Mary Lisbeth D'Amico
Pär Hedberg doesn't like
obstacles. In 2003, the CEO of what was then called Kista Innovation
and Growth, an incubator in Kista, 15 minutes from the centre of
Stockholm, noticed how tough it was to get initial funding for his
companies. In response, he founded a business angel network made up of
ex-tech entrepreneurs who could help get the companies off the ground.
Sting's four phases of incubation
Start-up, a series of evening seminars in which experts analyse whether a potential entrepreneur’s idea is valid.
Business Lab offers office space as well as a weekly coaching session to analyse the business idea’s commercial potential and help the entrepreneurs develop a business plan.
When the company gets more serious, the Business Accelerator spends up to one year helping with product development, financing and initial sales and marketing efforts.
Lastly the Growth Programme seeks to address strategic challenges such as internationalisation, financing or recruitment of management board members. Companies can also choose to move into Growhouse, a cooperation between Sting and a local property company, to offer entrepreneurs a low-cost headquarters for up to three years.
Financing models such as these that draw on both public and private money are getting increasing attention in Europe as seed funders seek to leverage their impact in a tough market. In particular the UK has embraced the idea. For example, the London Business Angels invests alongside a £4.8 million match fund provided by the UK government called London Seed Capital (LSC). UK investment bank Oxford Capital Partners also runs an angel network and a VC fund in tandem, as well as providing advisory services.
In Sweden, such arrangements are still uncommon, while the need for support in the seed funding area is great. Venture capital firms, like elsewhere, have avoided the seed arena over the past few years. And while the government last year re-committed to helping support early-stage companies with its Innovation Bridge initiative (see "Swedish government acts as bridge") the volume committed is not large - just €10 million over 10 years, and hands-on know-how is often hard to come by.
Sting Capital is seeking to address that by offering a complete set of services - incubator, business angel network and seed fund - under one roof. The goal, says Hedberg, is to create an entire funding ecosystem for the young companies until they become ready for venture capital. "Sting is a pioneer," in the Swedish market agrees Maria Nilsson, responsible for business angel activities at the Swedish Venture Capital Association. She says a number of other Swedish business angel networks have taken up the idea of formalising are working on plans of their owns to launch their own funds.
Incubator to angels
Sting's
roots go back to 2001, with the founding of Kista Innovation and Growth
(KIG), an incubator located at the Kista Science Park, an IT cluster
that houses Ericsson, Nokia and around 350 other technology companies.
With funding from Electrum, a foundation established by Ericsson, ABB
and the City of Stockholm, KIG was established to help commercialise
research coming from local research institutions such as the Lund
Institute of Technology and the Royal Institute of Technology (KIT) as
well as spin-offs from IT companies located in the Kista Science Park.
Swedish government acts as bridge
As in other countries, Sweden’s venture capital market has suffered in the wake of the downturn. Especially hard hit was the ITC cluster Kista Science City, which has seen vacancy rates of up to 50 percent. Market participants say that many incubators also have closed their doors, although no data exist on just how many were out there at their peak. Today, according to data from the European Commission, there are 21 incubators across Sweden.
Overall, seed funding has remained a tiny and relatively constant part of the overall picture in Sweden. In 2000, it made up 1.2 per cent of private equity investment, then dipped down to 0.7 per cent in 2002, according to the European Venture Capital Association. Last year, that inched back up to 1.6 per cent.
In 2001, according to the Swedish Venture Capital Association, some 66 companies were provided with €26 million in seed funding. (The volume of seed funding deals is always low, as the amounts are very small). That fell to 27 deals totalling only €7 million in 2002. Things are looking up somewhat this year, with already 100 deals worth €18 million tallied already.
The Swedish government has in any case stepped in to help. In 2004, it dubbed seven existing regional promotion agencies the Innovationsbron (the Innovation Bridge), but only available in Swedish) and gave it the remit to invest about €10 million over 10 years in very early-stage companies.
"We see ourselves as one of the nodes in the innovation arena in Sweden," says Peter Holmstedt, CEO of Innovationsbron Stockholm. An array of other government agencies also support early-stage investing, including Industrifonden, Vinnova, Almi and Connect.
