Six success factors for early-stage venture capital

The past few years have witnessed a certain rise in pessimism regarding Finnish and European early-stage venture capital. Since the burst of the IT bubble, early-stage venture capital has been yielding less than satisfactory returns. Sitra launched a three-stage research project to analyse the factors affecting the success of early-stage venture capital and to develop the related operative models. The key results of this analysis are now available in the report entitled The Prospects for Successful Early-Stage Venture Capital in Finland.

“The findings of the project were very interesting and promising for Finland and Europe at large,” says Professor Markku Maula, the editor of the report. Based on the results, Maula finds that the pessimism regarding Finnish and European early-stage venture capital has not been justified.

“Early-stage venture capital can be successful in Finland and Europe, provided, however, that the internationally proved fund strategies and business models are adopted as appropriate,” Maula says. This view is supported by European success stories and the improving returns yielded from short-term venture-capital investments.

According to the report, there is a higher number of companies seeking venture capital in Finland than has been anticipated: the annual deal flow is 800–900 companies instead of the assumed 300–500. The contacts for entrepreneurs are also increasing as new investors specialising in the field emerge on the market.

Through developing operative modes early-stage venture capital may be successful in the future although the returns in the past few years have not reached satisfactory levels.

The report makes six recommendations for Finnish venture-capital investors

1. Industry-specific concentration of investments yields better returns than geographically concentrated investments.
2. Networking with industrial partners is important since these target companies are potential clients and exit partners.
3. Networking with universities and research institutes helps identify new technologies and investment targets.
4. Concentrating investments in carefully selected companies showing international promise will yield better returns than distributing the capital across several smaller investments. It is crucial that venture capitalists actively support the growth and internationalisation of the companies through their industry-specific know-how and international contacts.
5. With respect to the returns from the fund, it is vital that adequate capital is reserved for further investment in the best investment targets and for maintaining the holdings until the exit.
6. Joint investments with partners providing added value contribute to the success of the target companies and improve the returns from the fund.

The results presented in the report now published are based on a three-stage research project. In the first stage, the volume and quality of the deal flows of Finnish early-stage venture capitalists were analysed. Secondly, the differences in the returns between European and American venture-capital activities were carefully scrutinised. In the third stage of the research, Sitra made visits to Israel, the UK and Silicon Valley and Boston in the USA to study operative models in venture-capital activities.

Sitra has introduced venture-capital activities in Finland and acted as a complementary investor on the venture-capital market since the 1980s.

“We actively participate in the development of the Finnish venture-capital activities. The results of this research project provide valuable knowledge for the market and give clear recommendations on how to develop venture-capital activities,” says Magnus Sjöblom, Sitra’s Director of Finance and Corporate Funding.

All of Sitra’s new venture-capital investments are targeted at its selected programme areas. The investments will be made at the initial stage by the Health Care Programme, the Food and Nutrition Programme and the Environmental Programme.

Further information

Magnus Sjöblom
Director of Finance and Corporate Funding, Sitra
Tel. +358 9 6189 9465
firstname.lastname@sitra.fi

Heikki Ojanperä
Director, Development of Corporate Funding (Project Manager for the research) Sitra
Tel. +358 9 6189 9265
firstname.lastname@sitra.fi

Markku Maula
Professor, Venture Capital Institute of Strategy and International Business, Helsinki University of Technology
Tel. +358 40 556 0677
firstname.lastname@hut.fi

Publication details

The Prospects for Successful Early-Stage Venture Capital in Finland.
Markku V.J. Maula, Janne Ahlström, Kimmo Haahkola, Mauri Heikintalo, Tom S. Lindström, Heikki Ojanperä, Ari T.P. Tiainen
Sitra Reports 70. Sitra. Helsinki 2006
ISBN 951-563-545-4 (paperback), 951-563-546-2 (URL:http://www.sitra.fi)
ISSN 1457-571X (paperback), 1457-5728 (URL:http://www.sitra.fi)

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You can order the report from Sitra, tel. +358 (9) 618 991, e-mail: publications@sitra.fi.