entrepreneurial finance in finland? files...while at cambridge associates, which tracks and keeps...

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Professors William R. Kerr and Ramana Nanda and Research Associate Alexis Brownell prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

W I L L I A M R . K E R R

R A M A N A N A N D A

A L E X I S B R O W N E L L

Entrepreneurial Finance in Finland?

It was summer 2011, and Ami Kemppainen and Otso Friström were at a decision point. Over the past year, they had been putting together a fund called Primus Ventures, with the hope of bringing more early-stage funding to Finland's new and rapidly growing entrepreneurial ecosystem. They had been trying to bring in large institutional investors, and now, in just a few weeks, they were scheduled to meet with representatives from SITRA, the Finnish Innovation Fund, a large and influential foundation overseen by the Finnish parliament. Getting SITRA on board would be a huge coup for Ami and Otso, if they could just persuade them that the fund would be successful and worthwhile.

Research and conversations with entrepreneurs had convinced Ami and Otso that they had correctly identified an opportunity or niche for their fund to fill, and that there was a definite and immediate need for the capital that they could provide. But before they could present any of this to SITRA (or any other investors), they had an important question to answer: how were they going to structure this fund?

There were multiple models they could choose from, from a small business accelerator to a traditional venture capital setup. Their final choice would have to take many factors into consideration. First, what was needed in the ecosystem? How much money should they plan to invest, and in whom? Also, was anything other than capital needed—for example, would the support and resources offered by a business incubator be more beneficial than just funding alone?

They also needed to have a good idea of what they could plausibly pull off, particularly in the context of Finland’s new start-up ecosystem. Until just the last few years, entrepreneurship—particularly entrepreneurship focused on innovative, high-growth start-ups—had had very limited presence in the country. Now, this situation was changing, but past attempts to inject more funding into the entrepreneurial scene had failed and new entrepreneurs were still having trouble finding enough capital. In particular, some structures (like incubators—or even stand-alone VCs) hadn’t worked well in Finland. Ami and Otso had to work out what kind of structure would allow them to actually make a difference to Finland’s entrepreneurs and, in the end, of course, to local investors.

812-140 Entrepreneurial Finance in Finland?

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The Founders

Ami and Otso, both originally from Finland, had known each other since childhood, when their families had gotten together for a spaghetti dinner at Ami’s house. Later, they had both attended Brigham Young University, had gone on to work at the same management consulting firm, and had both studied at HBS, overlapping for a year or two at each place (see Exhibits 1 and 2 for Ami’s and Otso’s resumes).

Ami

Ami Kemppainen had been interested in business and entrepreneurship since around the age of 15. While at BYU, he put together a couple of small start-ups, which served as an introduction to entrepreneurship for him. After graduating in 2004 with a degree in International Marketing, he worked for a couple years in management consulting at Monitor Group in Cambridge (MA), where he enjoyed the chance to observe and learn about many different industries.

Ami came to HBS in 2007, originally thinking he would focus on human relations. But an HR internship in Singapore helped him realize that he wanted to create bigger things on his own; he wanted to follow an entrepreneurial path.

While at HBS, in 2008, Ami ran into Kristo Ovaska, a fellow Finn who would later start a student

entrepreneurship society and an accelerator at Aalto University1 in Finland after encountering the start-up scene in the United States. Ami was intrigued by Ovaska’s account of developments in Finland, which historically hadn’t had much entrepreneurship. Over the next semester (Winter/Spring 2009) Ami traveled to Finland four times, and was impressed by what he saw happening on the entrepreneurial scene: “There was a lot of pent-up demand for entrepreneurship there. Something was happening at a foundational level, and I wanted to be a part of that.”

Prior to this, Ami had known that he wanted to return to Finland someday, but wasn’t sure about the timing—should he go back immediately, or get some more experience first in somewhere like London or New York? However, his trips to Finland convinced him that he should return right away. In addition to his entrepreneurial interests, Ami had always had the desire to help or give back to his home country, and the opportunity to do so by getting involved in Finland’s new start-up scene was too good to pass up.

Ami decided that he would either start his own business in Finland or try to join a company run by a serial entrepreneur. He had talked to many people in the entrepreneurial scene on his trips to Finland, and eventually he was directed to a company called Controlmatic (since renamed Sensire), which made temperature control and tracking systems for refrigerated units and storage spaces. Started in 2001 by a couple of engineers, the company had brought on serial entrepreneur J.P. Asikainen as CEO in 2007. At the same time as Ami was looking for a company to join, Asikainen was looking for a “wingman” to assist with various business duties, a role for which Ami was well suited. He joined Controlmatic in 2009 as the Director of Business Development. His work ranged from installing sensors in banana storage rooms in a client’s warehouse to the opening of large sales channels for the company, while helping devise the start-up’s future strategy. Ami stayed at Controlmatic for about a year and a half.

1 Aalto University was founded in 2010 from the merger of The Helsinki School of Economics, Helsinki University of Technology, and The University of Art and Design Helsinki.

Entrepreneurial Finance in Finland? 812-140

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While working at Controlmatic, Ami continued to observe that there was a funding gap in Finland’s start-up ecosystem—specifically, there was a shortage of capital available to early-stage companies. He had first noticed this problem during his earlier trips to Finland, and subsequent discussions with entrepreneurs and others in the start-up scene had confirmed his belief that this was an issue that needed to be addressed.

In the past, public institutions in Finland had tried to solve the problem but had failed, mainly because their approach had been simply to pump money into a field that wasn’t ready for it—more than just money was needed to produce a meaningful change in the system. But with the stronger foundation that he had seen developing during his time in Finland, Ami felt that there was a chance to make a real difference by providing capital to young companies. Further conversations (in late 2010) with people in government, entrepreneurs, and people knowledgeable in the field encouraged Ami, and his family and friends were also on board. Key founders of Finland’s venture capital scene gave votes of support and mentorship, saying the proposed fund was definitely needed and Ami was the right type of person to do it.

