Geektime spoke to Marjo Ilmari, the woman in charge of disbursing money to Finnish startups. The investment has paid for itself many times over, she says
When it comes to government funding of startups, there are two schools of thought. First, there are the free-market purists who believe that governments shouldn’t be in the accelerator business. Then, there are what you can call the startup welfare states, like Israel, South Korea and Finland, whose governments pour hundreds of millions into loans, grants and investments in startups each year. Judging by results, these startup welfare states already rank in the top five on global innovation indices, so there is a case to be made that they are doing something right.
Geektime caught up with Marjo Ilmari, director of the startup program at TEKES, the Finnish Funding Agency for Technology and Innovation, which is responsible for Finland’s generous government grants. We asked her how much money she gives to startups and what the rationale is behind this generosity.
Geektime: What kind of support do you provide to startups?
Marjo Ilmari: We provide mainly funding for startups. Our funding is in the form of grants and loans. We do not take any equity ownership. So the funding is non-dilutive for the entrepreneur and other investors.
Describe how large these grants are? How does one qualify?
Many companies say they wouldn’t exist without our funding. We have doubled our funding for startups in the last five years to some 130 million euros yearly.
We have three different types of financing:
There is the initial stage, planning for global growth — a grant of 75 percent, maximum 50,000 euros. It’s quite a small amount of money but with this money you can test your customer base, build a minimum viable product or service and the team can really increase their understanding of new markets. Meanwhile, we can see how the team works, if they can get enough market response, enough interested customers for their business idea.
The second type of financing is funding for research, development and pilot projects. It’s typically a loan that the company has to pay back. And the loan level is 50-70 percent of the project. The companies can develop products, services a business model and through piloting also demonstrate the functionality of the solution with customers.
If the business is successful they have to pay back the loan, but we do not take any share of the ownership. Payback starts typically after three years.
What if the company fails?
If the company fails then they don’t have to pay back the loan in total. We write-down the loan to the extent allowed by the European Commission.
What’s the third type of financing?
The third type is funding for young innovative companies, which is meant for the most promising startups with a scalable business model that are really capable of rapid global growth. There the funding is up to 1.25 million euros. Private investors can leverage this.
Can you describe any success stories that received these loans?
TEKES funding has had a major role in 60 percent of innovations in Finland. Supercell and Rovio for example both had funding at the initial stage. Gaming companies are paving the way for other companies from areas such as health tech, Internet of Things and ed tech.
What are your criteria for choosing companies?
Our criteria for funding are that the companies should have the spirit to grow and courage to take risk, but also have enough of their own resources for the development of an innovative business idea as well as profound technical and business knowledge. They need to have enough expertise to succeed and scale up the business. At the initial stage, we accept 60-70 percent of the applicants. Yearly we have some 650 startup companies financed.
What percent make it to the second stage?
We fund yearly some 450 planning for growth projects and 250 funding for research and development projects, which means that a bit more than half get further financing after their initial project.
Only about 50 companies receive funding for young innovative companies—meaning that only 10 percent of companies are selected.
Do these companies have to be Finnish? Can someone come from another country set themselves up in Finland and receive funding?
Actually, there are many foreign teams nowadays who decide that Finland is the best place to found their startup business. But the company has to be incorporated here. It should be responsible for the business, meaning that most of the management team lives here. Many companies receiving funding from us are not purely Finnish, but they are working in Finland and registered as a company here.
Beyond the funding, are there other sorts of help you offer?
We also organize events, where startup companies can network with larger companies and research institutes or with private investors. Our advisors are experienced. When they look at the applications or set milestones, the startups can utilize that advice as well.
If the government doesn’t get equity, why is it worthwhile to provide so much funding? What does Finland get in return?
Public innovation funding increases the amount companies invest in R&D and business development themselves. In return, we get more and more talented people working in new companies. When the companies grow, they export, pay taxes and bring well being into our country. Fostering innovative thinking and business development is very important to any country. We get a stronger knowledge base that is a springboard to new business areas in the future.
And you feel it’s been a very good return on your investment, that it’s been worthwhile?
Definitely. There has been an upward trending spiral in entrepreneurial activity in Finland. Students are actually selecting startups as their primary option when they decide what to do after their education.
