Finland is facing climate change in the fields of Startups and Venture Capital. This is not a new phenomenon, but it has taken faster pace. As a demonstration, in 2014 Finnish VC firms raised EUR 63 million of new funds, whereas Finnish VC firm, Open Ocean Capital, just announced (in Nov 2015) its new fund of EUR 100 million to target European software companies.
What does it mean to have at least 100 million euros of dry powder to invest in market like Finland?
Limited Partners, the actual investors, are targeting returns of 20% p.a. to boost their investment portfolio. From the VC firms’ point of view, the requirements for the €100m fresh capital create a demanding task. To gain returns of 20% for six years (really optimistic VC fund timeline), VC firms should triple the capital to 300m. When management fees and carry are taken into account, VC firms should turn 100m into roughly 400m during the fund’s actual lifespan to meet LPs’ target. Whenever a portfolio company exits VC fund owns maximum 20%, which means that market value for the portfolio companies has to be approx. 2 billion. Not an easy task to accomplish in Finland nor elsewhere, and new money flows in annually.
For startups this means a whole lot of chances to get funded, or does it? To bring back cash, not just percentages, VCs are looking for big enough opportunities to deploy the LP’s commitments. Though, there are certain limits for the boldest startups to raise capital due to VC’s maximum investment size per company, 10% of the fund’s size. To get the money flowing, numerous startups should be able to convince investors with x10 returns. Actually, startups should present business cases worth of EUR 5 billion to secure investments of EUR 100 million. This should be backed up by a strong ecosystem, which supports a long-lasting supply of potential money-makers to harvest cash via exits years ahead.
Disruptive technologies and new business models are wanted. Finnish GDP development in Q3/15 was the worst in EU (-0.6%), but in 2014 VC investments in Finnish companies ranked second in Europe relative to GDP. Controversial numbers indicate that there will be a significant shift in power from the traditional players to the new rising stars.
Time will tell how the climate change effects on the Finnish startup ecosystem. Will Slush turn to be a solid ground or does it melt down? One thing is for sure, there will be new winners and losers in the game.