Here was a great opportunity to help Finland and its entrepreneurs, and Ami believed that the right fund would have a good chance of succeeding. However, it wasn’t a task that one person could pull off. Luckily, Ami and Otso had been keeping in regular contact since their HBS days, often discussing their business ideas with each other. Thus, in late 2010, Ami called Otso to lay out his ideas and talk about the possibility of taking his plans for a fund forward.

Otso

Like Ami, Otso Friström had been interested in entrepreneurship for a long time. In high school, he had set up his own cleaning business, and during college had created a mobile reseller business. He majored in Information Systems Management at BYU, enjoying the combination of business and computer science. After getting his master's degree in 2003, he realized he had become more interested in the business side of things, and after graduating he went to work as a consultant for Monitor Group.

After a couple years at Monitor, Otso “somewhat randomly” met the executive director of a microfinance bank in Kenya. The privately-funded bank had been running for eight years and was growing quickly, but it was not being managed efficiently, and the bank was looking for someone to help with that. Otso accepted the job, excited to get experience with running the growing organization—he loved to work on projects of his own, and this was a chance to do just that. Otso had also always had a drive to help the poor, and was excited to be able to fulfill that through working at the bank.

Otso worked at the bank for a little over a year, and by the time he left the bank had changed direction dramatically for the better. While in Kenya, Otso also applied to HBS: he had known a number of MBAs while he was in Boston working for Monitor, and had decided that business school would be a good career move and a valuable experience. His acceptance packet arrived while he was still in Kenya. “One of the more surreal events in my life was when I got the welcome box from Harvard,” says Otso. “It was close to 100° F with dust flying on the roads, and I pulled an HBS scarf out of the box.” Otso started at HBS in fall 2006.

At HBS, Otso found himself drawn to investing, and he worked at internships at Lehman Brothers and Neuberger Berman. At the end of his second year, he interviewed with Nordic private equity firms, but ultimately decided he wanted wider exposure to investing and wasn’t quite ready to return


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to Scandinavia yet. He took a job as an investment consultant at Cambridge Associates in Washington, D.C., where he appreciated the opportunity to learn about different industries and the entire space of portfolio management, and to get an understanding of investing from a global perspective. He also enjoyed the “do-gooder” feel of the company, and the fact that it didn’t have the high-pressure, stressful environment of the stereotypical investment organization.

While at Cambridge Associates, which tracks and keeps databases on tens of thousands of funds all over the world, Otso noticed a shift beginning to happen in the world of start-up investing. Vehicles for very early-stage funding were starting to appear, which invested small amounts of money and moved fast. Cambridge Associates, which made large, safe investments that could be tracked over many years, was not interested in these vehicles—but Otso was. He had always been interested in accelerators and the start-up scene, and as he followed the developments in the early-stage scene, he noticed that overall, not many institutions were getting involved.

So, when he got the call from Ami and heard about the exciting entrepreneurial developments happening in Finland, Otso recognized that the shift to early-stage funding that he’d been noticing in the venture funding sphere seemed to fit well with the early-stage funding gap that Ami had noticed. With all the action happening on the entrepreneurial scene in Finland, starting a new fund made strategic sense. Also, the idea of running their own fund just sounded good to Otso: “It really excited me, because it fulfilled many of my personal needs: to run my own thing, build something new that could become something big. I wanted to change the world, and it just felt a little too good to let go.” He visited Finland over the Christmas holidays, met with Ami in Sweden to discuss the idea, and shortly after decided to join Ami in his funding idea. He quit Cambridge Associates in January, and by March had moved back to Finland.

Finland

Until World War II, Finland’s economy was mainly agricultural. However, in the years following the war, there was a fairly dramatic shift towards industrialization and urbanization. As of 2011, Finland, with a population of about 5.3 million people, had a GDP of $239.2 billion (approximately

€180 billion), or $35,400 (approx. €27,000) per capita.2 It had high levels of education and a strong social security system, and was known for its strength in high-tech exports, supported by strong research and innovation coming out of universities and government-sponsored research institutions (for more information on Finland and Northern Europe, see Exhibits 3 and 4).

However, until quite recently, there was very limited entrepreneurial activity around high-growth companies in Finland. Most entrepreneurs were satisfied with building small businesses that would allow them to make a living. In general, the perception was that starting a company was something done only if one couldn’t find a job at an existing company—it was viewed as a sign of failure. Only in the last few years did this begin to change, with more people becoming interested in starting their own companies, and government and other public entities making an effort to support start-ups.

Part of this shift towards start-ups may have been due to the decline of Nokia. For a long time, Nokia (which had been the world’s largest manufacturer of mobile phones since 1998) was the largest employer in Finland, and accounted for about one-third of the market capitalization of the Helsinki Stock Exchange. Many people in technical and related disciplines could rely on a safe and well-paid position with the company.

2 Conversions based on 2010 figures & estimates from CIA World Factbook


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However, in 2007 (when Apple first introduced the iPhone), Nokia was caught off guard by the emergence of smartphones. It began losing ground in the profitable smartphone market, as Apple and Android devices gained. In October 2009, Nokia reported its first quarterly loss since 1996, and by the end of that year Apple had overtaken Nokia as the cell phone maker with highest total operating profit. By mid-2010, the value of Nokia’s shares had dropped almost 75% since their peak in 2007, and in September 2010, Nokia replaced its current CEO with Stephen Elop, the first non-Finnish CEO the company had ever had. Elop would later write a memo likening Nokia’s position to that of a man on a burning oil platform in the North Sea who must either jump into the freezing waters or burn to death. Elop set in place new goals for Nokia and started a large restructuring of the firm.

