cross border investments - menon.no

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

[email protected]


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.


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.


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


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%


Venture investments by national market, market share, 2007 - h1 2010

International (excl. nordic) Nordic (excl. national) National


577

297

858

1333

38

83

69

158

30

93

39

90

0

200

400

600

800

1000

1200

1400

1600

1800


# 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


Mill

. EU

R

Average venture investment per portfolio company, 2007 - h12010

National Nordic (excl. national) International (excl. nordic)


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%


Nordic cross-border venture investments , share of total venture investments in market, 2007 - h1 2010

From Sweden From Finland

From Denmark From Norway


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


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


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


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


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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