Stockholm is the second most prolific tech hub in the world on a per capita basis, behind Silicon Valley. How did that happen and where does it go from here?
Sweden is the world's second most prolific tech hub on a per capita basis, behind Silicon Valley
By Lauren Davidson, in Stockholm
When Apple, the Silicon Valley veteran that revolutionised the music industry by unbundling the physical album and allowing individual digital song downloads, announced the launch of Apple Music earlier this month, the implications were immense.
The world’s most valuable business was admitting that a six-and-a-half-year-old company started by a 23-year-old from Stockholm had it right all along.
The very next day, that Swedish startup – Spotify – unveiled a mammoth $526m funding round, reaching a valuation of $8.53bn and cementing its place as the most valuable venture capital-backed company in Europe.
The music streaming service is the fifth unicorn, the name given to tech companies founded after 2003 that have reached valuations of at least $1bn, to come out of Sweden. Although the UK is home to more unicorns than Sweden – includingZoopla, Just Eat and Wonga – the Scandinavian country is the second most prolific tech hub in the world on a per capita basis, producing 6.3 billion-dollar companies per million people, compared to Silicon Valley’s 8.1, according to a recent report from the investment firm Atomico.
In fact, if you played a game on your phone today, listened to music online or video-phoned a friend, chances are you used a Swedish company. Skype became Stockholm’s first unicorn when it was bought by eBay for $2.6bn in 2005 – just two years after it launched – and has since been followed by Spotify, Candy Crush parent King, Minecraft maker Mojang and the payments service Klarna.
“Stockholm is becoming a world leader in technology,” Skype creator Niklas Zennström, who also founded London-based Atomico, said earlier this month at the inaugural Brilliant Minds conference, the brainchild of music manager Ash Pournouri and Spotify founder Daniel Ek. “We are living in an extraordinary time, and there is no doubt that Sweden is a leader in this proud new world. The dream we had of becoming a tech community 10 to 15 years ago is now becoming a reality.”
The Nordic region represents 2pc of global GDP but has accounted for almost 10pc of the world’s billion-dollar exits over the last decade, with more than half of these coming from Sweden, according to a report published in March by the Stockholm-based investment firm Creandum. Last year marked the best year ever in terms of exit value for Nordic companies, including three $1bn exits and more than $13bn in total exit value.
So how has Sweden – a country of 9.8m people, slightly more than London and roughly a sixth the size of the UK population – become the poster child of European innovation and why has the finance world only just started to pay attention?
The country’s tech scene has thrived because of, not in spite of, its small population. “We think globally from the outset,” Mr Zennström said. Stockholm’s successful startups “all realised the domestic market is not big enough,” with the average company from a small country expanding internationally within 1.4 years, less than half the time it takes a company from a country with a population of more than 50m to look outside its borders.
As Gustav Borgefalk, founder of Sqore, the competitions website that has helped clients including IBM, Shell, and Morgan Stanley recruit talent, put it: “In Sweden, we’ve always been exporters, from Ericsson, Volvo and Saab…to Abba.”
This esteemed history of globally-renowned brands, which also includes H&M, Electrolux and Ikea, laid the foundations for the Swedish government to invest heavily in its technology infrastructure in the 1990s, establishing high-speed internet and giving citizens tax breaks to buy a computer, creating what the World Economic Forum declared a few years ago to be the world’s most digital economy.
“It was a government intervention in the 1990s that is paying off in the 2010s,” Mr Borgefalk said, adjusting his baseball cap as he leaned forward over a table in the Sqore office, which was originally built as the headquarters of the Swedish company that invented the safety match and where all the rooms are now named after Star Wars characters.
Not only did this investment equip Swedes with the physical tools and digital savvy to become a nation of disruptors and a country of ready consumers, but it nurtured a generation of people who grew up on the internet, creating a culture of open access and entrepreneurial collaboration.
It’s no coincidence that the free file-sharing websites The Pirate Bay, Kazaa and uTorrent were also founded in Sweden, the latter two created by Mr Zennström and Mr Ek respectively, who would go on to build Skype and Spotify.
“Sweden is a testbed for innovation,” said Marta Sjögren, an investor at Northzone, the venture capital fund that is Spotify’s largest shareholder after its founders. The Nordic countries excel at “the concept of problem-solving investments as opposed to purely money-making investments… we call them game changers and game winners. This is deeply rooted in the Swedish mentality.”
