How Stockholm Became a ‘Unicorn Factory’

Nov 09, 2015

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What do Silicon Valley and Stockholm have in common? Spawning billion-dollar tech
companies. After Silicon Valley, the Swedish capital produces the highest number of so-
called “unicorns” per capita than any other global city. With a population of less than
900,000, Stockholm has birthed prolific global brands like Skype, Spotify, Minecraft and
Candy Crush Saga. In fact, American interactive entertainment firm Activision Blizzard
has just purchased the makers of Candy Crush Saga for $5.9 billion.

Experts say a number of factors — including the global success of well-known Swedish
companies, government foresight and infrastructure planning — have fomented an
environment that has fostered 22,000 tech businesses in the city alone. “Sweden has
developed a human, social, educational and corporate infrastructure that supports start-
ups Twitter ,” notes Wharton management professor Exequiel Hernandez.

The kind of spotlight that Stockholm has attracted is also fueling more investment. In
terms of global cities leading the way in deal growth, Stockholm is second only to Beijing,
according to CB Insights. Last year, $788 million of venture and growth capital,
excluding private equity deals, was pumped into Swedish companies, the research firm
notes. Venture capital investments have increased 338% from last year, and Stockholm
commands 15% of the total foreign direct investment poured into the European
technology sector. For a high-income country that’s comparable to Switzerland in size,
the Swedish are doing well in the start-up scene, notes David Hsu, Wharton management
professor.
Certainly, American investors are taking notice. “Sequoia Capital; Kleiner Perkins
Caufield & Byers; and Google have all invested in [Swedish companies]. It won’t be long
before the rest do,” says Tyler Crowley, an American consultant who moved from
“Silicon Beach” in the Los Angeles area to develop the Stockholm start-up scene for the
city government.

Spotify, a music-streaming service that may be one of Europe’s most high-profile start-
ups, reached an $8.53 billion valuation this past year. Swedish telecom company
TeliaSonera poured in $115 million, receiving a 1.4% stake. Think of it as the “pensioner
meets the teenager,” says Martin Carlsson-Wall, a Stockholm School of Economics
accounting professor. “The deal is a way for [TeliaSonera] to build its brand and associate
itself with a younger, innovative and faster-growing company. At the same time, Spotify
is perhaps too small and can build on the strength of a big company.”

“The notion of the entrepreneur in the garage or the small warehouse is romantic and
true in many ways, but that doesn’t happen without a lot of other infrastructure.” –
Exequiel Hernandez

Predecessor Swedish tech enterprises have set the pace for successful start-ups. In 2005,
Swedish telecommunications company Skype was bought by eBay for $2.6 billion.
Microsoft then bought Skype for $8.5 billion in 2011 in the largest takeover acquisition
in Microsoft’s history. Swedish software company MySQL was bought by Sun
Microsystems for $1 billion in 2008 and is now owned by Oracle.

A Candy ‘Crush’
The recent news about Swedish success is the record sale of King Digital, which
developed Candy Crush Saga in Stockholm before the company relocated its headquarters
to Dublin, Ireland. Around $3.6 billion of the purchase will be from offshore cash, and
Activision Blizzard, makers of the Call of Duty video game series and the Skylanders
franchise, would have lost more than $1 billion if the company had repatriated the funds,
notes Ian Bogost, Georgia Institute of Technology professor of interactive computing.
King Digital went public on the New York Stock Exchange for a valuation of $7.1 billion
in 2014 but has struggled to come up with another successful game. “Investors want
growth. If you’re a company that has one massive hit … [you have] got to be reaching
the limits of what you can do,” adds Kevin Werbach, a Wharton professor of legal studies
and business ethics. Selling the company may be the best business solution to appease its
backers, while Activision Blizzard gains entry into the mobile gaming space. (Werbach
and Bogost discussed the deal during a recent appearance on the on the
Knowledge@Wharton show on SiriusXM channel 111.)

Earlier this year, another successful Swedish gaming developer, Mojang, makers of
Minecraft, was bought by Microsoft for $2.5 billion.

A few more unicorns are on their way, says Joseph Michael, business development
manager at Stockholm Business Region Development, a government enterprise. Audio
streaming service SoundCloud started in Stockholm before moving to Berlin, Germany,
and was valued at $700 million at its last funding round. TrueCaller is an app that finds
phone numbers and blocks spam calls, backed by two Silicon Valley investors, Kleiner
Perkins Caufield & Byers and Sequoia Capital. Users are mostly located in India,
Lebanon and Jordan, and 200,000 are joining each day.

