Finland's VC industry remains buoyant despite pandemic

The amount of venture capital invested in companies based in Finland has risen steadily over the past few years, and 2020 was no different. When comparing the first half of this year to H1 2019, the country has significantly outperformed its Nordic counterparts in the number of venture capital deals recorded. Even during the second quarter of the year, the peak months of the pandemic, there were 23 venture capital deals in Finland, 27.7% higher than the deal volume recorded in the preceding quarter, according to Unquote Data.

The country saw more than €345m in venture capital investment during the first half of 2020, revealing a drop of merely 2.5% when compared to the same period last year – which saw an investment of €354m.

Companies operating in the technology sector account for more than half of all VC deals in Finland. These software companies, which can operate remotely, have seen limited exposure to the effects of lockdown or have even benefited from the pandemic.

Education technology, or EdTech, is one of those sectors, according to Sparkmind VC managing partner Marko Kyyrönen. The VC has invested in Playvation, Kide Science, School Day and Fuzu between January and June 2020. Kyyrönen says the sector has received a lot of attention from investors and general public during the coronavirus pandemic: "A lot of learners are flocking to the internet for digital learning, which helps attract investors."

Juha Lehtola, head of VC investments at Finnish investment agency Tesi, says: "The talent pool in Finland is growing by the year and cost effectiveness is higher here than the Silicon Valley. And, except for gaming, we don't have that many consumer internet companies. Even in fintech, we don't have giant fintech companies. But where we are strong is engineering-driven tech, health-tech companies and B2B software."

Another advantage for the country, according to Kyyrönen, is the presence of a national investment company like Tesi itself. He says: "I think they are one of the most active and professional state investors around, with enough funding of their own available for VC funds and directly for companies."

Filling in the gap
This could help alleviate one negative side effect the pandemic seems to have had for the Finnish startup scene. In June, online refurbished mobile phones retailer Swappie raised $40m in a series-B round from Tesi, Lifeline Ventures, Reaktor Ventures and Inventure. Prior to the signing, a European growth fund previously meant to be the lead investor in the round pulled out, resulting in Tesi increasing its stake and the company being funded entirely by domestic investors.

Foreign VCs, which usually account for a large chunk of the early- and expansion-stage activity in Finland, have largely been missing in action during the second quarter. Consequently, government-backed schemes were launched to support startups struggling to raise capital.

Tesi's venture capital arm last month launched the Venture Bridge programme to support Finnish tech companies. The scheme aims to mitigate the risk of international investors scaling back their investment in the region by providing bridge financing to companies. Lehtola says: "In March, it became clear that we had to adopt a new approach and act as a countercyclical investor. Over the last year, €300m of the €500m total VC investment in Finland has come from overseas. So, what happens when foreign VCs can't travel or make these investments as a result of the pandemic and lockdown restrictions? That's where we come in." So far, Lehtola says that about a dozen tech startups have sought funding through the programme since it was launched.

Notable Finnish VC deals (H1 2020)

source: Unquote Data

H2 prospects
The lockdown in Finland has eased, but much like other countries, the risk of a second wave of the pandemic remains. As such, whether VC activity in the second half of 2020 will surpass the first or fall short of it remains unclear.

The absence of non-regular, opportunistic investors, like the ones that flock to Finland's famous startup and tech event Slush, will be felt in the second half of the year, says Lehtola, as a notable chunk of investment volume comes from first-time investors. But the seasoned investors, he says, will still be there.

He is also worried about the prospects of the companies that are still suffering in the current climate. "Investors are understanding but they're still metric-driven. So, they'll still want to wait until they're convinced with the growth potential of the companies," says Lehtola.

He adds: "I'm less pessimistic than I was two months ago. Tech stocks have recovered pretty well, and the VC funds still have dry powder. So, assuming there will be no second wave, I think we will recover partially."

As a debut fund manager with just four companies in its portfolio so far, Sparkmind has been opportunistic and is aiming to make up to 10 investments this year. Kyyrönen says: "It's easier when we have more time for new initial investments without a legacy portfolio. The competition from generalist investors is slightly lighter because they're more busy taking care of portfolio companies."

Kyyrönen, who says he has been getting a new pitch almost every day, agrees: "The dry powder is there and the most opportunistic VCs in the region are deploying it. So, one could argue that the traction will continue, and I think that Finland's position will remain intact."

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• Topics
• Venture
• Nordics
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• Finland
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• coronavirus