic Venture Capital: Cross Border Investments
MENON-PUBLICATION NO. 20 /2010
Gjermund Grimsby, Leo A. Grünfeld and Anne Espelien
Menon Publication
Menon Business Economics 2 Paper
Menon Business Economics
www.menon.no
PO. Box 5250 Majorstuen
N0303 Oslo
Tel: +47 41105133
leo@menon.no
Menon Business Economics 3 Paper
1. Introduction
The market for European cross-border venture investments, has gained much
political attention over the last years. Small and medium-sized enterprises
(SMEs) are seen as keys to improved competitiveness, innovation and growth in
Europe. Moreover, venture capital has been identified as a crucial way of
financing SME growth. Unfortunately, venture capital markets in European
countries are highly fragmented, with limited European cross-border venture
capital investments and fundraising.
The Nordic region however, appears to be more integrated, and has shown a
remarkable increase in attractiveness for foreign investors in the venture
segment. During the last ten years, foreign direct investments (covering all
M&As and greenfield investments) into the Nordic countries have grown 50%
faster than the EU15 average, and overall economic growth has outperformed
the rest of Europe, both in business cycle down turns and up-swings.
This note gives a brief snapshot on what the Nordic venture capital market
looks like, its ability to attract Nordic and international investors, the bilateral
investment flows between the Nordic countries, as well as venture market
developments.
There is substantial investment activity between all the Nordic countries. No
surprise, proximity matters, both in terms of geographical distance, and in terms
of rules, regulation and business culture. For instance, Sweden and Finland
attract more venture investments from other Nordic countries than they do
from all other international venture funds.
Data on Nordic venture capital investments
This study is based data provided by the European venture capital association
(EVCA) and their partner PEREP_Analytics. The Nordic venture capital associations
SVCA, NVCA, FVCA and DVCA are all participating members, supporting PEREP with
vital information on VC and PE related matters. Notice that figures for the first half
of 2010 are preliminary as they do not include the activity from funds reporting any
later than September 2010. In the report we focus on cross-border venture
investments made from foreign management companies1. With venture capital we
here include seed, start-up as well as later stage venture investments.
1 The study covers cross-border direct investments in SMEs It is also interesting to cover to what extent
the funds themselves gain capital from foreign investors, this is however not covered here.
Menon Business Economics 4 Paper
2. Venture capital investments in and out of the Nordics
The figure below shows aggregated cross-border venture investments in the
period 2007 – H1 2010 from Nordic venture funds going into foreign SMEs and
investments from foreign venture funds located outside the Nordic region going
into Nordic early stage companies. We see that the flows nearly match in size,
with a small net outflow of venture investments going out of the Nordics.
Chart 1: Venture investments going in and out of the Nordics, mill. EUR, 2007 – h1
2010
Between 2007 and H1 2010, a total number of 108 Nordic SMEs received non-
Nordic venture backed finance. On average, this amounts to EUR 4,6 mill per
investment, a significant amount of equity for a venture case. This indicates that
the Nordic SMEs receiving venture backed finance from abroad are dominated
by more mature venture enterprises. In comparison, venture investments going
from Nordic venture funds companies located outside the Nordic region were
split among 303 enterprises, making it an average investment of only EUR 1,8
mill.
Case: Genizon BioSciences
Genizon BioSciences, with HQ in Canada, is an industry leader in genetic biomarker
discovery, with programs in 25 common diseases. Genizons activities appeal to
investors due to its international market potential and cutting edge technology.
Three Nordic venture capital funsd have made investments in this company:
HealthCap AB, Karolinska Investment Fund AB in Sweden and Bio Fund Management
Oy Ltd in Finland: All of them are particularly interested in life science projects. In
addition, 9 other investment companies as well as Pfizer involved in the company.
Menon Business Economics 5 Paper
Case: Innotech Solar
Innotech Solar, HQ in Narvik in Northern Norway recycles and processes waste from
other's wafer production. In addition, they deliver the entire value chain supplying
customers with fully installed solar power plants. The company is the only operative
player in this segment.
The Swedish American venture fund Sustainable Technologies has invested in
Innotech together with the Nordic fund Northzone Ventures and the Norwegian
government backed fund Investinor. The investors have different approach to their
investments. While Northzone is investing due to Innotech’s global potential,
Sustainable Technologies and Investinor also have particular interest in clean tech
companies.
3. Venture capital investments in the Nordic countries
The chart below shows the amount of venture capital invested in each of the
Nordic national markets. Not surprisingly the Swedish market has attracted the
most venture investments. This is as expected, as Sweden is the largest country
(both measured by inhabitants and GDP) as well as the most mature market for
private equity. If we control for country size (investment per capita), Sweden is
not a larger market compared to the other Nordic countries.
