Stockholm & Scandinavia: global locations for the tech industry

In a series of articles in the Monthly Policy Review, Mundus International has looked at innovation in Sweden.  Here we explore the emergence of Stockholm as a European centre for the tech industry and look at how Sweden is faring in comparison to other tech locations and what is driving the local tech industry forward.

A year ago the mantra of Swedish IT PR was that Stockholm was the second place per capita in the world, behind Silicon Valley, as the location to create a unicorn, the tech industry’s term for a billion-dollar company. Now, listening to insiders talk, it is evident that the conversation has moved on; Stockholm no longer measures itself on a per capita basis. With a total of 7 unicorns it places itself just behind London on an absolute basis. While it is generally evident in the local press that there is a ‘buzz’ around tech start-ups at present, it is perhaps less broadly known just how quickly things have developed over the past 12 months, and how well positioned Stockholm is. In this article, Mundus International explores some of the data available to industry insiders that charts the pace of explosive growth, and presents the story as part of a bigger context for developments in Scandinavia and Sweden’s economy. The article brings together reports previously published in the press, and we have also reached out into our network in Stockholm to bring together the picture of why Sweden’s tech scene is doing so well, and how this is having an effect on Stockholm’s IT employment market and immigration.

Scandinavia and the tech industry

The tech industry is not new to Scandinavia. Its roots go back decades; over a century if one includes Ericsson and Nokia, which were founded in the 19th Century. Sweden, and Scandinavia invested heavily in ICT technology during the 1990s, moving from a country where typewriters were the norm, to most homes having a computer. Carl Bildt was the first head of government to send another government head an email, when he emailed President Clinton. Sweden quickly became a leading ICT nation and created the underpinnings for the explosive growth now evident. With computers prevalent and fast, ubiquitous internet speeds, Swedish companies began to develop applications deploying this technology. Skype was founded in 2003, along with King, a gaming company. Klarna was founded in 2005. eBay bought Skype in 2009 for $2.6 billion, selling it to Microsoft in 2011 for $8.5 billion. But, for many years Skype was the only local unicorn (the term ‘unicorn’ itself was not developed until 2013).

Gradually more tech companies were established, with a particular focus on e-commerce and gaming in the years between 2005-10. By 2012 the industry had matured to the point that companies were being continuously founded and funded. In 2014, The Nordic Web reported 57 investments being made in Swedish companies, with a total value of $394m. In 2015 these numbers had leapt to 143 investments, valued at $1.07 billion. Growth was becoming exponential. From this point on it became more instructive to track investments by quarter, and then by month, as the chart to the right shows (available in the subscriber version only). In 1Q15 only 9 investments were made in Stockholm, a figure, which grew over 700 per cent to 64 investments in 2Q16. But 3Q16 alone recorded 92 separate investments, and the total invested for the year to date was $1.5 billion. Tech was no longer a few companies doing fun IT things on the side; it had become an industry in itself.

As tech developed as a sector in Scandinavia (and globally), the range of possible applications broadened, contributing further to growth. Big Data emerged as a concept, with applications in Sales and Marketing; the disruptive effects of Fintech are being worried about by banks world over, and, as we highlighted in our September edition of the Monthly Policy Review, digital health is a space capturing the mindshare of entrepreneurs and venture capitalists. It is not just the app co’s that are getting funding, investments in “deep tech”, where heavy technological innovation is required, have also been growing. In the last 5 years, $200m has been invested into companies from the fringe between academia and commerce, in areas such as AI and machine learning.

One analogy that could be made is of a snowball that has started at the top of a hill, slowly rolling and gathering size. As it continues to roll down the slope it gathers more snow and increases its pace; so by now Sweden’s tech scene is a large mass, moving at speed and attracting great attention from investors, who are keen to take further risks investing in new ideas and new companies. Hence, rather than focusing investments in companies that have proven a business model through cash flows and customers, investors are attracted to companies with ideas that they like. In 2015, 75 per cent of investments were in early stage ‘seed’ rounds, and only 25% of funds were allocated to the later stage ‘Series A, B or C’. Another measure of this is to look at the value of individual deals. The most common amount of cash raised in 3Q16 was in the $1-3 million range, when only 8 (of the 92) deals were over $5m in capital, indicative of the type of small, seed capital required to establish a firm, rather than the much larger capital necessary to build it out globally.

