It takes decades to turn a city into a hopping startup scene. The process begins with a pioneering entrepreneur who starts a company in the city - which enriches early investors -- often through an acquisition by a bigger company. (Think about how Skype was acquired by eBay and then Microsoft.)
It often helps if the big companies in that city -- which had previously been thought of as safe employers who could provide lifetime security -- suffer economic downturns that put thousands of talented people on the street. That's what happened with Ericsson in Stockholm -- which announced in August 2017 that it might layoff 25,000 people (23% of its employee base).
The combination of a local startup success story and the evaporation of the idea that big companies are safe places to work can change the local culture. Young people and their parents will both come to realize that going to work for a startup is the best option -- it can yield huge upside if it succeeds. And if it fails, there is always the chance of finding a job at a bigger company -- or if you have a spouse who works -- trying again.
That initial success attracts outside venture capitalists looking to get in on the next score in that city. Often these investors see if any of the founding members of the acquired company want to become CEOs. Some of them succeed -- forming a new generation of potential startup CEOs and startup investors.
As the region's talent base improves -- creating more people who can turn an idea into a large company. If that happens, the region will host pillar companies that provide fresh capital and talent to sustain that region's startup scene.
Here is the mind-blowing way one Stockholm venture capitalists is helping to spur its startup scene.
Staffan Helgesson is a general partner of Creandum, a Stockholm-based venture capital firm, which he joined in 2003. A graduate of Lund University, Helgesson spent five years as a brand manager at Procter & Gamble and about a year as a McKinsey consultant before starting a venture capital firm -- Startupfactory. He has been at Creandum ever since -- helping put the first institutional money into many Stockholm-based startups including music streaming service Spotify.
Helgesson has a unique perspective on venture capital investing. As he said in a November 14 interview, "In 1999 I attended an event at Stanford where Apple evangelist Guy Kawasaki gave a speech. After 20 minutes I knew I wanted to be involved in the startup ecosystem instead of working as a consultant to the old dinosaurs of Europe. Creandum was started in 2002, a time when Europe was badly hit. A lot of people felt that the Internet was a big bubble -- but we disagreed. People were shaking their heads for the first four or five years."
Creandum invested in consumer and software as a service companies. "We invested in Spotify and wireless payment service, iZettle. We had a string of successful companies. Today we have offices in Berlin -- which invests in Europe, Stockholm, and a business development office in San Francisco. We need to win globally by investing in the number one or two companies in their space. Our portfolio includes 20 companies with operations in the U.S.," he said.
Creandum has made money for investors. As Helgesson explained, "We have had returns in the top decile; top quartile globally. That is measured by absolute returns -- meaning how much money we return our investors after fees and carry -- [typically for venture capital funds those are 2% of assets under management and 20% of profits]. Top quartile means three times the investor's money back."
Stockholm is closer to Boston than Silicon Valley when it comes to investing in startups -- but Helgesson's style seems closer to Silicon Valley's. As he said, "The European ecosystem is much more conservative, more like Boston. Europe has a few firms and entrepreneurs who think more like the Valley or China. We look for bold ideas from super-ambitious people. It's not always someone who has done it before -- Spotify founder Daniel Ek was age 22 or 23 when we invested. If you compare 100 funds that earn three times investment to 100 funds that earn four times, you find that the ones that take more write-offs earn higher returns. To get higher returns, you need to take more risk," he said.
Creandum is careful about the kinds of risks it takes. "There are three big risks an investor takes: product, market, and team. We will not take team risk -- we want to invest in A-teams. We are willing to take product risk -- that can always be fixed. And we don't like to take market risk. We don't look at a company's economics as a whole -- we care about their marginal economics. If the lifetime value of the next customer is three times the cost to acquire that customer, then we want the startup to grow as fast as possible."
Helgesson is always looking for future opportunities. As he said, "We keep our ears to the ground to find the next big thing. For now we see opportunity in fintech -- which is trying to 'kill the banks' and making the quality of the enterprise user experience in their daily work as good as the consumer one is. We are also interested in the work of the future with all jobs becoming temporary and the use of artificial intelligence to plan your career."
Stockholm could be on its way to having its own pillar companies. "We need entrepreneurs who can take a company from A to Z [from an idea to a public company]. What you call a pillar company, we call an aircraft carrier. We think we will have aircraft carriers in Stockholm -- perhaps Spotify or game developer Supercell. [Stockholm aircraft carriers]
need to be worth $50 billion to $100 billion and they will be role models for Europe."