Oh Private Money, Where Art Thou?

    Editorial note: This is a guest post by Jaakko Salminen. More information on him towards the end of the post.

    One of the generally accepted wisdoms of the Finnish startup and growth company environment is shortage of private money. Startups run to Tekes for funding supposedly due to lack of available private early investments, and growth companies get sold very early when there is no VC money available. Easily available public funding is often cited as the dragon eating away any lucrative investment opportunities, and the vicious circle is ready.

    Or is private money simply being directed elsewhere? In fact some very interesting sources for additional private money could be made available, if we take a forward-looking attitude.

    By far the biggest investors in Finland are the pension funds. With their €140 B in combined investments they wield a mighty sword. These investments are by definition very risk-averse, concentrating mostly on instruments such as government bonds. Targeted yield is only 4%, and even that is now being lowered. These funds have made some investments in VC funds in early 2000s, but are now reluctant to make new investments. This is partly due to their bad experiences the previous time round, and partly due to the fact that a typical 5-15 M€ investment in a new VC fund is too small a figure to be interesting to them.

    By definition, the current pension funds only cover less than a third of the actual pensions. Those still working and paying their pension fees are covering the rest. It is very natural that these funds should be managed with caution in order not to risk future pensions. On the other hand, pension funds need as many people working as possible to keep the payments flowing in.

    This in turn means that they have a natural incentive to foster growth and employment. Since the growth companies create a lion’s share of new job opportunities, pension funds would do themselves a favor by investing in them. Also, the few millions that would make a big difference for growth companies amount to little more than rounding errors to pension funds.

    There are also other non-obvious sources for private money. Trust funds would be more interested in investing in VC funds, if their gains would be taxed as capital gains rather that income, as Finnish VC Association points out. Private individuals with money to invest would be more interested in startups and growth companies, if there were actual incentives for it.

    Many other EU countries have schemes in place to encourage private investments, and the countries with tax incentives have also substantial angel investment volumes, as European Business Angels’ Network has noted. UK in particular has some interesting schemes.

    Of course, we have had incentives designed to steer private investments for many years, and they have worked beautifully. Due to tax deductions for house mortgage interests, most Finns have their money tied to their homes. It would be nice to see at least some of this money invested in growth companies or the struggling Helsinki Stock Exchange. As usual, it’s a question of political motivation and courage to invest in future growth.

    Jaakko Salminen
    Jaakko Salminen is an entrepreneur, angel investor and advisor. His career so far includes Finland’s software sector development, partnerships and management in software companies with succesful exits, and international responsibilities in global IT corporations.

    Image by Mark Coggins