Explaining the phenomenon

In an 2015 article about the ‘Stockholm unicorn factory’, the Financial Times identified 4 strategies that Stockholm (as well as Sweden and the Nordics) had deployed to its advantage. The FT summarised these as;

  1. Long-term planning
  2. Experience
  3. Global ambition
  4. Being Swedish

These factors are referred to repeatedly by most business commentators, and therefore are worth considering, for other cities and countries interested in understanding Sweden’s success. Based upon our interviews with local experts, Mundus International would add a fifth factor, ‘Success breeds success’, and we suggest that ‘Long-term planning’, could be better labelled as ‘Infrastructure’. We explore these further below.

  1. Infrastructure

As already described in this article, Sweden has a very long history in the Information and Communications Technology (ICT) industry. This has created a society that has near universal access to computers, mobile phones and high-speed internet. But, infrastructure can also be thought of as the investments that society has made in educating its workforce, so that most people complete school with a solid education in in the basics of reading, writing, arithmetic and, we would emphasise, speaking English. This puts the Swedish talent pool ahead of its peers, especially for countries that are not native English-speakers. Interestingly, industry experts feel that even more needs to be done in this area, with schools teaching computer programming as part of the curriculum.

  1. Experience

The FT article provides a good description of how the length of time that the tech industry has been established means that today’s start-ups benefit from this cumulative learning curve. Alumni of earlier Swedish successes, such as Tradedoubler, Stardoll and Skype are scattered across the industry, often in senior roles. They have learned from previous mistakes and pass their wisdom on. Exequiel Hernandez, a Wharton professor, has observed that start-ups and tech hubs are not born in a vacuum, but exist in ecosystems which supply them with the technology and human capital that are essential to their existence. Hence, the dotcom crash of 2000, which caused hardship at Ericsson is credited with spawning the wave of successful technology start-ups that came several years later.

Our interviews have also identified the role that capital plays. Much of the investment done in Sweden is by individuals and venture capitalists that have a long history of tech. Despite easy global mobility of capital, the majority of this is done by Swedish firms. Young tech companies often seek out ‘strategic investment’, meaning that they are not just looking for cash, but also the wisdom and contacts that a strategic investor can bring to them. The investors see it as a way to add value, and reduce the risk of their investments.

Some insiders also believe that Sweden’s historical capabilities in computing give it a leg up. The founders of King (Candy Crush) and Mojang (Minecraft) learnt to code using the Commodore 64, and Klarna, an e-commerce unicorn, utilises Erlang, the Ericsson programming language.

  1. Going Global

Sweden’s population of <10 million makes it hard for most start-ups to get rich if they limit themselves to the domestic market. Even if a company uses Sweden as a test market, it will often have plans to export the success elsewhere. Many firms have English as the office language, making it easier to expand into bigger markets, the US in particular. This is reinforced by a large proportion of expat employees working within start-ups. It is not unusual for firms to have half of their staff as expats, Indian in particular, but also eastern Europeans.

Increasingly Swedish start-ups are becoming even more ambitious, with a ‘Born Global’ mindset. Chalmers University runs a course in this, financed by Almi and Vinnova, and there are many events in the tech scene that promote the benefits of designing the entire business to begin in the global market.