As a result of their troubles, Nokia’s image suffered in Finland, and engineers and young graduates who might previously have counted on a safe future with Nokia or similar company no longer necessarily assumed that such a future was guaranteed. In general, potential entrepreneurs were more willing to accept risk and more likely to look into entrepreneurship. The successes of Nordic start-ups like MySQL, Skype, Spotify, and Rovio (the company behind Angry Birds), may also have been a source of inspiration for people thinking of starting their own companies (see Exhibit 5 for more background on these companies). MySQL and Rovio, in particular, were considered important Finnish successes: MySQL (which, though headquartered in Sweden, had a Finnish co-founder) was sold to Sun Microsystems for $1 billion in 2008, and Rovio had had a massive success with Angry Birds, which shot to the top of the iPhone App Store charts in early 2010 and generated $4.5 million in revenue in its first 8 months.

Thus, by 2011, when Ami and Otso had embarked upon the first stages of creating their fund, the start-up field had been growing quickly for a few years. As Otso noted, “Statistically, there was a boom going on, as far as new companies per capita,” and a strong foundation was being built, with accelerators and other organizations bringing together teams from all over and bringing in experts to help. For example, Aalto Venture Garage (within Aalto University) provided space to and ran the Startup Sauna accelerator program for entrepreneurs from the Nordics, Baltics, and Russia. Other universities were experimenting with similar programs as well. The Finnish government had also been looking into accelerator-type programs, and had set up other funds like SITRA which could provide VC funding.

However, even with these improvements, entrepreneurs were still struggling. “Everybody we talked to complained that there was no capital,” recalled Otso. Although the government was good about providing money to start-ups, accepting governmental funding often involved a good deal of paperwork and bureaucracy, and often the money received could not be used for commercialization of a company’s product. It could also be difficult for companies that received this funding to make changes to their business models or to make the adjustments that are necessary for young companies. Yet, public funding sources were increasingly exploiting strategies that required matching funds from the private sector, which could provide extra leverage to funds.

In addition, VC firms did not have much of a presence in Finland—in general, they didn’t seem to do exceptionally well there—and there were very few angel investors in Finland (Sweden’s angel scene was slightly more vibrant). Overall, there was very little private money available. It was thus often difficult for companies to raise the money that they needed to get them from the earliest stages of product development to the point where they were ready for Series A rounds. Ami and Otso realized that they had the chance to become one of the first players in this area, and believed that with the changes taking place in Finland, they stood a good chance of being successful where others had failed. In contrast to even five years previously, Finland in 2011 had a much stronger


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entrepreneurial culture—more mentors, more assistance, more connections to global VCs—and with that foundation, what the landscape needed was more money.

Starting the Fund

By the time Otso came on board, Ami had already talked to many people in Finland’s entrepreneurial community and had begun researching and thinking about possible ways to structure the fund. However, there was still a lot to be done, and the early days of their partnership saw a number of changes and developments.

Fund Size

Originally, Ami had been thinking of having a small fund and planned to focus only on very early stage companies, mostly companies in the idea stage. Otso, on the other hand, was coming from a background with Cambridge Associates, where he had been responsible for moving billions of dollars around in his day-to-day work, and he pushed to make the fund bigger, with a minimum size of €30-40 million (about $40-50 million). Ami’s original idea had also been to focus solely on Finland, but Otso again pushed to go bigger, to cover the rest of the Nordic countries as well as Finland. They also considered the idea of expanding to cover the Baltics, and possibly even Russia, once the fund had gotten off the ground and was successful.

The main factor driving these proposed changes to the initial vision was the desire to attract institutions and other large investors, as well as investors from different countries. Originally, the plan had been to raise money from private investors, at around €100 thousand each, but this idea was abandoned because of the complications and difficulty that would arise from having so many people with a stake in the fund, especially as the goals for the larger fund emerged. Instead, Ami and Otso decided to try for a few, large investors: organizations like SITRA and similar institutions in other countries; Nordic pension funds; and corporations interested in “outsourcing” their acquisition processes, particularly corporations in other countries (e.g., Russia) that wanted to develop a Nordic presence. Investors from outside Finland were particularly important to them, as raising money from Finnish LPs could be difficult, especially for young funds like theirs.

However, these large institutions and investors, who might contribute as much as €10 million each, were unlikely to be willing to contribute to a small fund. Instead, they would likely prefer to be part of a fund where they could contribute a substantial amount (some of the pension plans had a minimum ticket size of €50 million) and still be responsible for a relatively small percentage of the fund. In addition, large investors—particularly those in other countries—might not want to invest in a fund that covered only Finland or the Nordic countries (which have a total population of only about 25 million people).

Finally, having a larger fund would allow Ami and Otso to eventually participate in early VC rounds, if the need were to arise. This investment capacity might allow Ami and Otso to avoid dilution and have stronger negotiation positions in their deals.

Networking & Advisors

In addition to restructuring their fund, one of Ami and Otso’s first moves was to begin building their network.


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In February 2011, before Otso moved to Finland, he and Ami spent a month in Silicon Valley, presenting their ideas to and speaking with experienced VCs and entrepreneurs like Steve Blank. In addition to getting advice and feedback (and in one case, finding an experienced entrepreneur who would later become one of their advisors), they hoped that they might become a “feeder fund” for a number of big-name American VCs: Ami and Otso would send along promising companies from their program to VCs for which they would be a good fit.

Aside from advice and support, having this network (particularly the big-name VCs) would distinguish their fund and make it more attractive both to start-ups and potential investors, who might otherwise be reluctant to join up with two young, unknown founders. Ami also had an extensive network in Finland, and they had brought in a Swedish serial entrepreneur, who brought his network in Sweden to the undertaking.

