Stockholm, Sweden, is rapidly becoming a hotbed for digital innovation. In fact, the capital city was recently ranked the second most prolific tech hub in the world (Silicon Valley was No. 1), according to VC firm Atomico. 

At large, Sweden is home to six billion-dollar businesses, anchored by giants like Spotify, Klarna, SoundCloud, and Skype. Stockholm alone was a runner-up for the highest percentage exit growth in Europe, according to data recently compiled by the Global Startup Ecosystem Index.

Sweden has long housed rich investors with experience. The caveat, though, was that it lacked business angels who were willing to support younger companies that couldn't land larger amounts of funding from VC firms, which hindered entrepreneurial activity. Essentially, many saw opportunity in starting a Stockholm-based business, but very few were inspired to actually do it, according to think tank Global Entrepreneurship Monitor.

In recent years, however, Stockholm has made massive strides in terms of economic growth. Small businesses have become prolific creators of jobs. The city has raised its standards for fostering new talent and implemented new regulatory systems to drive entrepreneurship. With health care costs on the decrease, better pension plans, and tax deductions for people who privately invest in startups, many are realizing that Stockholm has become a much safer place to start a business.

Here's why this European city is gaining ground as a digital IT hub and hotbed for innovation:

1. Tech-savvy talent 

Sweden's recent initiatives to improve the education system have paid off substantially by boosting Stockholm's talent pool. There are roughly 197,000 tech workers in Stockholm alone, according to a 2014 study. That's nearly 20 percent of the work force, which is the highest percentage of any city in Europe.

Such efforts include the push for more STEM-focused (science, technology, engineering, mathematics) schools, and business accelerators like the Stockholm School of Entrepreneurship and the Royal Institute of Technology. With cheap or free access to education, students don't have to struggle with the stress of paying off university debt before starting up.

Carl Waldekranz, 29, who co-founded the online retail marketplace Tictail in 2012, calls the city one of the best places in the world to build a tech venture. "Free education creates this massive talent pool," Waldekranz says. "We've seen a huge growth in the number of engineering and design talent."

Tictail is an e-commerce platform on which shoppers can browse products (home, garden, and jewelry are among the most popular categories) made by smaller, independent retailers from across the world.

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When hiring, he adds, you can bring on top-notch engineers in Stockholm and surrounding locations for a fraction of the cost you would pay in another area, like Silicon Valley. Those savings can then be reallocated to other areas of business. 

Sweden's government has also matured by investing in subsidized personal computers and a solid broadband infrastructure, which has played a major role in cultivating new talent and increasing the drive for innovation.

For a platform like Tictail, which caters to micro-entrepreneurs and retail customers, the need for tech talent is crucial. Waldekranz and his team built out Tictail's feed algorithm, which generates advice to business owners as they grow their presence on the platform, all from scratch.

2. An increasingly strong and supportive VC presence 

Sweden's venture capital scene is growing rapidly. Stockholm alone is home to firms such as Creandum Ventures, which counts more than €250 million ($273 million) under management in over 20 companies.

Recently, the Sweden-based media giant Modern Times Group hired former Google employee Rikard Steiber to head up venture lab MTGx, with goals to support and fund small startups.

Tictail received funding from Creandum as part of its staggering $22 million Series B funding round, announced in July. To date, the company has raised $32 million.

"They've been such great sounding boards for me, and they've helped me build up my own confidence," says Waldekranz. Meanwhile, Creandum sees Tictail as filling a major gap in the marketplace. "The startup is creating a platform and community to help micro-business thrive online," says investor Johan Brenner. "It's a huge market opportunity that has only had the surface scratched."  

Overall, as much as $457 million was invested in Sweden in 2013, representing a 2 percent uptick from 2011, according to the European Commission. Meanwhile, U.S. ecosystems are beginning to take notice, as success stories like Klarna are upping the country's startup credibility. Waldekranz, for his part, was surprised that East Coast investors like Thrive were already aware of Tictail and its business model before it came to the U.S. 

3. Small city, big advantages

Stockholm is a small hub. As Sweden's capital and most populous city, its current estimated population is 897,000. Waldekranz notes that this is a blessing in disguise, since it forces business owners to think globally--instead of trying to hack only the national market--in the beginning stages of building a startup.

At just three years old, Tictail is a newcomer in the tech space. It's up against more vetted e-commerce retailers, such as Etsy and Shopify, which each have a larger, more established market reach. Waldekranz says he views Etsy to be nationally focused; but Tictail, by contrast, wants to help people find niche wares from different countries.

Still, he insists that the company's main goal is to be mobile-friendly, which is what really sets Tictail apart from competitors. "We want to believe that we have a huge technology advantage over them," says Waldekranz, "having come into a market where it was already clear that mobile would be the leading platform for e-commerce in the future." To wit, more than half of Tictail's sales (55 percent) are executed through mobile activity.

Today, the startup hosts 85,000 emerging local designers and brands. Though the company wouldn't disclose revenue, it says that a new shopper is born every three minutes on the platform. 

While Waldekranz sees Etsy as going through something of an "identity crisis" as it expands beyond U.S. borders, he says that Tictail, in true Nordic form, has been outwardly oriented from the beginning.