Finnish Software Product Industry Ohjelmajohtaja Irmeli Lamberg Technopolis Ventures Oy Centre of Expertise for Software Product Business
Current state of the software product industry in Finland The overall turnover remained at 1000 million at the end of 2003 Profitability increased from the previous year Employs app. 12000 software professionals Current capital market situation is limiting operational possibilities of especially young companies An increase in external financing plans due to the increased growth prospects 2
The focus of the survey: software product business Software product business is business around software products, where customer tailored parts are not an essential part of the whole software Own software product business is software product business, which is based on company s self developed and maintained software products Definition does not include embedded software such as mobile phones or customer tailored software In Finland software product industry generates approximately 30 % of the whole software industry s revenues Important Object of the trade is software, not a service or an other product The software has been productized Sale units 10 000 000 1 000 000 100 000 10 000 1 000 100 10 1 Service business Professional services Low Product business Enterprise solutions Medium Degree of productization Packaged mass-market software High Source: McKinsey 1999 3
Background and implementation of the research Financers: Centre of Expertise for Software Product Business, Employment and Economic Development Centre of Uusimaa and National Technology Agency in cooperation with Ministry of Trade and Industry Study implemented in March-May 2004 as a web-questionnaire Questionnaire was posted to 2480 companies sources: company classification of Mailer Inc., companies from the last year study and contacts of the Centre of Expertise companies can be found under several industry classification codes (e.g. software design, databases, telecommunication etc.) 196 companies that are in software product business were reached According to professional estimated there were approximately 1100 software product companies in Finland at the end of 2004 Response rate 17 % Largest companies were systematically approached in order to gain industry volumes Responding companies generated over 60 % of the whole industry s revenues and over 80 % of the exports 4
About software product companies answering the survey Location 80 % of the companies located close to technology centres and universities 54 % of the companies located in Uusimaa, 74 % of the larger companies (sw-product business turnover > 3 M ) Profitability Majority of the companies made a close-to-zero profits 20% of the responding companies generated losses (25% in 2002) 24% of the companies had profitability over 15 % (15% in 2002) Age of the companies Average age 11 years and average age of the software product business 10 years The amount of start-up companies has decreased in the last two years Size of the companies 34 % of the companies generated less than 200 000 in sw-product business in 2002 (38% in 2002) revenue / employee 113 000 (107 000 in 2002) 27 % of the companies employed less than 6 people (34% in 2002) Financing 41% of firms intended to seek external financing in 2004-2005 (30% in 2002, 43% in 2001) Increasing share of VC ownership; from 3% in 2002 to 7% in 2003 5
Turnover development of software product business industry 1997-2003 1) Total revenues remained at 1000 million in 2003 Year 2003 was challenging for the biggest companies Smaller companies managed to increase turnover Volume of export remained at the level of previous year (app. 40% of whole turnover) Value of export decreased 5% by reason of big companies and changes in exchage rate of euro Export of smaller companies (turnover from own software product business 0,2-2 million ) increased app. 130 % Growth prospects more optimistic than year ago Million 1800 1600 1400 1200 1000 800 600 400 200 0 1997 actual 1998 actual 1999 actual 2000 actual 2001 budgeted 2001 actual 2002 budgeted 2002 actual 2003 budgeted 2003 actual 2004 budgeted 1) Ekstrapoloitu toimialan kokonaisyritysten määrää vastaavaksi Export budgeted Domestic budgeted Export Domestic Overall 6
Development of the largest companies The development of the large companies (n=18) was followed (sw-product business exceeding 3 M in 2003) Average annual growth in domestic markets 2001-2003 12,7 %, median growth negative Average annual growth of export negative 5,4 %, median growth positive 13,2 % Amount of software personnel in thesebig companies (n=15) decresed 4,4 % in 2003 Million 18 16 14 12 10 8 6 4 2 0 Domestic (mean) Liikevaihdon kehitys 2000-2002 Domestic (median) Export (mean) Export (median) 2001 2002 2003 7