Back in Finland, Ami and Otso continued their networking, recruiting an advisory board to help them with difficult or complicated investment decisions. They planned that, if any of their portfolio companies reached a pre-determined, significant level of investment, the senior advisors would be brought in to help determine whether that company merited further investment. The appropriate threshold for this more extensive review was still being debated. The advisors would also help with the funneling process of weeding out companies and start-ups that weren’t performing adequately and should be dropped. And, for successful start-ups, the advisory board could help make the decision of whether a certain start-up should be directed to an existing corporation (for an acquisition), or whether it had IPO potential and should continue on its own. Finally, Ami and Otso planned to set aside part of the entire fund for Series A-round financing, for which the help and advice of entrepreneurs and VCs with 20 or more years’ experience would be invaluable.

Structure

With all the groundwork under way, Ami and Otso turned to the decision of what type of fund/organization they wanted to run. There were four basic options (some more viable than others) that they considered: accelerator, incubator, VC or micro-VC. Otso had some experience with different models from his time at Cambridge Associates, and he and Ami also talked with entrepreneurs, did extensive reading and data gathering, and sought feedback on possible setups from potential investors and other players in the start-up scene in order to help them make their decision. The models they considered included:

1. Accelerator:

Business accelerators provide support and training for very early stage start-up companies. They are usually very short-term—typically lasting only a few months—but they provide intense instruction and coaching from experienced entrepreneurs and investors. Small groups of entrepreneurs receive help not only in refining their ideas and developing products, but also in creating business models and in learning various business skills like marketing. In theory, an accelerator can help a start-up go from an idea to a prototype, or even to a marketable product, in a few months (for this reason, accelerators tend to focus on internet-based start-ups or other companies that can develop a product relatively quickly and cheaply).

Accelerators don’t normally provide much funding to the companies they select. Companies may get a few thousand dollars, but the main attraction of accelerators is the quality of help


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and coaching that one receives from experienced mentors. In addition, start-up companies and their founders benefit from being around and exchanging ideas with their peers (other start-up founders), and they are often able to tap into a strong alumni network during and after their time at the accelerator.

These days, accelerators exist all over the U.S. and are run by many different types of organizations, including universities, local government or economic development groups, and venture capital firms. One of the first accelerators was Ycombinator, located in Silicon Valley and started in 2005, which has so far “graduated” over 300 start-ups, including some well-known names like Reddit and Dropbox. Finland has also started to get in on the action, with programs like Vigo, a set of independent companies/accelerators that has been assembled by the Finnish government; or the aforementioned Startup Sauna at Aalto University, which caters to start-ups from Russia, the Baltics, and Northern Europe.

Ami particularly liked the concept of an accelerator. Accelerators had a lot of strong components which would be beneficial for their start-ups—things like training in various business areas, assistance with future investments, strong alumni networks, and experienced mentors to provide support and advice. Accelerators also provided an opportunity for a lot of hands-on work with the companies, something Ami and Otso valued highly. Top accelerators (like Ycombinator) had also proven that they could be financially successful, so the economics made sense as well.

However, they also felt that the accelerator space in Finland’s start-up ecosystem was already becoming a little crowded. For example, Startup Sauna, which started in 2010, was doing “a nice job,” in Ami’s view. At the same time, similar government-sponsored entities were beginning to spring up, and a few were already well-established.

In addition, Ami and Otso worried that an accelerator model wouldn’t fully solve the problem they were trying to tackle. They wanted to fix an existing gap in early stage financing, but accelerators don’t normally provide large amounts of funding—the average investment size is €10-20 thousand, which wouldn’t cover the space between the accelerator and Series A-round financing. Similarly, while accelerators can be very good at helping a new start-up get up and running, they often don’t provide all the tools and training necessary for a company to make it to the Series A round.

Finally, Ami and Otso worried that the size of most accelerators didn’t fit with their plans. Accelerators tended to work with only a small number of companies at any time before moving to the next batch of start-ups, whereas Ami and Otso had a larger vision and wanted a larger portfolio and a larger fund. They also had to consider their plans to expand to cover the Nordic region, the Baltics, and Russia. This would require a fairly “light” approach, which didn’t fit with the standard accelerator model.

2. Micro-VC:

Micro-VCs—sometimes grouped together with super angels—are usually business angels whose success attracts funding from outside sources. Like traditional VCs, micro-VCs invest their funds in promising portfolio companies. However, unlike traditional VCs which may have funds of hundreds of millions of euros, micro-VCs have a much smaller pool, typically $100 million (€75 million) or less.


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Hence, micro-VCs invest relatively small amounts in individual companies. In addition, they mostly invest in early-stage companies, and also usually work with many different companies at once, as opposed to the ten to fifteen companies that traditional VCs usually invest in. One advantage of micro-VCs is that, since they invest less money to begin with, they don’t need a “home run” in order to make money on an investment.

The distinction between micro-VCs and super angels is not clearly defined, and experts disagree on what makes one a micro-VC vs. a super angel, if such a distinction exists. People or entities sometimes considered micro-VCs or super angels are SoftTech VC, Ron Conway, and Floodgate, a fund started by Mike Maples, HBS ’94.

Ami and Otso did not have the traditional micro-VC background, not being former business angels, but they felt that if they could pull it off, a micro-VC could be the right fit. They liked what Ami termed the “flexible format” of the vehicle. As a micro-VC, they would be able to fund seed-stage companies, and could offer more than the €10-20 thousand investments typically offered by accelerators in the Nordic region, making investments in the hundreds of thousands. They would also be able to invest in more mature companies, up to and including early VC rounds, and they would also be able to invest in more companies than an accelerator would normally do—accelerators generally pick a handful of companies and focus very closely on that handful, while Ami and Otso planned to fund as many as 40 to 50 start-ups. A micro-VC, then, would be of a size that would need and could attract outside investors and institutions.

On the downside, though, Ami and Otso worried that a micro-VC still wouldn’t be enough to fix the funding gap. At the time they were starting up the fund, they doubted that there were enough promising start-ups. “Given the ecosystem, we couldn’t just find 50 good cases that already were ready to be funded with bigger bets,” said Ami. “We felt we would need to build a pipeline of our own in order to have enough companies to work with.”