Chart 2
The next graph shows the split between investments made by national funds,
funds from other Nordic countries and international venture funds.
477
280 294
777
41
63 73
162
151
16729
154
0
200
400
600
800
1000
1200
Norway Denmark Finland Sweden
Mill
. EU
R
National market venture investment split by source, 2007 - h12010
International (excl. nordic)
Nordic (excl. national)
National
Menon Business Economics 6 Paper
Denmark has the largest relative share of non-Danish capital with 45 percent of
the venture investments in Danish SMEs made by foreign located funds. The
other Nordics countries have between 25-30 percent of the investments made
by non-national funds. Denmark has also the largest relative portion of
international venture investments. In absolute numbers however, Sweden,
Norway and Denmark have about the same amount of capital from international
venture funds. Norway has the lowest share of investments from other Nordic
funds2.
Chart 3
If we look at the number of VC fund investments, the pattern is pretty much the
same as for absolute figures. Interestingly however we see that Finland has the
second highest number of venture backed investments with a total of 630,
following Sweden with 1042. Norway and Denmark have respectively 435 and
305. On average the venture investments in Finnish enterprises are smaller,
indicating that a higher proportion of these companies are at the seed and early
start-up stage.
2 Investments are considered national if the fund has established a local management office in the
country. The share of national investments is however somewhat exaggerated in these figures. This
follows from that investments made by foreign management companies established in the country is
considered to be domestic investments in this statistics. Particularly, this is likely to have an effect on the
internationalization ratio for the Swedish figures as more of the larger Nordic non-swedish venture funds
have chosen to have a subsidiary in Sweden. Examples of such are CapMan (FI), Northzone Venture (NO),
Verdane Capital Advisors (NO), Nordic Growth (DK), Via Venture Partners (DK) , are considered to be
national Swedish as they are also established in Sweden.
71%55%
74% 71%
6%
12%
18%15%
23%33%
7% 14%
0%
20%
40%
60%
80%
100%
Norway Denmark Finland Sweden
Venture investments by national market, market share, 2007 - h1 2010
International (excl. nordic) Nordic (excl. national) National
Menon Business Economics 7 Paper
577
297
858
1333
38
83
69
158
30
93
39
90
0
200
400
600
800
1000
1200
1400
1600
1800
Norway Denmark Finland Sweden
# in
vest
men
ts
Number of investments in venture companies, 2007 - h1 2010
International (excl. nordic) Nordic (excl. national) National
Chart 4
If we look at the share of companies with investments from respectively
national, Nordic and international funds, we see a clear pattern across the
Nordic countries that foreign funds typically invest in larger ventures, requiring
more capital. While domestic funds have somewhat smaller investments than
other Nordic funds, international funds clearly invest in more capital intensive
projects.
Chart 5
0
1
2
3
4
5
6
7
Norway Denmark Finland Sweden
Mill
. EU
R
Average venture investment per portfolio company, 2007 - h12010
National Nordic (excl. national) International (excl. nordic)
Menon Business Economics 8 Paper
4. Venture capital flows between the Nordic countries
Although the majority of venture investments are made by national funds
located in the home country, there is a significant amount of cross-border
interaction between the Nordic countries. That is, there exists a well-
developed Nordic market for venture capital investments.
The chart below focuses on the bilateral level of Nordic venture investments. It
presents the share of venture capital investments in the national market made
by other Nordic funds relative to the total amount of venture capital invested in
the national market.
Chart 7
Swedish funds are the largest contributors in terms of cross-border capital
between the Nordic countries. Particularly we see that Swedish funds play an
important part in the Finnish market, both in absolute terms and relative to
investments from Denmark and Norway. Sweden attracts about the same
proportion of capital from each of the other Nordic countries, indicating that
Sweden is pretty much in the core of the region. Norway is the country which
attracts the least venture capital from the other Nordic countries. However, as
shown in chart 2, Norway compensates this by attracting more international
venture capital from outside the Nordic region.
4% 4%6%
1%
4%
4%
1%
2%
5%
4%
6%
11%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Norway Denmark Finland Sweden
Nordic cross-border venture investments , share of total venture investments in market, 2007 - h1 2010
From Sweden From Finland
From Denmark From Norway
Menon Business Economics 9 Paper
Truly Nordic Venture Funds
During the last decade, we have seen the emergence of some truly Nordic VC
management companies, investing extensively cross border and running offices
in multiple locations in the regions. Northzone Ventures, Verdane Capital,
Eqvitec Parners, Via Venture Partner and Nordic Venture Partners are typical
examples of such companies, and overall, the funds they manage do well.