Software product business personnel 1) 14000 Software product business personnel increased 20 % Employs app. 12000 software professionals especially smaller companies (tunrnover from own sw-product business < 3 million ) personnel increased Companies remain cautious in plans to recruit in 2004 Small companies estimated to growth software product business personnel on average 20 % in 2004 In responding companies On average 35 % in R&D (in 2002 34 %) 12000 10000 8000 6000 4000 2000 0 1999 2000 2001 2002 budgeted Development of software personnelin the industry 1) 22 % 8 % 13 % 17 % 35 % 2002 2003 budgeted 2003 2004 budgeted 5 % Product development Sales & Marketing Customer service Product services and delivery Management and administration Other The allocation of tasks (responding companies) 1) Exstrapolated to the industry level 8
Product development (responding companies) Young companies R&D investments increased in 2003 companies with age of sowtware product business less than 3 years invested in R&D on average 45 % of turnover ( 27% in 2002) The most important focus areas of the R&D were developing of the degree of productisation and developing of valueadding services Subcontractin from abroad is quite rare 13 % of responding companies used subcontractin from abroad 28 % of responding companies used domestic subcontractors 50 % 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % R&D investments in 2001 and 2002 (% of total turnover) Degree of productization Value-adding services Improving R&D and delivery processes New product New market specific version Median (n=134) Median (n=104) Median (n=141) 2001 2002 2003 1 2 3 4 5 6 7 Not at all Very much Age of software product business 1-2 years 3-5 years 6-10 years >10 years 2001 2002 2003 Focus of the R&D 9
Improvement areas (responding companies) The most important improvent areas were product development, networking and international sales and marketing Focus of small companies was in product development and networking Focus of large companies was in international sales and marketing 90 % of companies focusing on acquiring financing had turnover from software product business belowe 1 million Frequency 80 70 60 50 40 30 20 10 0 Product development or productisation Networking and cooperation International sales and marketing Improvement of personnel knowledge Acquiring financing Strategic planning The Most Important Improvement Areas International delivery Product localisation or international version 10
International Operations (responding companies) Revenues from Abroad? Foreign Revenues Share Histogram 70 % 60 % 50 % No 50 % Yes 50 % 40 % 30 % 63 % 20 % 10 % 0 % 18 % 10 % 10 % (0; 25> (25; 50> (50; 75> (75; 100) Share of Revenues from Abroad (%) 50 % of firms reported revenues from abroad (46 % in 2002) Gap between initial foreign sales and full internationalization Increase in average share of revenues from abroad to 31 % (19 % in 2000) Significant growth in geographic coverage to 6,3 countries on average (4,6 in 2000) 11
Financing and Ownership(responding companies) Increasing share of VC ownership; from 3 % in 2002 to 7 % in 2003 Founders and their family members Distribution of ownership 41 % of firms intended to seek external financing in 2004-2005 (30 % in 2002, 43 % in 2001) Significant increase in the percentage of companies seeking external finance from 2002 caused both by increased growth prospects and higher confidence on the availability of external finance 25 % if firms had to change business plan due to the problems with availability of finance Management and employees External individuals/ business angels Private VC investors Government VC investors Banks, insurance companies and other FIs Corporations Other investors and shareholders 0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % Percentage of ownership Youngest firms find availability of risk finance as a significant barrier 80 % Comparison of External Financing Plans 40 % 70 % 35 % Share of founders and their family members 70 % in 2003 Plans to seek external finance 60 % 50 % 40 % 30 % 20 % 30 % 25 % 20 % 15 % 10 % Share of firms (%) 10 % 5 % 0 % 0 % (-inf.;0> (0;15> (15;30> (30;80> (80;+inf.) Expected growth category (%) Share of firms, 2002 Share of firms, 2003 Plans to seek external finance in 2003-2004 Plans to seek external finance in 2004-2005 12
Current state of the industry and development areas Current state Internationalization of the industry is in an early phase, but several internationalization programs for software companies have been successful Turnover / employee is increasing Financing situation is currently very challenging Development areas Gaining deeper understanding of the nature of the duplicated product business Strengthening and developing networks and supporting services Making more attractive and favorable environment for foreign private equity investors Improving the knowledge of internationalization (especially by the SMEs) 13
Contact information Program Director Irmeli Lamberg, Centre of Expertise for Software Product Business irmeli.lamberg@technopolis.fi p. (0400) 883 822 Researcher Jani-Pekka Jokinen (software product industry survey) jani-pekka.jokinen@hut.fi p. (09) 451 6261 Professor Jyrki Kontio (software business) jyrki.kontio@hut.fi p. (09) 451 3230 Senior Researcher Markku Maula (financing) markku.maula@hut.fi p. (09) 451 3085 14