  1. Being Swedish

The FT article points to a willingness to collaborate between Swedes in the tech scene, and there are plenty of examples of this. However, Mundus does not fully agree that this is a universal behaviour here, or that Sweden is necessarily advantaged in this respect. However, there are likely to be other cultural factors that do assist. One that is frequently commented on is a socio-economic structure that allows for a relaxed attitude to the risks of a start-up. Sweden’s state funded education system means that graduates from universities leave without crippling student debts. And, if their start-up is unsuccessful, individuals are able to fall back upon relatively generous unemployment benefits. Financial assistance from the government is also useful for the start-ups able to access the grants.

Secondly, Sweden is frequently credited with a high degree of design thinking. This pedagogy works equally as well with e-commerce as it does with furniture and fashion, and some believe that Swedish tech start-ups rate very well when it comes to developing the service to wrap around their products as evidenced in games, music, and overall in building engaging consumer products.

Thirdly, Sweden’s culture of respecting all people’s opinion, and allowing them a voice in discussions is helpful in a fast-changing tech scene, where a graduate may be more aware of a new programming technique or competitor app than the manager.

Success breeds success

The above factors may have created an environment from which start-ups could grow and succeed in Sweden, but there is strong anecdotal and factual evidence to imply that it was the success of previous waves of tech companies that have given local entrepreneurs the desire and confidence to go for it. Previous waves also generated wealth amongst individuals and the finance sector, which is reinvested in new entrants. One veteran of 3 different tech companies told Mundus ‘beforehand, we thought we were good (at tech entrepreneurism), but Skype was the trigger from which everything followed’. Every new unicorn (and smaller success stories) creates more people willing to invest their time and careers in a start-up, and more money to fund them. Hence, when The Nordic Web says in its most recent quarterly report that ‘With just 8.7% of the investments above $5 million, there is a small concern regarding a trend in 2016 that has seen little activity in Sweden in terms of larger, later investments’ this can be understood to infer an increase in the risk appetite to fund a profusion of new companies.

The effect on the employment market

According to LinkedIn, the tech sector (14%) is the second biggest source of jobs in Sweden, only just behind government (16%). IT infrastructure, software engineering, web programming and C/C++ are 4 of the top 11 skills in the workforce. In Stockholm, this is even more attenuated, with telecoms (4G, GSM), digital marketing and game development also added to the list. Of vacant positions advertised on LinkedIn, 23% were technology jobs, easily the largest category.

The explosion of tech jobs has exhausted the available domestic talent pool. In companies that Mundus International has visited it is not unusual to find dozens of expats employed, with English clearly being the office language. For this report Mundus investigated this observation, speaking to a recruiter specialising in IT, Invest Stockholm and Truecaller, a start-up that has attracted $80 million in funding. The messages from these conversations and LinkedIn support our observations about the employment pool;

-It is estimated that there are around 200,000 people employed as software developers in Sweden, with around 18,000-20,000 requiring a work permit (meaning that the do not come from EU countries).

-According to the recruiter, around 30 per cent of jobs currently being filled go to an expat. There have been around 5,000 visa applications in 2016.

-UK, USA and India are leading countries for hiring, but also the Former Soviet Union (Russia, Ukraine, Romania), South Asia (Pakistan, Bangladesh) and the Middle East (Syria, Turkey, Iran)

-Speaking Swedish is not mandatory, and English is the office language for many companies. This represents a major change, as Swedish was mandatory for many recruitments only a few years ago.

-Cities compete for the available global talent. The IT specialists that choose to come to Sweden often choose it for its political freedom and quality of life. Sweden is especially interesting for married couples, where the woman wishes to work, and that benefit from the free child-care, education and healthcare.

For many countries, the tech industry and innovation have become important issues of government policy. Winning a reputation as a tech industry hub can bring multiple benefits, in terms of investment and wealth creation, jobs and societal advancement. We leave you with the a quote from Tyler Crowley, an American consultant working to build MeetUps for the tech industry in Stockholm, who states that as an entrepreneur looking for ‘a lake to fish in, he’d fancy his chances to land a 50lb bass in Stockholm’ over any other European city.

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Note: This is a shortened version of the original. Tables and footnotes are only available in the subscriber version of this article.