Why tiny Stockholm has the most stunning startup ecosystem since Tel Aviv
It’s Friday night in Stockholm, and there’s an elbow-to-elbow crowd at ecommerce startup Tictail’s office. It's a wood-floored loft space in a quiet southern corner of the city -- an embodiment of the minimalist Swedish design that has inspired the company.
There are buckets of Peroni beer on ice, Tictail DJs are on the decks, and in the crowd a few venture-capitalist blazers mingle with the flipped-up caps and high-top sneakers of the startup crew. You have to get pretty cozy to hear one another over the raging electro music. These leaders -- and wanna-be leaders -- of Stockholm’s startup community are literally breathing down one another's necks.
This is the inaugural party for Stockholm Startups, a loose confederation of startups -- led by Tictail, Wrapp, iZettle, and others -- that in a very un-Swedish way have finally decided it's time for the local ecosystem to start talking itself up. Later, there’ll be smoke machines, lasers, and, at about midnight, a speaker will fall off its stand, bringing the event to a premature halt. It seems awkward party fouls are the international language of startups.
Tonight is just a party, but it’s indicative of an emerging trend towards Stockholm’s previously disparate startup community actually organizing itself. That’s not to say there hasn’t already been a strong entrepreneurial vein in the city, or a substantial tech scene. Far from it. Stockholm has a history of tech innovation and entrepreneurship that reaches back to QlikTech (founded 1993), MySQL (1995, also claimed by Finland), TradeDoubler (1999), and Skype (2003, also claimed by Denmark and Estonia), not to mention one-time mobile giant Ericsson (which started life as a telegraph equipment repair shop in 1876).
But while the Swedes are good at cooperating, they haven’t been so hot at marketing their talents. They’ve been guilty of keeping to themselves, happy to pitch in from time to time or share information, but slow to form associations, alliances, or to aggregate their intellectual resources in order to tell a strong story about their community. “I really think it’s an amazing scene, but we’re very Swedish about it,” says Tictail co-founder and CEO Carl Waldekranz, the host of tonight’s party. “We just don’t talk about it.”
And so they’ve ceded the "LOOK AT ME" mantle to Berlin, a city that has not been shy about holding itself up as a kind of European startup Holy Land. Don’t think that the Stockholmers haven’t noticed. When magazines name the top tech cities in Europe, Berlin often comes out on top, with London and Stockholm close behind. But venture capitalists and entrepreneurs in Stockholm’s startup ecosystem will tell you that the Germans are strong mostly in consumer Web, and that the city doesn’t enjoy the breadth -- in enterprise, in finance, in travel, in mobile, in gaming -- that Stockholm boasts. In fact, these people will point out, one of Berlin’s hottest startups, SoundCloud, was actually started by Swedes. (For what it's worth, our own reporting has shown that the people who frequently hold themselves up as the poster child of innovation and startup panache, aren't usually the big winners.)
Thanks to Klarna, Spotify, Rebtel, and King.com, among others, Stockholm has a longer history of tech successes and more big-dollar exits than its German rival. For instance, the Nordic region as a whole -- which still represents a much smaller population than Germany -- accounted for about 6.5 percent of the world’s billion-dollar exits from 2005 to 2012, according to statistics provided by Stockholm-based venture capital firm Creandum. Europe -- excluding the Nordics -- represented 12 percent. And of the billion-dollar private companies listed in Business Insider’s Digital 100, 13 percent are from the Nordics, while Europe without the northern region represents only 8 percent.
“The Nordics are definitely delivering a disproportionate amount of large companies, especially considering that much less capital is invested in the region and of course that the region is much smaller,” says Creandum’s Daniel Blomquist.
One might argue the Nordic countries are winning the battle of sexy too. While Germany is mostly known for knock-offs, Finland has Angry Birds, and Sweden has Spotify. Those are two of the hottest companies in any country in recent years. And in terms of impact, the Nordic development of crucial parts of the open source stack enabled this entire generation of Web companies.
Aside from a multitude of exciting startups emerging in Stockholm -- some of which I have reported on in the last week, including Magine, Tictail, Virtusize, Wrapp, and iZettle -- there are plenty of anecdotal signs that suggest the scene is growing up. Spotify, for instance, has just moved into a new building, large enough to accommodate its ever-growing staff of 350, with a bit of room around the sides. Klarna, the payments company founded in 2005, has recently moved into similarly luxurious quarters, big enough to hold much of its staff of 800 (the rest are spread around Europe), with more to come.