Finally, micro-VCs, like accelerators, were a new development in the world of venture funding. Unlike accelerators, though, there hadn’t been a lot of action around micro-VCs in region, and it was still an unfamiliar concept to many, including potential investors and start-up companies. Ami and Otso knew this was a hurdle they would have to overcome if they decided to go with this unknown and untested (in Finland, at least) model.

3. Incubator:

Like accelerators, incubators are (usually non-profit) programs that offer young companies support and help in getting their businesses off the ground. However, unlike accelerators, incubators are long-term programs without set “end” dates, and businesses will often spend a couple of years at an incubator.

A start-up company that is accepted to an incubator will be provided with a variety of services and support. Perhaps the most obvious benefit of incubators is the infrastructure they provide to start-ups: ready-to-use office space, usually at lower-than-average rent, as well as services like high-speed internet and use of shared conference rooms, office equipment, and reception services. Incubators that focus on a certain industry—medical devices, for example, or even food—also provide labs, manufacturing spaces, or other amenities needed by companies in that industry.


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Also, like accelerators, incubators have expert mentors who provide entrepreneurs with training in necessary business skills, access to VCs and other potential investors, and assistance with securing bank loans and other sources of funding. In addition, incubators often provide services like marketing or accounting help, which companies may not be ready to do on their own. Also similar to accelerators is the chance to be around other start-ups, which allows entrepreneurs to exchange knowledge and help each other as they try to build their companies as well as providing networking opportunities.

For Ami and Otso, an incubator was initially an unattractive proposition, for a couple reasons. First, incubators generally don’t provide the companies that they host with funding (although they may introduce them to VCs or help them acquire other outside funding), and Ami and Otso did not want a fundless structure. They also weren’t interested in creating a place for start-ups to set up shop, and didn’t feel that such a step was necessary. For the most part, there was not a lack of real estate for start-up companies in the region (there was some overcrowding around Stockholm, where start-ups sometimes struggled to find affordable housing and space), and they were confident that, like accelerators, they would be able to bring together entrepreneurs to network and share ideas without actually requiring them to have offices in the same space. Ami and Otso wanted to have a fund with a “light” structure, and incubators were not light.

They did like the way that incubators provided businesses not only with training but also with a “network of partners,” high-quality and decently-priced services and facilities, like marketing and accounting help, reception services, and so on. However, Ami and Otso didn’t want to take on the task of putting together this infrastructure, feeling that it would be better and easier to outsource those activities.

Incubators had existed before in Finland, and most investors would have known what the term meant, which would make it easier to get them on board. Unfortunately, incubators in Finland also didn’t have a stellar track record—indeed, most of them failed. If Ami and Otso wanted to go with an incubator-like model, it would clearly have to be something special if they wanted to avoid the same fate.

4. VC (traditional):

A traditional VC would definitely have enough money to be able to make investments at the scale that Ami and Otso were hoping for, and it could certainly supply the funding that the ecosystem needed. Structuring their fund this way would also allow them to avoid the problem of dilution that they might face with smaller funds. However, setting up a true VC fund was a daunting task, and they had some misgivings. For one thing, VCs tended not to do well in the Nordic countries, particularly Finland. “There were only a few VCs in the entire country,” says Otso. “Nordics in general felt pretty dead, with only a few recognizable players and much of the little VC activity actually coming from outside the region (mainly from London).” To add to that, Ami and Otso felt that their youth and relative inexperience would make it difficult for them to put together a multi-million euro fund.

Structuring themselves like a traditional VC also wouldn't allow for some of the aspects they found attractive in other models, like the hands-on approach of accelerators, or the opportunity to have start-ups interact and learn from each other. Finally, traditional VCs sometimes struggled with making the kind of early stage investments that Ami and Otso were interested in, because the amounts of money invested in seed rounds were usually too small for the VC to be able to make a meaningful return on their investment.


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The Path Forward

As they considered the different structures available to them, Ami and Otso ended up focusing on a few main questions. First, what did entrepreneurs in the Nordics, and specifically Finland, need? That is, what was missing in the country that might prevent entrepreneurial growth? Lack of capital was the obvious problem identified by all the entrepreneurs they talked to, but were there other aspects to consider as well? The accelerators, incubators and similar programs at Aalto University and those set up by the government were producing results, but was there still a need—or a space—for Ami and Otso in that arena?

Second, how could Ami and Otso best provide this capital—and any other solutions—to the start-ups they intended to help? They would need to think not only about how to get investors or institutions interested in contributing, but also how to most effectively move that money into the ecosystem. Just how big did they need their fund to be, and which of their models could best accommodate that size? They also needed to model their funneling process: how many companies would they target for the idea stage, the start-up stage, and the growth stage? And, how important was it to provide entrepreneurs with coaching, or even infrastructure—or were investments the main thing that the young ecosystem needed?

Although entrepreneurship was taking off in Finland and some programs and funds were showing promise, it was still not an environment in which it would be easy to create a successful early-stage venture fund. Primus Ventures, under any scenario, would be high risk and high reward. Which model, if any, would best enable them to meaningfully contribute in a tricky ecosystem where so many others had failed? And with a model selected, how should Ami and Otso pursue investors and begin rolling out their fund?


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Exhibit 1 Ami Kemppainen's Resume, early 2011

AMI KEMPPAINEN

education 2007-2009 HARVARD BUSINESS SCHOOL BOSTON, MA, USA

Master in Business Administration, June 2009.

Member of Entrepreneurship, Marketing and Tech & Media clubs. Co-president of Human

Capital Management club. Built marketing plan for femtocell device and services startup

through Massachusetts Institute of Technology course.

2000-2004 BRIGHAM YOUNG UNIVERSITY PROVO, UT, USA

Bachelor of Science in Business Management. Cum Laude. Awarded merit-based university

scholarships. Selected for honor roll every year. Advised Project Read, an adult literacy

program, on organizational restructuring.

experience

2008-present MEROS DELHI, INDIA

Co-founder, Board member

Building a cloud-based admin and courseware platform for Indian institutes of higher

education. Serving nine top colleges and growing. Advising company and seeking next round

of financing.