This mindset wasn’t built in the ‘90s: it is an offshoot of the reigning axiom of Swedish culture, known as Jantelagen, or the law of Jante, a set of rules laid out in a 1933 novel that prioritise the collective over the individual and promote humility over hierarchy.
In a classic example of Jantelagen, Ingvar Kamprad, the founder of Ikea and one of the wealthiest people in the world, famously drove his 1993 Volvo until it was no longer roadworthy.
These ideals are also the driving force behind public policies that permit a high quality of life and allow entrepreneurship to thrive. Sweden has among the highest female and maternal employment rates in the EU because of generous paternity leave laws, equality incentives and readily-available affordable childcare.
“The whole freezing your eggs thing” – the benefit that Apple and Facebook introduced to allow their female employees to focus on work – “would never happen in Sweden,” said Northzone’s Ms Sjögren.
But these cultural factors are not new, nor is the legacy of global brands that have come out of Sweden over the last two centuries. So why is it only over the last couple of years that the funding pouring into Stockholm has picked up, reaching quarterly levels up to four times higher than previously?
CBInsights data show that $787.6m of venture and growth capital was pumped into Swedish companies last year, excluding private equity deals, making 2014 “the best year for funding since the dotcom boom 15 years ago”, according to Torbjörn Bengtsson of Stockholm Business Region Development, the city’s official investment promotion organisation.
He added that 2015 has "most likely" already surpassed the total for 2014, driven by Spotify's $526m funding round.
That has allowed the city to foster a growing tech scene, with shared working spaces such as Sup46, the digital startups haven, and THINGS, Sweden's first hub for hardware makers, launching in October 2013 and March 2015 respectively. But a decade ago, that community did not exist.
“Attracting capital was very hard when we started,” said Sebastian Knutsson, co-founder and chief creative officer of King, the gaming studio behind Candy Crush that launched in 2003 and floated on the New York Stock Exchange at a valuation of $7.1bn last year.
Speaking at the Brilliant Minds conference, he added: “That’s starting to change – it’s better to start a company now than it was 10 years ago. Stockholm is in the limelight.”
So what’s different? As Mr Zennström put it: “Success breeds success.”
I’d be very worried for an investor if Sweden wasn’t on their road trip
Jonathan Forster, Spotify
Newer companies are benefiting from the global attention drawn to Stockholm by King’s New York IPO,Microsoft’s $8.5bn takeover of Skype (its largest ever acquisition) and its $2.5bn purchase of Minecraft maker Mojang in September, as well as Spotify’s mammoth VC-backed valuation and warfare with the likes of Taylor Swift and Apple.
"When we started, we couldn't compete," said Jonathan Forster, who runs Spotify's Nordic operations. "Now, I’d be very worried for an investor if Sweden wasn’t on their road trip."
Johan Attby, whose social network for anglers, FishBrain, recently reached 1m users, tried unsuccessfully to raise capital in 2006 for another startup, Tific, and ended up having to leave Sweden for Silicon Valley.
“That was pre-Skype. Sweden wasn’t known for anything besides Abba,” he said. “It’s totally different today. There’s more capital and better investors. It’s now super credible being from Stockholm.”
Henrik Torstensson, founder and CEO of the health tracking app Lifesum, which raised $6.7m in its first round of funding just over a year ago, added: “The last few years have been driven by the power of example: we’re in the third or fourth wave of internet companies."
He said that Stockholm is now full of "familiar faces" who succeeded or failed in earlier generations of Sweden's startup scene.
Now that the world is paying attention, where does Sweden go from here? Spotify founder Daniel Ek wants the country to think even bigger – not just to make money but to create legacy.
“Whenever a European company has ever been on the brink of success, it’s sold,” he said to a small group of reporters at the Brilliant Minds conference. “I told [Skype founder] Niklas Zennström, you sold too early.... Skype could have been one of the big ones.
“The US has 320m people and has produced Amazon, Facebook, Google, Apple, Microsoft,” he said, adding that it is “insane” that Europe has a population almost twice as large and doesn’t have one of these companies. “Statistically, that’s an anomaly.”
But Sweden could help to change that. “This small country is really punching above its weight in creativity… There’s a new wave of entrepreneurs, we’re at a breaking point,” he said. “Europe can do the same.”