Wrapp, the social gifting startup, recently moved into new digs, too, a converted industrial space that more than adequately accommodates its 50 employees. It is also shipping its sales and marketing teams to San Francisco as it gears up for a big push in the US. Gaming company Mojang, creator of Minecraft, meanwhile, has become so big that it hosts an annual convention for Minecraft alone.
These are the fruits of what is now a relatively thick tech cluster that has been a couple of decades in the making. The cluster spans three generations, starting with QlikTech and Skype, moving through to Spotify and Klarna, and bringing us up to Tictail and Wrapp. It is supported by a wealth of engineering talent, educated for free in Sweden’s quality universities and incubated in the many tech companies, from Ericsson down, that for years have been plying their trade from the country. That talent is pretty affordable to retain, too, especially when compared to SIlicon Valley. While Valley engineers on average are paid in excess of $100,000 a year, in Sweden you can hire people of equivalent skill sets for closer to $60,000, according to the startups I talked to.
That talent advantage is what keeps a lot of startups in Stockholm. Tictail, for instance, was considering a move to Silicon Valley and even flew there for three weeks of intense meetings on a scouting trip. The team ultimately decided against the move, however, because it felt it would be best to compete for top talent in Stockholm rather than just be another startup in California. Other startups in Stockholm espoused similar views.
There is, however, plenty of competition within the city. One 15-person startup complained that Spotify and Klarna suck up all the talent. On stage at the SIME Internet media conference, Klarna co-founder Niklas Adalberth said the big guys frequently slug it out for talent. “We fight with Skype and Spotify on every engineer,” he said.
While Stockholm looks inward for talent, however, it looks outwards for business. It must. Sweden is a small country -- population: 9 million -- so it has always turned to outsiders for trade, reaching back to the industrial periods of the 1800s, when it exported paper, pulp, iron, ore, and wood. Over time, it has built major international companies that way, including IKEA, Absolut, and Volvo. In the past, though, it would have to open offices in each market. The distribution power of the Internet plays right into Swedish hands, then, by lessening the need to have a physical presence on the ground in each new market.
And yet, because of its size, relative affluence, and technological advancement, Sweden does make for a useful first market for homegrown Internet companies. A common expansion plan starts in Sweden, moves out to the rest of the Nordic countries, zips over to Germany, the UK, and the rest of Europe, and then, all going exceedingly well, winds up in the US.
Stockholm enjoys numerous other advantages, including a widely developed broadband network pushed out by the government in the 1990s, giving most residents the sorts of download speeds that could only encourage rampant piracy, and hence the arrival of enterprises such as Kazaa and the Pirate Bay. It’s not surprising that Spotify started in Sweden, where piracy was so rampant as to be utterly normalized. Spotify founder Daniel Ek has said that he started Spotify in part to offer a legal alternative to peer-to-peer file-sharing.
Those fast Internet connections, however, coupled with a government-instigated PC-lending program that put computers in the hands of even the lower classes from an early stage helped cultivate a high-tech, early-adopter society. Plus, Swedish winters are long, dark, and cold, which encourages people to stay inside and noodle away at creative endeavors, such as programming or gaming.
And don’t forget that those Swedes have enviable design skills, which helps them build some of the prettiest Web services on the planet.
So, for those keeping score, Sweden has: A nice complement of successful tech companies across a broad range of verticals; a solid second generation of startups that have grown to respectable sizes; promising new startups that are taking inspiration from international successes such as Skype and MySQL; abundant and affordable engineering talent; an international outlook; a tech-savvy society with good broadband; a government that on balance seems to have helped rather than hindered the startup ecosystem; impeccable aesthetics; and shitty winters that force everyone to stay inside and play on their computers. Ladies and gentlemen, that's why Stockholm is winning.
But it must suck at some things, right?
Stockholm’s biggest problem is that it doesn’t have much in the way of early-stage capital. It’s fine from Series A on -- the Nordic VC firms Creandum and Northzone take care of that, along with international investors, such as Accel Partners, Index Ventures, London Venture Partners, Balderton, and others. What it lacks is a strong network of angel investors. Sure, there are a few -- Skype co-founder Niklas Zennstrom, with his Atomico fund, among them -- but there aren't nearly enough. Just getting off the ground can be a major challenge for many startups, and having limited initial funds shortens companies’ financial runways and potentially negatively impacts their willingness to take risks or build slowly.