Table 1: Selected funds with Nordic investments and focus
HQ country Management company HQ country Management company
Via Venture Partners Scope Capital Advisory
Nordic Venture Partners Innovations Kapital
Eqvitec Partners BrainHeart Capital
Northzone Ventures Sweden Creandum II Advisor
Verdane Capital Advisors Ålands Investering
Pod Venture Partners
PNP Venture Capital
Novo Rite Ventures
Nordic Growth Sustainable Technology Partners
Denmark North Cap Partners
Nordic Biotech Advisors
Sunstone Capital Agder Energi Venture
Alliance Venture
Norway Convexa
Inventure Ferd Venture
CapMan Life Science Kistefos Venture Capital
Conor Venture Partner Teknoinvest AS
Nexit Ventures Telenor Venture
Viking Venture
Finland
Nordic
Menon Business Economics 10 Paper
4.1. Nordic industries with strong international attractiveness Below, the graph presents the most popular Nordic industries with respect to
attractiveness for international (non-Nordic) venture investment. The most
attractive Nordic sector for foreign venture fund investments is life sciences
followed by computer and consumer electronics and energy and environment. Not
surprisingly, it is in the Danish market that we find the strongest international
interest for life sciences ventures. In Sweden, computer and consumer electronics
are the most attractive industries, while Norway appears attractive within the
segments of energy and environment. Finland has received relatively moderate
attention from international venture capital during the past three years.
Chart 6
0
20
40
60
80
100
120
140
160
180
EUR
mill
.
International funds' investments in Nordic industries, 2007 - h1 2010
Sweden Finland Denmark Norway
Menon Business Economics 11 Paper
5. VC investments in the Nordics during financial crisis: A tough ride
During the period 2007-H1 2010, VC investments in these countries have followed a
unisonous negative trend. The level in 2007 was about twice the level as it was in
2009. While the buyout segment has shown signs of recovery through 2009 and
2010, this does not seem to be the case for venture investments. Except for Norway,
the preliminary figures for 2010 do not show any signs of recovery. The figures for
first half of 2010 have been extrapolated in order to be comparable to the annual
figures from previous years. One factor which may make the 2010-figures lower
than they actually should be is that the response rate was somewhat lower for the
first half of 2010 compared to the previous annual surveys due to the fact that some
management companies had not yet reported their activity.
Chart 8
*The figures for h12010 have been extrapolated with a factor of two in order to correspond
to annual figures from previous years.
0
50
100
150
200
250
300
350
400
450
2007 2008 2009 h12010
Mill
. EU
R
Venture investments in national markets, mill. EUR*
Sweden
Norway
Denmark
Finland
Menon Business Economics 12 Paper
Chart 9 clearly shows that is not only because the invested amount per company has
decreased, the number of SMEs receiving venture capital finance has also
decreased. This goes for all Nordic markets.
Chart 9
0
50
100
150
200
250
300
350
400
450
2007 2008 2009 h12010
# o
f in
vest
men
ts
Number of venture investments in Nordic countries,
Sweden
Norway
Denmark
Finland
Menon Business Economics 13 Paper
Brief note:
Venture capital and the Europe 2020 strategy
The ambition of EU’s Lisbon Strategy for growth and jobs was to make the EU the
most competitive knowledge-based economy in the world by 2010. The ambition
has not materialized, but a new strategy for “EU 2020” has been launched. This
time the EU wants to become a smart, sustainable and inclusive economy, and has
set a list of five objectives including an ambitious goal for innovation to be reached
by 2020. This includes re-focusing R&D and innovation policy on major challenges,
while closing the gap between science and market to turn inventions into products.
Furthermore the strategy will propose actions to develop innovative financing
solutions, including making an efficient European venture capital market a reality. In
other words, venture capital is still key.
Brief note:
Tax barriers to cross border venture capital investments
Recently the Venture Capital Expert Group, established by EU Commission, delivered
a report which identified the main tax barriers to Venture Capital cross-border
investments in the EU. In the report one of the main challenges addressed is to
avoid double taxation of venture funds performing cross-border investments.
Consequently the report recommends that the State into which a Venture Capital
(VC) fund invests should never treat the activities of the VC fund manager as
constituting a permanent establishment (PE) of the fund. Furthermore, to prevent
double taxation, all Member States should recognize the tax classification of a VC
fund applied by the Member State in which the fund is established. Following the
ambitions of EU 2020 strategy it is expected that the Commission will follow up on
the recommendations.
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