Although the amounts are tiny, the government hopes by acting as an anchor investor to encourage private investors to take part. For example, Teknoseed, the former technology transfer office of Lund, was recently able to win two corporate investors for its new fund, which had a first close of €5 million. Joining government investors Innovationsbron Syd and the Region Skåne are the IKANO Group, (backed by the founders of IKEA) and savings bank chain Sparbanken Finn.
And while such government agencies have certainly kept the struggling seed financiers alive, that support can be a two-edged sword. "There is always the danger that government money doesn’t come with knowledge," says angel investor Katarina Bonde. Such subsidies often come in the forms of soft loans, she notes, meaning that if investors don’t succeed, they don’t have to pay the money back. "Once you take that crutch away, you have to make sure you can stand on your own. When you have VCs in your company, you have to make it work."
"We don't like to be thought of as a government-supported organisation," says Hedberg. "The City of Stockholm has understood that and doesn't get overly involved. They trust what we are doing as long as we deliver," he says.
About 31 companies focused on information and med-tech technologies have passed through the doors of the incubator. Of those, 4 companies failed, 12 are currently in the incubator and 15 have moved on to venture capital or IPO.
Some of these companies have already seen relative success. For example Syntune, a maker of single-chip tuneable lasers for fibre-optic communications and sensor systems, last year received €4.7 million in VC funding from InnovationsKapital, Teknoinvest of Norway, US corporate investor Vision Capital and private investors. Research spin-out Replisaurus Technologies, which has developed a technology for metalising silicon wafers, has also garnered a number of awards as one of Sweden's most promising semiconductor start-ups, and received €400,000 in seed funding in 2004.
Earlier this year, the incubator was restructured as Stockholm Innovation and Growth to reflect a broader focus on all of Stockholm. A second location was recently established on the KIT campus, and the company received capital of roughly €1.7 million from government sources for the restructuring.
Angels getting hands dirty
The business angels, made up of 15 to 20 members in what is called the Kista Investor Network, are of course not obligated to invest in Sting's companies. But those that are interested after a pitch from a group and choose a leader to manage the combined angel investment.
Angels in the network give Sting high marks for the quality of the companies they see. "These are knowledgeable people who have run businesses themselves and have a a tight set of criteria" for entering the incubator, says Katarina Bonde, a participating angel who splits her time between Stockholm and Seattle, where she runs a women's angel group called Seraph Capital.
Companies that give their elevator pitch to the angels have also normally been coached for at least six months. "I've been in other angel networks, and this is by far the most professional," says Per Hedebark, an angel who also sits on the board of Sting Capital’s pre-seed fund.
Many of the angels are keen on getting involved as well.
Hedeback, who also runs a family enterprise, recently accompanied the RFID start-up Scirocco on a trip to visit potential customers in China, for example. "We all have a passion for building companies and like to get dirt under our nails," says Hedebark.
Angel investors from the Kista Investors Network also provided about a quarter of the committed capital to the new Sting Capital fund. The fund plans to invest about €180,000 in each start-up, at a rate of about 10 to12 a year. No follow-on investments will be made from the fund. Sting also will forgo a management fee in favour of taking 20 per cent of the fund’s return on investment. "One of the problems with seed investments is that the cost of management fees for a fund is too large compared to the size of the investment, which makes it unprofitable" explains Sting CEO Hedberg. Two investments have already been made, and a third is under way, but Hedberg doesn't want to name them before they are finalised.
Only time will be able to attest to the success of Sting's model in a market where ten years is the minimum invested in getting a company off the ground. Certainly more will be expected than merely the creation of companies, with even the government hoping for a profit in order to be able to finance its further investments in seed stage companies. But combining public and private funds appears to be a good start.
Interestingly, it looks like institutional VCs could be renewing their interest as well. Angel investor Hedebark says that the Kista Investors Network recently lost a deal it was interested in to the IKANO Group, a venture investing arm of IKEA's founders.
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