2009-2011 SENSIRE HELSINKI, FINLAND

Director of Business Development

Directed use of company resources towards three high potential segments and supported serial

entrepreneur.

Managed strategic key accounts and helped open large sales channels.

Created and helped direct marketing and sales.

2008 SINGAPORE TELECOMMUNICATIONS SINGAPORE, SINGAPORE

Training Officer

Built strategy focused leadership development programs and instituted corporate MBA

internship program.

Achieved rare unanimous approval from HR Directors and executives on main project.

2007 BAIN & COMPANY HELSINKI, FINLAND

Consultant

Advised global cargo handling company on meeting ambitious 40% growth target.

Identified aggressive growth opportunities in services and solutions.

2005-2007 MONITOR GROUP CAMBRIDGE, MA, USA

Consultant

Structured and executed analysis for businesses in IT, telecom, energy, pharmaceuticals, toys

and beverages

Led team in delivering integrated analysis for turnaround of IT company in Monitor

Ventures portfolio.

Evaluated multi-play growth opportunities for telecom players.

Analyzed and recommended regional play strategies to one of largest energy players in

US.

Redirected training program be treated as lasting change initiative at investment bank

client.


13

2004 FIVE POINT POWER PLANO, TX, USA

Lead Market Analyst

Led team of four to provide market analysis, sales support and to run the company’s first two

trade show visits.

Ensured high sales conversion rates through thorough trade show operations and concerted

follow up.

2003-2004 ACCUPROSE PROVO, UT, USA

Managing Partner

Refined growth strategy of online translation service. Aligned online marketing program to

deliver growth.

Built profitable Google ad campaign with payback period of only two months.

personal Member of Global Steering Committee for Brigham Young University Management Society.

Two-year long missionary service in San Francisco. Honors from military service for Finnish

anti-aircraft.

Fluent in Finnish, English and Estonian; conversational Swedish. Active runner.


14

Exhibit 2 Otso Friström's Resume, early 2011

OTSO T. FRISTRÖM

education 2008 HARVARD BUSINESS SCHOOL BOSTON, MA

Master of Business Administration Assistant Vice President of SEC. Organized the inaugural Harvard Business School

Microfinance Symposium. Member of the Private Equity and Venture Capital, Investment,

and Turnaround Clubs. GMAT: 750/99th percentile.

2003 BRIGHAM YOUNG UNIVERSITY PROVO, UT

Master of Information Systems Management, with Distinction

Bachelor of Management, Magna Cum Laude.

Researcher for Rollins Center for eBusiness. Board member of Systems Management

Association executive committee. University, Marriott School of Management, and Hinckley

Scholar (top 0.3%). GPA: 3.90.

experience 2008-2011 CAMBRIDGE ASSOCIATES WASHINGTON, D.C.

Investment Consultant/Outsourced CIO Managed and advised multiple institutional portfolios totaling over $4 Billion. Most of the

assets under full discretion.

Invested in multiple asset classes from private/public equity and fixed income to alternative

strategies and commodities.

Authored globally distributed research paper on agricultural investing. Member of the

Mission Related Investing-group.

2009-2011 SOFTCENTRE MEDIA NAIROBI, KENYA

Founder/Director

Built a marketing and advertisement agency providing logistics and content, targeting East

African businesses. Partnered with hundreds of local business owners and service providers to

increase coverage and the product platform.

2007 LEHMAN BROTHERS NEW YORK, NY

Associate – Portfolio Strategy Designed and built models for institutional and private wealth divisions. Took part in

realigning the strategic asset class distribution recommendations. Allocated client money

between various asset classes and money managers.

Designed, built, and trained people on a Monte Carlo-based option modeling application

that was immediately adopted by the division – consequently saving clients millions of

dollars during the ensuing market crash.

2007 NEUBERGER BERMAN NEW YORK, NY

Associate – The Capital Group Made investment recommendations for the portfolio. Researched various industries and

companies. Analyzed earnings announcements and estimated future surprises, and assisted

with client analysis and tracking.

2005-2006 YEHU MICROFINANCE BANK MOMBASA, KENYA

CEO Led 50+ full-time employees and interns, introduced new financial products, initiated

employee and client training, and turned the bank towards growth and profitability.


15

Reorganized and standardized the bank’s operations, and restructured the corporate strategy to

focus on semi-urban areas to achieve self-sufficiency and facilitate 50% annual growth.

Increased the loan repayment rate from 60% to 90% by creating a new incentive structure

and monitoring tool.

Discovered and corrected large reporting and operational discrepancies, saving the bank

50% of loan portfolio.

Instituted computerized information systems, radically improving speed and reliability of

operational data.

2003-2005 MONITOR GROUP CAMBRIDGE, MA

Consultant Consulted for the biotechnology, software, pharmaceutical, energy transportation, automotive,

and medical device industries. Built models on revenue estimation, market sizing, and

operational efficiencies. Performed competitor evaluation, market segmentation, process and

industry analysis. Developed marketing strategies for several products.

Built a risk analysis and client training for a $10B biotech product, resulting in personal

recognition from the CEO.

Created a global operations analysis for a large transportation company, leading to a

multi-billion dollar acquisition.

community Mentored students for several years in the Boston, MA and Provo, UT school districts.

Oversaw volunteers during the 2002 Winter Olympics in Salt Lake City.

Supervised and trained volunteers for two years as a full-time church representative,

volunteering 85+ hours/week.

Commanded Finnish Air Force troops of over 50 soldiers. Top 5% of entering class.