Recently, mobile payments company iZettle raised $68 million on a $500 million
valuation, led by Intel Capital, the investment division for the U.S.-based chipmaker. The
Stockholm start-up makes payment card-reading devices that attach to mobile devices.
The devices incorporate a secure chip-and-pin technology used primarily outside the
United States.
Another company to watch out for is Tictail, an e-commerce company whose employees
have used English instead of Swedish in their internal communications since it was
founded four years ago. English is the language of tech in Sweden, says Crowley. “All
their start-ups are in English. Sweden is small, so entrepreneurs are forced to think in
English from the beginning, unlike France, Germany and Poland,” he adds. On the other
hand, Carlsson-Wall points out that his students have a difficult time getting a job in
Sweden if they don’t speak Swedish.

What Gives?

For a Scandinavian country with a population of less than 10 million, a little more than
the size of New York City, Swedish businesses have always had to think outside the
country’s borders. Companies like Volvo, Ikea, H&M, Absolut Vodka and telecom
company Ericsson have paved the way for global success. A Swedish company typically
begins to expand globally within a couple of years of its start. Sweden is so small that
internationalization of companies is quite normal, notes Carlsson-Wall.

“The government played a very proactive role early on in shaping the technology
ecosystem in Sweden.” –Kartik Hosanagar

“Sweden does have the legacy of its Volvos and Ericssons. They realize that start-ups can
be successful and diversify their economy,” says Hsu. “A whole spectrum of companies
can help a country be resistant in times of downturns.”

When Swedish multinationals became successful in the past, they contributed a lot of tax
money to finance infrastructure and entrepreneurship ventures, says Carlsson-Wall.
Hernandez explains: “Start-up and tech hubs don’t emerge in a vacuum. Even though we
hail the young start-ups, they usually feed on the presence of large and established
organizations that provide the technology and human talent required for the next big
thing.”

To that end, Stockholm built the world’s largest open-fiber network in 1994 with 100%
of businesses and 90% of homes tapping into that infrastructure today. More than 94% of
the population is online with the fourth highest usage in the world. Over 91% of the
population accesses the Internet at least once a week.

Kista Science Park, where Ericsson is headquartered, is also home to 700 tech companies
with enough fiber-optic cable to circumnavigate the Earth 30 times. “The notion of the
entrepreneur in the garage or the small warehouse is romantic and true in many ways, but
that doesn’t happen without a lot of other infrastructure,” says Hernandez.

Back in the 1990s, the Swedish government even offered a tax break for residents to buy
personal computers. “People could pay for computers with pre-tax money and employers
would supplement the costs,” notes Kartik Hosanagar, a Wharton professor of operations,
information and decisions. “This led to a huge influx of PCs in homes, which led to really
high PC penetration. The government played a very proactive role early on in shaping the
technology ecosystem in Sweden.” Founder of Klarna, an e-commerce firm that provides
online payment services, 33-year-old Sebastian Siemiatkowski says this subsidy helped
him become an early technology adopter at the age of 10 when his family couldn’t afford
a computer, in an interview in The Independent.

It comes as no surprise the most common job in Stockholm is programmer with 18% of
the city employed in the tech sector. University education is free as well, and institutions
are starting to foster start-up clusters. Daniel Ek came up with the idea for Spotify during
his first year of college at Stockholm’s Royal Institute of Technology, which graduates
one-third of the technical expertise in Stockholm.
This kind of government planning has created a whole generation of highly educated
digital natives who have grown up with a familiarity with computers and broadband. “The
whole mindset has led to a very tech-savvy population,” adds Hosanagar.

According to Hernandez, the Swedish start-up community has built on the strengths that
Sweden has to offer, such as a highly educated population, social and political stability,
and extremely high openness to new ideas. “One of my pet peeves is that many places are
trying to be like Silicon Valley. But nobody can do that because Silicon Valley was the
product of unique historical and social circumstances,” Hernandez notes. “That’s usually
the genius of a start-up or tech or industrial hub. It can’t be replicated because the
founding conditions are idiosyncratic. So the main lesson may simply be to build on
existing strengths and focus on what is unique. That will prevent any geographic or local
advantage from dissipating when others try to imitate.”

Moreover, work-life balance is integrated into the culture, with the tradition of all Swedes
taking a multi-week vacation over the summer. In addition, Sweden has one of the highest
female and maternal employment rates in Europe. Day care costs are subsidized by the
government, making it extremely affordable. Men normally take paternity leave. “In
Stockholm, it would be considered very conservative if fathers don’t stay home with the
kids,” says Carlsson-Wall. Marta Sjögren of venture capitalist firm Northzone, who
backed Spotify, said in The Telegraph, “The whole freezing-your-eggs thing would never
happen in Sweden,” a benefit offered to Facebook and Apple female employees.
However, Crowley said he notices that there are fewer women in the Swedish tech scene
than the American tech scene. “As progressive as Swedes are about gender issues, they’re
a bit behind with female tech engineers,” he says.