It’s computer science, it’s engineering, but it’s also business, art and design students. The best thing they do is set up a team that has people from different backgrounds — technical, business and design.
A lot of countries have a policy that we should just leave this to the free market, we don’t need to support these businesses. If they’re viable they’ll succeed, if not, not. Why does Finland believe they need to get government support?
I think there is still clear market failure in startup funding especially when you look at the seed or early stage. This is a situation all over Europe. When you look at their U.S. counterparts for example, our companies fall well behind in the amount of private investments.
Do you have statistics to prove that with the increase in government support there has been increasing success? Do you get all the money back in tax revenue that you give to these startups? Do you have numbers?
There is a recent, very interesting study of the TEKES Young Innovative Companies financing scheme by Imperial College Business School and Aalto University. The research states as a conclusion that high-growth entrepreneurship policy can deliver a non-trivial, value-adding impact on the growth of technology-based new firms. The benefits to the economy and the tax revenues more than cover our startup funding. For example, Supercell and its founders have paid during the last two years three times more taxes than the yearly amount of TEKES startup funding. These super performers really take care of the economic rationale.
In terms of the young innovative (stage 3) companies, three out of 10 have been high-growth companies with a revenue growth of over 30 percent for three successive years. Ninety percent of the portfolio total growth is attributed to these gazelles, as we call them.
We see ourselves as a risk taker. We look at the benefits with a wider perspective. It is not only tax money, but the benefits to the society as a whole.
What percent of startups end up failing?
The amount of bankruptcy is quite low, say 5-10 percent in the startup scene, but many companies fail in that they don’t grow enough, they stay as a really small team of 5-10 employees. The companies break even but they do not make a big success. So from our perspective they are not perfect success stories.
Let’s say a company has five people, they get stage 1 funding from you and they just continue along and they have some revenue. Will you continue to support them or stop the funding?
After each stage, we consider if we will continue funding of not. We often set milestones that should be reached after the project. For example the targets can be a specific level of turnover, new international customers or private investments. If the milestones are not met, we do not fund the company further.
Quite often if the company is growing and is still promising we continue to fund them, if they appear to have an interesting future and our financing is needed to share the risk. But if they are not meeting the milestones, then we do not fund the company anymore.
Have you compared Finland’s program to other countries? You just seem like one of the most generous company to startups. Do you know how you compare to other countries?
There are some companies considering founding here or in Silicon Valley and they decide to establish the company here.
Are they from Finland or do they just want to start in Finland because of the TEKES program?
Yes, these are mostly Finnish teams that compare whether they should go to Silicon Valley or Finland. Lately one team selected Finland because of the quality of life here: good public services for families, high quality education and a clean and very safe environment. This gives the entrepreneurs peace of mind and they can focus on growing their startup business. The daycare, preschool, elementary school systems and universities are excellent — when the society is working well, the entrepreneur can really focus on scaling up their business.
If you’re not Finnish at all but you have European citizenship can you just move to Finland and start a startup?
If you have European Union citizenship, you can set up your own business in any EU country. In Aalto university and the Startup Sauna, there are really many international teams; there are actually more teams from abroad than from Finland that participate in the acceleration program. If they then decide to launch their startup here, we give them funding. We are willing to finance any successful entrepreneurs or great teams.
Do they have to be European?
They can be from any country at all. People who come to work or study in Finland of course need a residence permit. There have been Russian and even African teams in the Startup Sauna accelerator program.
So if any reader anywhere in the world has a really brilliant startup idea and they love snow and they love saunas and they want to come to Finland, they can come and can apply for TEKES funding?
Yes, they can apply. Of course at that stage they should have their company incorporated, and have their residence permit. When that’s ready and they have a great idea and a great team, we are really willing to fund them.
What advice would you give to other countries that perhaps had economic problems like Finland had, in terms of government funding of startups?
I think the governments’ role should not be so much in supporting the stagnating industries. If those industries do not find totally new creative ways to succeed and apply radical innovations, organizations like TEKES shouldn’t support them. Rather, startups that build totally new business concepts should be taken as a focus.
What is really important, and what is starting to happen in Finland nowadays, is that big corporations understand the importance of cooperating with the startup ecosystem. The big corporations are looking for ways to participate and innovate with startups.
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