Audit questions Swedish state's early-stage investment

In the wake of a February audit by the Swedish National Audit Office, which criticised the way the state supports early-stage capital investments, Jennie Nilsson, Social Democratic member of parliament asked: "The scandal puts the state venture capital system into question – is it effective?" According to the audit, state support lacks a thought-through strategy and competent organisation, as seen in the case of InlandsInnovation. Moreover, state funds are largely directed towards mature companies rather than start-ups.

Given the state's lower return requirements, and thus lower willingness to participate in co-investment deals at the high-risk early stage, the report's finding that more than 40% of the capital earmarked for venture goes into later-stage companies is not surprising. But should such co-investments take place on equal terms with no incentives to bring private capital into early-stage deals? "The demand for co-investment with private players doesn't support the ambition to focus on early-stage," explains auditor general Claes Norgen.

Clear focus
But Claes de Neergaard, CEO of Industrifonden, does not agree with the report's findings and argues that both Almi Invest and Industrifonden – the largest state investors – have a clear focus on early-stage: "In Industrifonden's portfolio, 50% of our invested capital is in companies with a turnover up to SEK 20m – that's not mature companies. New investments are directed to early-stage and we have followed the mature portfolio companies we have for a long time in most cases," he says.

The report also said capital tends to end up in specific regions and industries. State venture funds InlandsInnovation, Fouriertransform and Almi, which are either region or industry-specific, receive 60% of the SEK 10bn venture pot available, while only 27% of this filters down into early-stage deals. According to unquote" data only 14 early-stage deals took place in Sweden during 2013, starting with Almi's backing of social networking service FishBrain in February and ending with Industrifonden's injection of SEK 10m in e-commerce site Garantibil in December. Five deals were in the software space: Sphare, Qwaya, Wrapp, Dexplora and Jumpstarter. Creandum and international venture firms such as Greylock Partners, Earlybird and Atomico invested in the majority of these cases.

Another problem is the large bulk sums that are initially dumped in the funds; InlandsInnovation received SEK 2bn in 2010 and Fouriertransform SEK 3bn in February 2012 when the funds were set up. "The high liquidity creates issues, as the capital is invested in short-term securities by the various state funds. Instead, this capital should stay at the National Debt Office until it can be put to use in early-stage," says Bengt Lewin, who leads the Audit Office's investigation.

According to Lewin, maybe too many state investors are involved in Swedish venture compared with neighbouring Norway. He agrees with Nilsson, who argues the need for consolidation and a clearer focus: "A stronger direction towards early-stage and funds-of-funds, where state and private players are sharing the risk, is important'" she says. "Directives set by the government are vital for effective action and we will review this by looking at successful examples such as Industrifonden and Norwegian funds when working out alternatives." Proposals for improvement will now be sent to parliament within four months, including the audit group's recommendations.

So far, the government has implemented three measures: a tax incentive for business angels; the merger of two state investment companies in order to increase early-stage financing; and the launch of incentives for R&D in small businesses, which reduces the need for external capital. Says de Neergaard: "I'd like to see two further initiatives: the set up of a fund-of-funds that invests in private venture funds, increasing the number of private players; and to reduce taxation on options in young entrepreneurial companies."

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