How Sweden became Europe’s Silicon Valley
STOCKHOLM, August 11 (Reuters) – As Klarna’s billionaire founder Sebastian Siemiatkowski prepares to host one of the largest European fintech corporate listings ever, a celebration of capitalism, he credits an unlikely backer for his fleeting success: the Swedish welfare state.
In particular, the 39-year-old sets a government policy from the late 1990s to put a computer in every home.
“Computers were inaccessible to low-income families like mine, but when the reform came into play, my mother bought us a computer the very next day,” he told Reuters.
Siemiatkowski began coding on that computer when he was 16. Fast-forwarding more than two decades, and his payment company Klarna is valued at $ 46 billion and plans to go public. It has not given details, although many bankers predict that it will be listed in New York early next year.
Sweden’s home computer and simultaneous early investments in internet connection help to explain why the capital Stockholm has become such a rich land for startups, childbirth and incubation of Spotify, Skype and Klarna, even though it has some of the highest tax rates in the world.
That is the opinion of Siemiatkowski and several technical CEOs and venture capitalists interviewed by Reuters.
During the three years that the system ran, 1998-2001, 850,000 home computers were bought through it, which reached almost a quarter of the country’s then four million households, who did not have to pay for the machines and thus included many people who could not otherwise afford them.
In 2005, when Klarna was founded, there were 28 broadband subscriptions per 100 people in Sweden, compared with 17 in the US – where dial-up was still much more common – and a global average of 3.7, according to data from World Bank.
Spotify allowed users to stream music when Apple’s (AAPL.O) iTunes was still download-based, which gave the Swedish company the upper hand when streaming became the norm around the world.
“It can only happen in a country where broadband was the standard much earlier, while in other markets the connection was too slow,” says Siemiatkowski.
“It allowed our society to be a couple of years ahead.”
Some executives and campaigners say that the Scandinavian nation shows that a deep social safety net, often seen as the opposite of entrepreneurship, can promote innovation. It is a result that might not have been thought of by the architects in Sweden’s welfare state in the 1950s.
Childcare is mostly free. A number of income insurance funds can protect you if your business fails or if you lose your job, guaranteeing up to 80% of your previous salary during the first 300 days of unemployment.
“The social safety net we have in Sweden means that we can be less vulnerable to taking risks,” says Gohar Avagyan, the 31-year-old co-founder of Vaam, a video messaging service used for sales outlets and customer communication.
START PRICE VS SILICON VALUE
Although the overall investments are larger in the larger European economies in the United Kingdom and France and their long-term financial hubs, Sweden in some respects exceeds its weight.
It has the third highest start-up rate in the world, behind Turkey and Spain, with 20 startups per 1,000 employees and the highest three-year survival rate for startups anywhere, at 74%, according to a 2018 study by OECD economists.
Stockholm is second only to Silicon Valley in terms of unicorns – startups worth over $ 1 billion – per capita, about 0.8 per 100,000 inhabitants, according to Sarah Guemouri at the venture capital company Atomico.
Silicon Valley – San Francisco and the Bay Area – has 1.4 unicorns per 100,000, says Guemouri, co-author of a 2020 report on European technology companies.
However, no one can say for sure whether the boom will continue in a country where capital gains are taxed at 30 percent and income tax can be as high as 60 percent.
In 2016, Spotify said it was considering moving its headquarters from the country, claiming that high taxes made it difficult to attract foreign talent, even if it did not.
Yusuf Ozdalga, partner at the venture capital company QED Investors, said that access to financing and administrative or legal information in connection with starting a company can also be difficult for non-Swedish speakers to navigate.
He contrasted this with Amsterdam, the capital of the Netherlands, where the government adopted English as the official language in April to make life easier for international companies.
‘INTERESTING DILEMMA’ FOR VC
Jeppe Zink, partner at the London-based venture capital company Northzone, said that a third of all exit values from fintech companies in Europe – the amount that investors received when they withdraw – came only from Sweden.
The government’s policy had contributed to this trend, he added.
“It is an interesting dilemma for us venture capitalists because we are not used to regulation that creates markets; in fact, we are inherently nervous about regulation.”
Sweden’s digital minister Anders Ygeman said that social regulation can make it “possible to fail” and then “be up and running again” for innovators.
Peter Carlsson, CEO of startup Northvolt, which manufactures lithium-ion batteries for electric vehicles and is valued at $ 11.75 billion, said that the success ultimately created success.
“You really create ripple effects when you see someone else’s success and I think that’s perhaps the most important thing in creating local ecosystems.”
Reporting by Supantha Mukherjee and Colm Fulton in Stockholm; Haircut by Pravin Char
Our standards: Thomson Reuters Trust Principles.