You've heard of Ericsson, Skype, and Spotify. But Stockholm has nurtured many other soon-to-be household names.

The Swedish capital is home to 134 of the fastest-growing private companies in Europe, according to the 2017 Inc. 5000 Europe. The third annual tally--which is based on private-companies' three-year revenue growth--finds that five of the top 10 companies hail from Stockholm. These include Daniel Wellington, a global watch manufacturer with sales of more than €155.8 million in 2015 ($169 million), and Star Stable Entertainment, a game developer that grew revenue by more than 3,000 percent between 2012 and 2015.

So what exactly is in Sweden's water, you might ask? Here are a few things that have helped Stockholm's entrepreneurial ecosystem thrive:

An educated work force

Analysts point out that all great startup hubs benefit from their surroundings. "The location provides resources for you as an entrepreneur," says Zeke Hernandez, an assistant professor of management at the University of Pennsylvania's Wharton school, where his research centers on entering global markets. In particular, he notes that Stockholm has some of the best "starting conditions" for entrepreneurs. "There was a big investment in human capital made by the Swedish government," he adds.

Sweden has long touted a socialist government--currently led by Prime Minister Stefan Löfven--which means its workers benefit from subsidized education and health care. As such, there's a large supply of technical workers here, coming from universities such as the Royal Institute of Technology and the Chalmers University of Technology in nearby Gothenburg. Hernandez also points out that large successful companies have created savvy mid-level managers--including at Volvo, Ikea, H&M, and Ericsson.

A connected population

Historically, Sweden has been quick to adapt to advances in tech. Back in 1994, Stockholm built the world's largest open fiber network--giving all businesses the ability to tap into the infrastructure. Also in the early '90s, the local government offered a tax break for residents to buy their own personal computers. Today, Sweden is among the most-connected countries in the Eurozone, with more than nine out of 10 households having internet access as of 2015, according to European Commission data.

This early support and interest in tech has fostered successful ventures, such as Ericsson, the 141-year-old Swedish telecom provider that brought in nearly 223 billion SEK ($25 billion) in 2016. More recently, the videoconferencing startup Skype was bought by eBay for $2.6 billion in 2005; later, in 2011, U.S. computer-maker Microsoft acquired Skype for $8.5 billion.

Desire to give back

As more companies expand beyond their Swedish borders, their founders, in turn, invest more capital in the country's startup ecosystem. "There's some money to go around, because frequently, these are the firms that finance the startups," Wharton's Hernandez says. To his point, Skype co-founder Niklas Zennström launched the investment firm Atomico in 2006, which focuses primarily on European startups. Atomico has invested in Swedish companies including Klarna, a payments processor, and Truecaller, an advanced caller ID service. Last month, Atomico announced that it had raised $765 million to invest in EU startups--among the largest European investment funds to date.

Limited government regulation

The Swedish tax structure is favorable to businesses, especially when compared with that of China and the U.S. Sweden has a corporate tax rate of 22 percent--far higher than, say, Ireland's 12.5 percent, but lower than the United States' high-end rate of 35 percent.

Thomas Ekman, the CEO of Stockholm-based Cabonline Group, says he's had no trouble procuring tax licenses for his company. "Sweden is totally deregulated in this area, so there are virtually no limits on how you do things," Ekman says. Cabonline, which sells a tech platform to transportation companies, brought in €6 million in 2015 revenue ($6.5 million), making the Inc. 5000 Europelist at No. 6.

Room to grow

Still, others point out that Sweden fails to support entrepreneurs in other ways. Carl Waldekranz, the founder of Tictail, a Stockholm and New York City-based e-commerce site, says it can be difficult for small businesses to set up a stock options program, which makes attracting competitive talent tough. "I worry about our ability to create sustaining and growing businesses looking forward," Waldekranz says.

Published on: Mar 13, 2017