“Small innovations with really good user-friendly designs will be important, and
Sweden has a really good leg up in that respect.” –Kartik Hosanagar
Overall, the start-up scene is starting to gel and the next generation of Swedish tech
companies is beginning to crop up in a “virtuous cycle,” notes Hernandez. Indeed, Skype
founder Niklas Zennström went on to start Atomico, a venture-capital firm based out of
London that funds many Swedish start-ups.

More to Come?

While Stockholm’s success in the start-up space is impressive, there are a few negatives
when it comes to attracting outside talent, Hsu notes. The cost of living is high, in terms
of taxes and housing. Also, landlords have to obtain special permits, driving the cost of
subletting even higher.

Income taxes are notoriously high, though university tuition and health care is free.
Carlsson-Wall says there is proposed legislation to attract expat workers by classifying
them as “foreign experts” so they can pay lower taxes. Even stock options, a popular
incentive for tech workers, are taxed before and after they cash out.

Gabriel Karlberg, a doctoral student at the Stockholm School of Economics, adds that if
a company goes bankrupt and a person has served on its board or as the CEO, the
bankruptcy becomes registered in that person’s personal credit rating for life and becomes
a personal liability, making it more difficult to get a mortgage or a loan for another start-
up where the bank might do a personal credit check as an extra precaution.

“Swedish society in general needs to understand that a bankruptcy sometimes is a

necessity and that some firms need to fail and that the persons on the board or the CEO
might still be great entrepreneurs,” Karlberg notes. “The risk of getting a bankruptcy on
your records makes people more reluctant to launch a company and take risks, since the
failure could hurt you as much as the economic losses from the bankruptcy many years
after it happened.”
Overall, the Scandinavian start-up scene is still burgeoning, particularly the one in
Stockholm. “Stockholm is the only city with a population of less than one million people
with any unicorns. It’s a unicorn factory … and they’re not slowing down. There’s more
in the works,” says Crowley.

Hosanagar agrees, noting that “there will be more and more coming out of Sweden.” One
important reason, he adds, is that future start-ups will be less about tech and more design
conscious. In the last 20 to 30 years, Apple, Microsoft and Google have made enormous
strides with technology. Sweden has always had a really strong design sense with iconic
brands like Ikea and Volvo. These days, success can be measured by how intuitive and
convenient it is to use a particular piece of software. “Small innovations with really good
user-friendly designs will be important, and Sweden has a really good leg up in that
respect,” Hosanagar says.
Malmö smartwatch company Kronaby files for bankruptcy

Richard Orange

richard.orange@thelocal.com

Richard_Orange

8 February 2019

10:08 CET+01:00

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Malmö smartwatch company Kronaby files for bankruptcy

The Swedish actor Matias Varela has been hired to promote the watches. Photo: Kronaby

The Malmö company behind the premium smartwatch brand Kronaby has filed for
bankruptcy after an abrupt shift in strategy at its Chinese backers.

The filing, made on Wednesday, puts 60 people at risk of losing their jobs at the
company’s offices in the city’s new Västra Hamnen district.

Pål Borge, chief executive of Anima, told The Local that the company's majority owner,
the Chinese electronics company Goertek, had decided to concentrate on their original
business, component manufacturing, and shut down all of the brands they had begun to
develop.
"They decided to leave this branding business, and they also decided to do it extremely
quickly, so they shut off all capital injection and support with immediate effect," he said.

"They did this in December, so they left us one and a half months to find new investors,
which was absolutely too short. We have a number of leads which we will continue to
work on, but we have not been able to finalize them."

Pål Borge came to the company after Sony Mobile. Photo: Anima

Kronaby was founded in 2015 by four executives from Sony Mobile, and launched its
first 'hybrid' watches in 2017, taking on Apple by combining high-end materials and
stylish design with almost invisible smart hardware.

Revenues grew to over $50m last year, a 40 percent increase on the $37m worth of
watches sold in its launch year, when it made a $127m loss.

The watches, which range in price from about 2,000 kronor (around $215) to about 6,000
kronor (around $647), were positively reviewed by style magazines such as GQ.

Borge said the company had aimed to reach break-even by the end of 2019 and had only
required a small further capital injection of a few million dollars to do so.

"It was the final investment that could be done to make us break even," he told The Local.
"The biggest disappointment was that it was notified in such a short time, so we didn't get
a real chance to find a new investor."
Borge told Sydsvenskan that he hoped that the company’s administrators would be able
to find a buyer or investor willing to come to the company’s rescue.

“We have a platform ready and a business which should interest many, so our ambition
is, together with the administrator, to find a solution,” he said to the newspaper.