The size and activity of the venture capital industry has increased sharply in recent years. In Sweden today there are about 130 venture capital companies, which combined, have more than SEK80bn under management.
Growth in the Swedish venture capital industry has occurred in ‘waves'. The first step towards a venture capital industry was taken during the second half of the 1970s through government programmes involving a number of regional funds. An initial venture capital wave then occurred in the early 1980s with the formation of approximately 30 venture capital companies and a number of government funds. This growth was stimulated by an upturn in the stock market and the establishment of the OTC (over the counter) list in 1982 at the Stockholm Stock Exchange. However, the activity decreased during the second half of the decade when the stock market climate cooled and the property market attracted significant capital.
The number of venture capital companies increased sharply during the 1990s. Sweden has gained greater access to capital as a result of improvements in the stock market, increased savings and increased allocation of pension funds to venture capital. We have a growing group of entrepreneurs and business managers who have acquired the financial resources with which to make investments in growth companies, and who have formed networks and companies for venture capital investments. Exit possibilities have improved as a result of the rise in the stock market, the development of new stock listings and interest from larger foreign corporations acquiring Swedish technology companies in areas like IT, telecom, the internet, pharmaceuticals and biotechnology. Many of the new venture capital companies focus on a specific industry like mobile communications, the internet and life sciences. There has also been an increase in early-stage investment by a number of incubators.
When it comes to venture capital investments, Sweden ranks third in the world after the US and the UK. In 1999 Swedish VC firms invested over SEK11bn, of which 80 per cent or SEK9bn comprised initial investment into 301 companies. This equals 0.57 per cent of GDP, which is about double the European average. Only the UK invested more - 0.86 per cent of GDP. In the US, venture capital investment in 1999 amounted to 1.14 per cent of GDP.
In previous years, young companies have found it difficult to get VC funding. But today Sweden is the European leader in seed and start-up investment. Of all VC investments made in Sweden in 1999, 58 per cent of the companies were in the seed or start-up stage. This compares with a 27 per cent average for Europe, 45 per cent for Germany, 42 per cent for Italy, 36 per cent for the Netherlands, 35 per cent for France and nine per cent for Great Britain. In total, SEK2.1bn was invested in Swedish seed and start-up companies in 1999 - this is 18.9 per cent of the total amount invested.
Industry products and services have attracted the greatest amount of investment - slightly over SEK2bn. But in terms of the number of investments, the leading sector is telecoms, followed by computers and electronics-related industry, then the medical and health-related sectors.
Fund raising from outside Sweden - at 52 per cent - was slightly larger than domestic funding, at 38 per cent. Of total funds raised in 1999 - which equalled SEK8.7bn - pension funds, insurance companies and corporate investors dominated with 34.5 per cent, 22.4 per cent and 20.4 per cent respectively. The figures for 2000 are expected to be different, with several VC firms now listed on the stock exchange.
Exit strategies are also significant. Trade sales are only slightly more frequent than IPOs but are worth 2.6 times as much. The figures in this article come from the annual survey conducted by the EVCA and PricewaterhouseCoopers, with the support of the national venture capital associations.
The general picture of the Swedish venture capital market is positive. However, there are problems that restrict this development, causing concern for Swedish investors. Foreign investors do not share the same concerns - a foreign investor in a Swedish company does not have to pay any Swedish taxes when making an exit. But for local investors, there are some difficulties. For example, active investments in unlisted companies are often taxed at a higher rate than passive investments in listed companies, which are always taxed as capital gains and do not face the special tax problems encountered by partners in small companies.
Venture capital firms and investors often operate through funds abroad. One improvement in the tax laws for Swedish companies would be to broaden the definition of the investment company tax status, allowing more venture capital firms to exit without being taxed. This money could then be used for new investments. The rules for employee stock options are quite complex and a lot of attention has to be given so the capital gain will not be taxed as income, but as capital gain (30 per cent tax). In order to make experienced people leave well-paid positions in large companies for uncertain futures in young growth companies, it is important that there are incentives.
