Menon Publication Nordic Venture Capital: Cross Border Investments MENON-PUBLICATION NO. 20 /2010 Gjermund Grimsby, Leo A. Grünfeld and Anne Espelien
www.menon.no PO. Box 5250 Majorstuen N0303 Oslo Tel: +47 41105133 leo@menon.no The report is written for the Norwegian and Swedish Venture Capital Associations (NVCA) and (SVCA). is fully responsible for all contents in the report. All statistical information on venture capital investments are made available through PEPEP Analytics and EVCA. We are grateful to analyst Monica Biolan in PEREP Analytics who helped us structure the information. 2 Paper
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 on data provided by the European Private Equity and 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 companies 1. 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. 3 Paper
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. 4 Paper
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 Mill. EUR National market venture investment split by source, 2007 - h12010 1200 1000 800 600 400 200 0 151 41 477 International (excl. nordic) Nordic (excl. national) National 167 29 63 73 280 294 154 162 777 Norway Denmark Finland Sweden The next graph shows the split between investments made by national funds, funds from other Nordic countries and international venture funds. 5 Paper
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 funds 2. Chart 3 Venture investments by national market, market share, 2007 -h1 2010 100% 80% 60% Norway Denmark Finland Sweden 7% 14% 23% 33% 18% 15% 6% 12% 40% 20% 71% 55% 74% 71% 0% International (excl. nordic) Nordic (excl. national) National 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. 6 Paper
Chart 4 Number of investments in venture companies, 2007 -h1 2010 International (excl. nordic) Nordic (excl. national) National # investments 1800 1600 1400 1200 1000 800 600 400 200 0 38 30 577 93 83 297 39 69 858 90 158 1333 Norway Denmark Finland Sweden 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 Average venture investment per portfolio company, 2007 - h12010 7 6 5 Mill. EUR 4 3 2 1 0 Norway Denmark Finland Sweden National Nordic (excl. national) International (excl. nordic) 7 Paper
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 welldeveloped 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 Nordic cross-border venture investments, share of total venture investments in market, 2007 - h1 2010 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% From Sweden From Finland From Denmark From Norway 11% 5% 6% 4% 4% 4% 2% 1% 4% 4% 6% 1% Norway Denmark Finland Sweden 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. 8 Paper
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 Nordic Denmark Finland 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 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 9 Paper
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 International funds' investments in Nordic industries, 2007 -h1 2010 EUR mill. 180 160 140 120 100 80 60 40 20 0 Sweden Finland Denmark Norway 10 Paper
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 Venture investments in national markets, mill. EUR* 450 400 Sweden Norway 350 Denmark 300 Finland 250 Mill. EUR 200 150 100 50 0 2007 2008 2009 h12010 *The figures for h12010 have been extrapolated with a factor of two in order to correspond to annual figures from previous years. 11 Paper
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 Number of venture investments in Nordic countries, # of investments 450 400 350 300 250 200 150 100 50 0 Sweden Norway Denmark Finland 2007 2008 2009 h12010 12 Paper
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. 13 Paper