In the past few months, we started to notice a trend in which more and more investors are focusing on either early-stage startups or super-early stage ones.
First calling was the news from Icebreaker VC, announcing that the fund will focus on early-stage startups and “pre-founders”, people who have an extensive experience but only now start tapping into the startup world. Then, there were Wave Ventures, a 1.2M euro VC fund run completely by students which offered pre-seed investments for startups in the Nordics. We also have a newly established investment and consulting company called Start Here, which aims to become a “godfather” for young founders to help them through the first steps of their entrepreneurial journey. Last but definitely not least, Neil over at The Nordic Web, announced a pre-seed angel investment fund together with some of the best entrepreneurs from the region such as Johan Brand (Kahoot!) and Linda Liukus (Hello Ruby).
Our question is – why is this happening and is this a good sign for the region?The Rise Of The Pre-Seed Investment Stage
With new early-stage funds being announced almost monthly – we could not help but ask the question – why? At first, we thought that this simply means positive developments in the startup community. For instance, it could be due to a large and increasing supply of good early stage startups. However, we have then realized that this might actually be a symptom of a problem.
What if this development is not related to the fact that there are many high-quality startups in the region, but to the fact that the investment market has become too competitive? Just a number of years ago – VC’s tried to differentiate themselves based on industry knowledge, “smart money” and specific focus. Then, they started adding extra frills, such as founder meet-ups, technical help, and summer camps.
All the while, there is indeed a gap in both the later funding stage and the super-early funding stage. The later funding rounds are hard to come-by in the Nordic region both due to the size of the region but also due to the fact that it is simply so much harder to raise a 100M+ investment fund focused specifically on the Nordics/Baltics.
Combine that with the fact that the Seed/Series A funding stage, where companies are a “verified business with traction”, might simply be too full of established investors, which does not match with the quantity and quality of deal-flow at that stage.
The result could be that the only good space in the market for new funds is the super-early stage both because other investors do not go there and because it is significantly easier to raise a fund at that stage compared to a super-late stage. Result? The gap is filling in quickly.Salvation Or Symptom Of A Problem?
Where does this leave us? Well, with plenty of funding for the early-stage companies that can now be funded with little more than an idea at a rather favourable valuation. It also creates an incentive for a much larger amount of people to try their strengths at being an entrepreneur. Why?
This removes a lot of the risks that people have with starting companies. If you can now get a salary that you can survive on from day one, then why not give it a try? After all, you are taking a shot at millions without too much of a downside as an entrepreneur (which technically makes your investor the true entrepreneur).
Which brings us to the question – is this a good thing or a sign of a problem?
The truth is, as with most things – it depends and it’s a double-edged sword for the community.
On the one hand – we might get less “real” businesses, as founders will not be risking anything and hence will not have the need to be as efficient, as those more hungry than them, which is something we discussed at greater length in this article. Perhaps a bigger problem could be that all the new entrepreneurs coming into the market, will think that the normal way to build a business starts with raising funding and not getting clients.
On the other hand – we will get more startups, more companies, more startup events and overall – more hype. Which might mean that simply put – the filtering will happen at a different stage. When before, we knew good companies from bad ones at the very beginning since they either made it or not. Now, we will only know once they achieve product-market fit and Series A stage.
Technically, the market could still correct itself, if these companies start failing, which would then force investors and others to start looking for real businesses as opposed to startups. Personally, I would love to see a much larger amount of highly technical, deep-tech companies combined with real-businesses to come about from our region.The Nordics Are Perfect For Entrepreneurship
In all of this, there might lie the holy grail. One great thing about all of these new funds is that they focus on founders, and that – might be the solution for our region and perhaps the rest of the world.
We are known for our pragmatism, good design, efficiency, good work-life balance. If any region could re-invigorate a belief in true entrepreneurship, in real-businesses as opposed to over-hyped and over-valued startups, in a healthy way to work with other people – then we are it.
Especially, if you think about the fact that we need to get ready for a new world – where work will not be the same anymore. Where automation, robotics and distributed solutions will start changing not only how we work – but how we live and what we value.
So in the end – my hope is that all of these new funds will use the hype in order to find and grow true entrepreneurs and that they will position the Nordics as the capital of true entrepreneurship. That’s certainly our goal at ArcticStartup. Over and out.