Books I have co-authored

Verification, a substitute for seed financing

One of the many hurdles for startups and entrepreneurs in Sweden has been the shortage of investment capital for seed financing. In the very first stages of a new company the capital requirement can be as little as a below 50,000 Euros.

In countries such as the US entrepreneurs have often been able to raise the small amounts that are needed by taking out a second mortgage on their house, or from FFF investors (Family, Friends and Fools), or sometimes from angel investors. The higher level of private capital accumulation in a low tax economy makes that easier compared to Sweden.

The Venture Capital model is not suited for seed financing. For a VC investor, the amount of work needed to evaluate a 40,000 Euro investment is almost the same as for an investment of a million Euros. Failure rates are much higher for seed financing and the higher returns do not compensate for all the work that goes in to managing a portfolio full of many small investments.

That seed financing is a bottleneck in the Swedish Innovation System has been known for over a decade. The already existing government agencies for funding of new companies such as Almi and Industrifonden were adapted for lending to and investments in established companies. Agencies such as Vinnova and Tillväxtverket (formerly Nutek) used to fund applied industrial commercial research, often in partnership with larger companies, but did not have specific programs in place to help innovators to transform their innovations into a viable startup company.

What the Swedish government has viewed as particularly dissatisfactory is that the high percentage of GDP spent on R&D in Sweden has produced so few new successful companies.

To facilitate the commercialization of scientific results from the Swedish university system, new government funded programs have been put in place during the last few years. Their aim has been to fill the gap where there is insufficient support and funding in the earliest phase of the startup.

In 2005 the government agency Innovationsbron (the Innovation Bridge) was founded. They provide funding for regional incubators and have some funds available for loans and seed investments.

What I find unconventional and interesting is that as a complement to the traditional role as an angel investor Innovationsbron also offers support for an extensive verification of the technological and commercial viability of the innovation.

This way the entrepreneur doesn’t even have to set up a legal business during the first evaluation phase and can put all their focus on getting a better understanding of the viability and potential of the business concept. Innovationsbron offers the first phases of this evaluation. Vinnova (The Swedish Governmental Agency for Innovation Systems) can offer the most promising concepts a deeper commercial and technological evaluation with prototyping up to an additional 200,000 Euros from their program called Vinn Verifiering.

A few weeks ago I listened to the program director for Vinn Verifiering Kjell Håkan Närfelt at a seminar. An interesting observation was that the linear planning and control paradigm seems to be falling out of favor in the startup and innovation world.

Närfelt defined his mission as valorisation of R&D (valorisation is a term that means creation of value). Instead of viewing verification and early phase work in a startup as a development project he stated that it should be viewed as a learning process.

The linear control paradigm with roots in Industrial age Fortune 500s and MBA-style management consulting works well for large corporations that operate in stable and well defined markets. For environments with very high uncertainty it is less helpful to work with a framework built on plans, predictions, and deviations from plan.

For a startup a better method is to use Discovery Driven Planning and turn common practice upside down. Instead of starting the market analysis with the macro level concept “market attractiveness” it is better to start with an analysis on the micro level with an understanding of the customer’s context and needs. Instead of beginning with a business plan it is better to go through the extensive verification process first and write a business plan when you have more facts on the table. Another example of the new approach in the Vinnova verification program is the ambition to give prototyping a wider scope than technology only. Prototyping should also be used to learn more about the users and their context.

I find this whole approach very promising. If you are a talented researcher in the Swedish university system and have a scientific discovery with commercial potential, the government has paved the way for you. In addition to these verification programs, the government will (starting next year) spend somewhere around 5 million Euros annually on eight new Innovation Offices located at the major Swedish university campuses. The Innovation Offices will be the first point of contact for the budding entrepreneurs and offer support in patenting and hands-on business skills. What sets Sweden apart from most other Western countries is that the scientists are allowed to keep the intellectual property of their discoveries such as patents. Sweden has been at a disadvantage in attempting to attract international top scientists due to high taxes, mediocre salaries and a less than inviting climate. However, the promise to keep your patents and get support for your startup might be a magnet that can overcome these disadvantages.

As it is right now these programs only target commercialization of scientific results. If your startup is outside the R&D area you can’t get this support and funding. Hopefully in a few years, the experiences from these programs can be repackaged into a other programs that are aimed at promising startups in all sectors of the economy.

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