812-140 -16-

Exhibit 3 Nordic and Baltic Region: Selected Economic Statistics

Finland Sweden Norway Denmark Estonia Latvia

Area (sq km)

Land area

338,145

303,814

450,295

410,335

323,802

304,282

43,094

42,434

45,228

42,388

64,589

62,249

Population (millions of people)

0 – 14 yrs old

15 – 64 yrs old

65+ yrs old

Median age

2011 est. pop. growth rate

5.26

16%

66%

18%

42.5

0.08%

9.09

15%

65%

20%

42.0

0.16%

4.69

18%

66%

16%

40.0

0.33%

5.53

18%

65%

17%

40.9

0.25%

1.28

15%

67%

18%

40.5

-0.64%

2.20

14%

70%

17%

40.6

-0.60%

GDP ($billions)

GDP real growth rate

GDP/capita (in $)

GDP composition by sector:

Agriculture

Industry

Services

Currency

239.2

3.1%

35,400

3%

29%

68%

Euro

455.8

5.5%

39,100

2%

27%

72%

Swedish krona

414.5

0.4%

54,600

3%

39%

58%

Norwegian krona

310.8

2.1%

36,600

1%

22%

77%

Danish krona

19.8

3.1%

19,100

3%

29%

68%

Kroon

24.1

- 0.3%

14,700

4%

22%

74%

Lats

Member of EU? Yes Yes No Yes Yes Yes

Source: CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/), Europa (EU Website) http://europa.eu/about-eu/countries/index_en.htm

812-140 -17-

Exhibit 3 (continued)

Lithuania Russia Poland Germany United Kingdom

Area (sq km)

Land area

65,300

62,680

17,098,242

16,377,742

312,685

304,255

357,022

348,672

243,610

241,930

Population (millions of people)

0 – 14 yrs old

15 – 64 yrs old

65+ yrs old

Median age

2011 est. pop. growth rate

3.54

14%

70%

17%

40.1

-0.28%

138.74

15%

72%

13%

38.7

- 0.47%

38.44

15%

72%

14%

38.5

-0.06%

81.47

13%

66%

21%

44.9

-0.21%

62.70

17%

66%

17%

40.0

0.56%

GDP ($billions)

GDP real growth rate

GDP/capita (in $)

GDP composition by sector:

Agriculture

Industry

Services

36.4

1.3%

16,000

3%

29%

57%

1,465

4.0%

15,900

4%

37%

59%

468.5

3.8%

18,800

3%

33%

64%

3,316

3.5%

35,700

1%

28%

71%

2,247

1.3%

34,800

1%

22%

78%

Currency Litas Ruble Zloty Euro British pound

Member of EU? Yes No Yes Yes Yes

Source: CIA World Factbook (https://www.cia.gov/library/publications/the-world-factbook/), Europa (EU Website) http://europa.eu/about-eu/countries/index_en.htm


18

Exhibit 4 VC & PE data from selected countries, 2009 & 2010

Finland Sweden Norway Denmark

Total private equity investment (1000s €) 632,450 1,881,874 1,312,504 430,903

Total private equity investment /GDP 0.37% 0.58% 0.44% 0.19%

Total # of companies receiving private equity

investment

229 375 157 96

Total venture investment (1000s €) 95,139 220,336 147,406 78,730

Total venture investment/GDP 0.054% 0.070% 0.051% 0.035%

Total # of companies receiving venture investment

161 286 116 66

Distribution of venture investment, by stage (%)

Seed

Startup

Later-stage venture

7.7

59.5

32.8

2.4

52.7

45.0

2.8

52.9

44.3

11.2

56.5

32.3

Distribution of venture investment, by sector (%)

Business & Industrial Products

Business & Industrial Services

Communications

Computer & consumer electronics

Consumer goods & retail

Consumer services

Energy & environment

Life sciences

Transportation

Other*

14.4

1.4

11.2

28.6

1.7

1.0

12.7

26.2

0.1

3.1

4.4

1.5

10.9

31.6

1.1

0.4

17.6

28.3

0.7

3.6

5.5

1.7

9.5

19.1

0.1

0.6

39.8

9.4

5.1

9.7

3.2

0

8.7

15.1

1.9

0.2

10.1

56.7

0

4.3

2010 # of VC firms 19 68 30 19

2010 # of other private equity firms

25 62 15 16

2010 capital under mgmt of VC firms (millions €) 1,658 4,449 2,002 2,367

2010 capital under mgmt by other private equity

firms (millions €)

4,550 31,427 5,222 4,602

Net share of investment made by foreign private

equity firms

36.47% 18.13% 29.97% -8.21%

*Other = Agriculture, Chemicals & Materials, Construction, Financial Services, Real Estate and Unknown

Source: EVCA 2011


19

Exhibit 4 (continued)

Baltics** Poland Germany U.K.

Total private equity investment (1000s €) 19,517 461,874 3,715,626 8,722,021

Total private equity investment /GDP 0.03% 0.14% 0.15% 0.53%

Total # of companies receiving private equity

investment

21 35 1,274 657

Total venture investment (1000s €) 4,046 1,600 677,062 742,689

Total venture investment/GDP 0.007% 0.001% 0.028% 0.046%

Total # of companies receiving venture investment

13 8 926 354

Distribution of venture investment, by stage (%)

Seed

Startup

Later-stage venture

15.4

77.6

7.0

0.0

25.2

74.8

7.5

54.0

38.6

1.3

42.9

55.8

Distribution of venture investment, by sector (%)

Business & Industrial Products

Business & Industrial Services

Communications

Computer & consumer electronics

Consumer goods & retail

Consumer services

Energy & environment

Life sciences

Transportation

Other*

10.3

0

23.2

22.2

0

2.5

19.5

18.9

0

3.5

0

0

67.7

1.7

0

14.0

0

15.0

0

1.8

10.1

8.2

15.5

16.4

5.2

1.1

9.7

29.0

1.3

3.5

6.4

1.5

20.9

20.0

3.9

3.4

14.0

24.2

0

5.8

2010 # of VC firms 7 13 124 129

2010 # of other private equity firms

7 12 110 235

2010 capital under mgmt of VC firms (millions €) 124 250 10,832 12,780

2010 capital under mgmt by other private equity

firms (millions €)

