Stockholm’s Sizzling Start-Up Scene

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In the mid 1990s, Swedish business school students like Jacob de Geer were prepping to become bankers or consultants.Then several Swedes helped to pioneer the European Internet scene. Among them was SIME conference organizer Ola Ahlvarsson, a co-founder of Boxman, which, in the late 1990s, became the largest European e-commerce store selling CDs online. Ahlvarsson helped internationalize Boxman’s operations, setting up local offices in various European markets.Boxman was one of the first Swedish Internet companies to go international but it most certainly is not the last. The early pioneers helped inspire students like de Geer to try their hands at building global start-ups of their own.

De Geer (pictured on Informilo’s home page) joined TradeDoubler, a Stockholm company specializing in performance-based digital marketing, when it was just two guys working out of their apartment. Armed with a five-page business plan, within five days the start-up secured $500,000 in seed money. The company launched in November 1999. Four months later it raised $10 million in private equity from George Soros, who at the time was investing in Swedish Internet companies. The next few years would prove to be a bumpy ride: the global tech bubble burst, the company nearly went bankrupt, rallied, went public on the Stockholm exchange and later narrowly missed concluding a spectacular deal with AOL Time Warner. One of the Swedish company’s big shareholders pushed too hard during negotiations and the talks failed.

The founders and early employees left and went on to create the current generation of Swedish start-ups and/or to invest in them. De Geer is now running iZettle, a Stockholm-based mobile payments company with operations in nine countries: seven in Europe and two in Latin America. Martin Lorentzon, a founder of TradeDoubler, went on to co-found Spotify, the popular global music streaming service which, according to press reports, currently has a valuation of over $5 billion. Stardoll, another early successful Internet start-up, also ended up seeding the ecosystem. Daniel Ek, Spotify’s co-founder, came from there, as did many other key players on the Stockholm start-up scene. (See the box for more details.)

Sweden has, arguably, gone on to produce more Internet companies with valuations of a billion dollars or more than any other tech hub in Europe. And its entrepreneurs have had an outsized impact. Niklas Zennström, the Swedish co-founder of Skype, helped give the world free voice services, transforming the global telecom industry in the process. QlikTech, a start-up born in Sweden that pioneered a disruptive new approach to business intelligence software ended up taking business from IBM, SAP, Oracle, and Microsoft before launching an initial public offering on NASDAQ in 2010, with a valuation of $1.5 billion the year it went public. MySQL, a disruptive open source database company that called Sweden home, was sold to Sun for $1 billion. Spotify co-founders Ek and Lorentzon have created a multi-billion dollar company and disrupted the global music industry. Mojang, creator of Minecraft, is a global gaming giant and King.com, a gaming company started in Stockholm and now headquartered in London, is one of the top games on Facebook and is rumored to be planning an IPO with a valuation of $5 billion.

“Stockholm is unique in the sense that founders tend to stay and build world-class companies there rather than knee-jerk relocating to the U.S.,” says Nikolaj Nyholm, a seasoned Scandinavian entrepreneur who now a general partner at Sunstone Capital in Copenhagen. “This creates a strong group of lieutenants ready to go on to the next great start-up or found their own. For recent examples look at ShapeUpClub with Henrik Torstensson (ex-TradeDoubler, Stardoll and Spotify) and Marcus Gners (ex-Bilddagboken and Stardoll), or Vint with Louise Eriksson (ex-Adprofit), Magnus Hult (ex-Spotify and Wrapp) and Leo Giertz (ex-Bambuser and Wrapp).

De Geer calls it the Björn Borg effect. “When Sweden had a world champion in tennis it inspired two generations after that. Right now we have a fantastic soccer player — Zlatan Ibrahimović — who is playing for PSG [Paris St.-Germain] in France. He is a national hero so again I expect that for the next two generations we are going to produce fantastic footballers. The same thinking is true of tech start-ups. In the early days we had people like Ola Ahlvarsson, Johan Staël von Holstein (founder of LetsBuyIt.com) and Hjalmar Windbladh, who sold his company Sendit to Microsoft. And then came TradeDoubler and Stardoll and out of these companies a new generation of companies like iZettle, Spotify and ShapeUp Club. If people see that you can be part of creating something and see that it is ok to try things and fail it can be extremely powerful,” says de Geer.

The presence of these role models in the market has inspired the current generation of high-fliers coming out of The Royal institute of Technology or business schools in the Stockholm region to all want to create start-ups, says Pär-Jörgen Pärson, a partner of Northzone, a VC firm active in Scandinavia which is currently in the process of investing its sixth fund and raising a new one. And, “international capital has started to pour into Stockholm because in order to cover the global market you need significant capital. Ten or 15 years ago it was a hard exercise to get overseas investment but now we regularly have investors come from London, Silicon Valley and the East Coast of the U.S. to meet with our companies,” he says.

Indeed, for iZettle, his fourth venture, de Geer has raised $42 million from investors that include Index Ventures, Greylock, MasterCard and American Express.

As for Sendit’s Windbladh, after selling to Microsoft, he created mobile VoIP provider Rebtel and now is a co-founder of Wrapp, a social and mobile gifting start-up. Wrapp’s star-studded board of directors includes Zennström, Skype’s co-founder and founder of Atomico (which announced an investment in Wrapp at SIME two years ago); Reid Hoffman, LinkedIn’s co-founder and a partner at Greylock; and Fabian Månsson, former CEO of Swedish clothing behemoth H&M.

