Why do only some companies get venture capital?

As an investor in growth companies in IT and environmental technology for the past 15 years, I often hear that we are so over-cautious that we are anything but venturous as regards our risk appetite in providing capital to start-ups

What’s easy to forget is that fairly few companies actually benefit from receiving venture capital from a company like ours. Some of the most successful companies in Sweden have been built without any financing other than the funds the company has generated on its own, brick by brick, over the course of many years, without any interference by financiers who eventually intend to liquidate their investments.

But how about the companies that have received financing from us at Northzone, such as Daniel Ek’s Spotify, Per Olofsson’s Climatewell, Sorosh Tavakoli’s Videoplaza or John Elvesjö’s Tobii? What made us decide to take the step toward financing these companies? And why did these entrepreneurs feel it was a good idea to bring Northzone onboard?

There are three questions that we almost always discuss with entrepreneurs:

• How large is your market? Can you change the rules of the game in the market to your advantage?
• Can you and your team attract the very best employees in the world to build up a company that’s a global leader?
• Do you have a business concept and technology that are better than the rest, and can be heard above the constant din of the market?

These three questions enable us to quickly ascertain whether we and a given entrepreneur are the right partners for each other. We want to cooperate with entrepreneurs that confront really fast-changing markets, with the help of world-class employees that produce innovative business concepts. This is naturally a pretty risky, capital-intensive, matter, and it’s not easy for a company to finance by itself. That means the entrepreneur needs a strong capital investment partner.

However, there are very few companies that score high on all these three factors. Every year, we analyze about 500 investment proposals in the Nordic countries, and only five to eight of these lead to new investments. In addition, it’s difficult to succeed even when all the factors are present, as evidenced by the fact that up to half of our investments fail. The other half must thus be very successful.

Sweden and the other Nordic countries can be proud of long being one of the leading regions in the world in developing businesses that become global leaders. And this is true today, as well. We’ve analyzed statistics that show that the Nordic area with only has 8% off the population of Europe account for one-third of the value created in sales of companies or public offerings. We can be very proud of these companies, which have made a name for themselves internationally, and have been financed by venture capital. Just look at the following business successes that have been sold for high prices: Skype, MySQL, Qliktech, Coding Technologies, Nordnav, Carmen, Spotfire, Pricerunner, Tradera, etc.

Maybe you’re involved with a future global leading company, or maybe you have a fine business that’s being built brick by brick with its own funds. Both types of companies are needed if Sweden is to continue to develop and improve its leadership position, and be able to compete with new companies and regions on the rise. I truly look forward to being part of this for at least the next 15 years, and to develop growth companies together with driven entrepreneurs.

Pär-Jörgen Pärson, Venture Capitalist, Northzone Venture