609 3,270 18,772 256,666

Net share of investment made by foreign private

equity firms

7.66% -28.38% 6.46% -70.46%

*Other = Agriculture, Chemicals & Materials, Construction, Financial Services, Real Estate and Unknown

**The Baltics includes the countries of Estonia, Latvia and Lithuania

Source: EVCA 2011


20

Exhibit 5 Notable Nordic Start-ups

MySQL AB

MySQL AB was a Swedish company that created the popular open-source database management software known as MySQL. It was founded in 1995 by two Swedes, David Axmark and Allan Larsson, and Michael Widenius, who is Finnish. According to one story, the company was located in Sweden because of the difficulty of finding financing in Finland. In 2008, MySQL AB was acquired by Sun Microsystems for approximately $1 billion in total consideration.

Skype Technologies SA

Skype (now owned by Microsoft) is the maker of the internet voice- and video-conferencing software of the same name. It was started in 2003 by Janus Friis and Niklas Zennström, from Denmark and Sweden respectively, and was based in Luxembourg. In 2006, eBay purchased Skype for $2.6 billion, after which eBay announced that it had overvalued the company and, eventually, sold off about two-thirds of the company to private investors. As of May 2011, however, Microsoft had agreed to acquire Skype for $8.5 billion.

Spotify AB

Spotify is a free music streaming service that allows users access to millions of tracks. Spotify AB was founded in 2006 in Stockholm, Sweden, by Daniel Ek and Martin Lorentzon, and was launched in October 2008. Today, Spotify’s parent company, Spotify Ltd., is headquartered in London, although research and development still takes place in Stockholm. As of November 2011, Spotify had over 10 million registered users and 2.5 paying subscribers across Europe and in the U.S.

Rovio Entertainment Ltd.

Rovio is a mobile game development studio and is best known as the creator of the Angry Birds series of games. It was founded in Finland in 2003 by Kim Dikert, Jarno Vakevainen, and Niklas Hed, and in 2009 released Angry Birds. The game soon became a massive success: it was the top-selling paid application in Apple’s U.S. App Store in February 2010 (and stayed in that position until October), and had 40 million users monthly as of March 2011. Recently, Rovio has continued to grow, and has received $42 million in Series A investments (March 2011) and acquired two other Finnish companies, Kombo Animation Studios (June 2011) and Futuremark Games Studio (March 2012).


21

Exhibit 6 Bloomberg Businessweek Article

Finland Imagines Life Without Nokia

By Kati Pohjanpalo and Diana ben-Aaron on April 19, 2012

When your country is closely aligned with a single company, there can be wonderful highs. In

2000, Nokia (NOK) was the world’s dominant cell-phone manufacturer. When paradise ends,

though, the consequences are brutal. Nokia’s 94 percent share-price plunge from its 2000 peak

has left thousands of engineers looking for work now that Nokia is curtailing local development

and moving production to Asia. Nokia’s share of gross domestic product probably shrank to 0.8

percent in 2011 from as high as 4 percent in 2000, according to Jyrki Ali-Yrkkö, an economist at

Helsinki-based researcher ETLA. By the end of this year, Nokia’s Finnish staff will have fallen

40 percent in six years, according to the Economy Ministry.

Nokia’s smartphone business is being eaten up by Apple’s (AAPL) iPhone and the Android

handset makers. Its affordable phones for emerging markets are being undercut on price by

Chinese rivals. Finns have shown their faith by buying Nokia shares. Finland’s households now

hold about 10 percent of Nokia stock, up from 5.4 percent two years earlier.

Yet there’s a definite sense that Finland is over the worst of its Nokia shock. “Nokia has

overshadowed the other industries here for years,” says Petri Peltonen, who runs the innovation

unit at the Economy Ministry. “It was sucking all the resources from the country. Now the

presence is diminishing a bit.”

One way for Finland to keep its reputation for cool stuff is through mobile games. Angry Birds

took iPhone users by storm, and its creator, Rovio Entertainment, could be Finland’s next big

tech initial public offering, with a possible valuation of more than $1 billion. Total staff at

Finland’s 100 game companies will more than quadruple, to 6,500, by 2020, says Sonja Kangas,

head of the Finnish branch of the International Game Developer Association.

The government is trying to attract data centers to old paper mills, touting an electricity grid that

suffered downtime only once in 30 years. Google (GOOG) was the first taker, and IBM (IBM)

has followed. Intel (INTC) this month opened a research facility near the capital city. Despite

Nokia’s cuts, the jobless rate fell from 8.5 percent in 2010 to 7.9 percent last year.

What’s needed are businesses that can’t be duplicated elsewhere or moved to Silicon Valley.

Nickel miner Talvivaara Mining is among the new stars. The chemical industry accounts for

about 20 percent of total exports, up from 10 percent in 2000. One company, Kemira (KRA1V),

has come up with compounds that make tainted water drinkable.

Finnish shipbuilders have developed a niche making Arctic exploration vessels, icebreakers, and

the world’s biggest luxury cruise liners. Allure of the Seas, built in Turku and delivered in 2010

to Royal Caribbean Cruises, features a Central Park with 12,000 plants and trees, a surf

simulator, and a 3D movie theater. The Nordic nation will bounce back, says ETLA’s Ali-Yrkkö.

“Finland’s future growth will be like small streams merging into a river.”


22

The bottom line: Nokia has dominated Finland’s economy for years. Now other industries are

gaining in importance as the phonemaker cuts back.

Source: Kati Pohjanpalo and Diana ben-Aaron, “Finland Imagines Life Without Nokia,” Bloomberg Businessweek, April 19, 2012, http://www.businessweek.com/articles/2012-04-19/finland-imagines-life-without-nokia

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