“The first million is as hard as finding the next 10 or 15 million, if not harder,” says serial entrepreneur and iZettle co-founder Jacob de Geer.
Taxes can also be a problem. Salary tax is high, but that’s not the biggest issue. It’s difficult for companies to offer employees stock options, because they get taxed at both ends. The employer has to assess how much an option is worth and then factor it into its accounting accordingly. The employee, on the other hand, only gets paid out on the option if the company succeeds, meaning he pays his tax but can’t recover the money if the company fails. When startups have limited funding -- and many do, because of that early-stage problem -- that restriction on options can be a serious impediment to putting together competitive car accident compensation packages.
Stockholm also faces challenges in attracting talent to the city, competing as it does against Berlin, which has decidedly better weather and a zeitgeist-y reputation, especially right now in its hipster heyday.
The government’s short-sighted attitude to foreign students doesn’t help -- they’re kicked out of the country as soon as they complete their degrees, even though the state heavily subsidizes the cost of their study. A lack of downtown housing also makes the city a tough sell for new arrivals, not least because housing is expensive compared to, say, Berlin.
For Swedes, however, the taxes and the high costs are significantly offset by the welfare state, which grants free education and healthcare, and provides for a base standard of living that puts other countries (Oh, hello there, United States of America) to shame.
For some, that might suggest that the country’s entrepreneurs won’t be hungry enough to make it. If they know there’s a safety net to catch them if they fall, this theory goes, then they won’t throw themselves into the task of company-building with the “all or nothing” zealotry that is apparently vital to building a successful business. The entrepreneurs and investors I spoke to, however, said that the safety net means that many people aren’t afraid to take that first step into the unknown, because they know they won’t die on the streets if they fail.
A perhaps negative effect of the social-capitalism, however, is that “entrepreneur” is not all that popular a vocation in Sweden. Entrepreneurs are still considered outliers in society, which prefers to produce professionals such as doctors and lawyers. Some families and friends think it weird that a young scruff should want to start a company. With the success of Skype, Klarna, and Spotify, however, that’s beginning to change. And anyway, some folks told me, that means that the entrepreneurs who are around are very serious about what they’re doing. It’s not typically a decision they’ve made lightly.
And now we must mention a final cultural quirk that throws up sometimes unexpected challenges. In Sweden, as in all Scandinavian countries, there exists an embedded mindset that makes it unseemly for someone to hold himself above others. Swedes, if they’re behaving themselves, should not stand out for any reason. That means no fancy cars, no conspicuous yachts, no bragging about their world-changing companies. This phenomenon has a name: The Law of Jante.
Before you laugh off the Jante Law, however, consider that National Geographic author Dan Buettner has argued in his book "Thrive" that status equality is strongly correlated with happiness. “If you live in a neighbourhood where everybody makes about the same amount of money as you, you’re better off than if you live in a neighbourhood where you have the cheapest house on the block and everybody else makes five times as much as you,” Buettner once told me. That’s one of the reasons that countries such as Sweden and Denmark score so highly on global happiness surveys.
Fine. But isn’t such status equality a death knell for entrepreneurship, which is supposed by many to require ambition far beyond one’s village? Well, maybe. But I couldn’t find anyone in Sweden who agreed with that. In fact, said Northzone’s Pär-Jörgen Pärson in a widely echoed statement, another way to look at it is that if a company succeeds, it sets an example for the others and makes big goals seem achievable. If they can do it, I can do it, goes this line of thinking. (Pärson, by the way, is also the frontman of a heavy metal covers band called Frank Xerox and the Perfect Copies.)
And that idea of social leveling brings us back to Tictail's party. That, fundamentally, is why it is “un-Swedish” to hype oneself up, and it probably explains why it has taken so long for a group of startups to even think about banding together to tell a good story about their scene to the rest of the world. That’s why the inaugural Stockholm Startups event at Tictail’s office might be more than just a party after all. It also might be the start of a subtle cultural shift that ultimately gives Stockholm the bragging rights over Berlin -- and the confidence to actually brag.
[Image courtesy Alexandralee]