Then there is Stockholm-based Internet payments company Klarna, which was started in 2005 by three friends at the Stockholm School of Economics. Klarna lets the consumer receive the goods first and pay afterwards, while the company assumes the credit and fraud risks for the merchants. It’s one of Europe’s fastest-growing companies; in the past seven years it has grown to 800 employees operating in seven European countries with over 12 million consumers. 2012 transaction volumes totaled €1.8 billion. The company has raised over $155 million in capital. Its backers include DST Global, the investment firm founded by the Russian billionaire Yuri Milner and global growth equity firm General Atlantic as well as prestigious Silicon Valley venture firm Sequoia Capital (Sequoia Chairman Michael Moritz, an early investor in Google, PayPal and LinkedIn, sits on Klarna’s board).

So why is it that Sweden is producing a disproportionate number of large Internet companies? The Swedish government started rolling out broadband in the 1990s and many people have access to very-high-speed networks. The ability to do speedy downloads, coupled with a government PC-lending program, which put computers in the hands of the masses, helped make Swedes natural early adopters of new technology. That makes it an ideal test market, but its small size means that companies know they have to go global from day one. And they are very good at designing good products. Sweden’s design heritage encourages people to “simplify and make it easy to use,” says Northzone’s Pärson. “This very high emphasis on usability has really made a difference for quite a few of these companies, including Spotify.”

Sweden is also, of course, the headquarters of global telecom gear maker Ericsson, meaning a significant proportion of the work force is in tech, making it an important part of the economy.

Surprisingly, though, unlike in the UK or Ireland, where tech start-ups are considered local heroes and engines of the economy, the Swedish government largely ignores young tech companies, according to venture capitalists and entrepreneurs.

“The government is appallingly uninterested in tech,” says one venture capitalist. He recalls how U.S. President Barack Obama asked to meet Spotify’s Ek while on a visit to Sweden. “Nobody in the Swedish government had ever met with Daniel Ek so there was this level of confusion,” he says. “There is no contact between the government and the start-up community, They look at entrepreneurship as a way to raise taxes rather than a way to create jobs.”

De Geer agrees and says he believes it is a mistake. The Swedish government should do more to promote entrepreneurship, like the UK and Irish governments, he says. “Creating an optimal ecosystem to further entrepreneurship is increasingly important,” says de Geer.

But even without government support and tax and stock option regimes that are less friendly than those in the UK and Ireland, Sweden is managing to build more billion-dollar Internet companies than rival tech hub London.

“The difference with Stockholm and other hubs in Europe is a couple of things are needed to create a really successful hub — critical mass in access to talent, access to capital and access to market and constituents of the market,” says Northzone’s Pärson. “Stockholm over the last five to 10 years has reached critical mass in all of these dimensions.”

Berlin holds promise but the ecosystem is far more immature, say investors, who point out that the biggest young innovative Internet success to come out of Berlin — Soundcloud — was started by Swedes in Stockholm. As for the UK, its historical strength was in the hardware space, while Stockholm moved earlier to embrace the Internet paradigm. “Why haven’t we seen more large global companies come out of London in the Internet space?” asks Pärson. “You would expect more out of London given the size of their market.”

Today, “there are two hubs in Europe that you have to be presence in as a European investor — London and Stockholm,” says Fredrik Cassel, a general partner at Creandum, a venture capital firm that is active in the Nordics and which invests in seed, early- and later-stage companies with innovative technology and disruptive business models, such as iZettle.

The Swedish capital has developed into a not-to-be-missed hub for entrepreneurs and investors, says Cassel. “The ecosystem, the ambition, the best talent needed to build fast-growing companies. Everything is there in Stockholm.”

Seeding The Ecoystem

Chart Explaining How Ex-employees from TradeDoubler and Stardoll have either founded or are fueling the success of more than 12 other Stockholm-based start-ups

 

TradeDoubler

 

Jacob de Geer: Was the first employee at performance marketing firm TradeDoubler, where he played a major part in building one of the largest advertising networks in Europe. After leaving TradeDoubler in 2007, de Geer co-founded two companies: Ameibo, a “legal” movie sharing company of which he was also the CEO; and Tre Kronor Media, an award-winning communications agency. Both companies were acquired in 2010. Currently founding CEO of iZettle.com.

 

Martin Lorentzon: Was TradeDoubler’s co-founder; he is now the co-founder and chairman of music streaming service Spotify.

 

David Mühle: Was Account Director at TradeDoubler. Now Head of Nordic Sales at Videoplaza, a video advertising management company.

 

Jonas Flodh: Was Vice President, Products and Technology at TradeDoubler; now now Chief Product Officer, VP Product at Videoplaza.

 

Peter Sterky: Was TradeDoubler’s CFO; now COO at Spotify.

 

 

Stardoll

 

Daniel Ek: Was Chief Technology Officer at Stardoll, after founding Advertigo and selling it to TradeDoubler. Founder of Spotify.

 

Fredrik Nylander: Was Stardoll CTO. Went on to serve as EVP of engineering at Tumblr. Now CTO at Oscar Insurance, a new kind of insurance provider, in New York.

 

Andreas Ehn: Stardoll engineering manager; went on to become CTO at Spotify, then co-founder, CTO and board member of Wrapp.

 

Birk Nilsson: Was Technical Lead, Social Games at Stardoll; now engineer & Co-Founder at Tictail.

 

Henrik Torstensson: Was SVP Strategy at Stardoll; then Head of Premium Sales and other roles at Spotify. Now CEO of ShapeUp Club.

 

Marcus Gners: Was VP Business Development at Stardoll; now Deputy CEO of ShapeUp Club.

 

Anders Hallin: Was Stardoll’s Director, Business Development (previously was Head of Skype for Business and other roles). Went on to co-found Duego, Saltside Technologies, and Bokavård.se.

 

Johannes Schildt: Was Product Manager, Social Games at Stardoll. Founder of Tieday Group; Boxerfy.com; and White Eye AB.

 

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