The future of the Norwegian startup ecosystem

‘We’ve had it too good’

While richly endowed with natural resources it is often forgotten that, prior to the discovery of the Ekofisk field in 1969, Norway was a largely maritime nation that was never associated with oil and gas production.

However, since then the rapid expansion of Norwegian oil and gas has allowed the small country of 5.3 million to build up a £770bn sovereign wealth fund.

While this has created wealth and security for the population, many of the founders and investors attending Oslo’s fourth annual Tech Excursion, hosted by venture capital firms Concentric and SNÖ, were of the opinion that the economy’s over-reliance on Norway’s traditional energy and fishing sectors had stifled innovation.

“Norway got lazy with oil and fish and gas, so we never pushed for technology, whereas Sweden is not even remotely the same – they’ve had to do something else, and a natural tendency was to start companies,” says Mikkelsen, adding that the abundance of secure, high-paying jobs in the oil and gas industry means there is little incentive to set up new companies.

Mikkelsen says that Norway’s extensive social security system has been both a blessing and a curse: “Maybe having it too good, in a way, has prevented us from really trying something new and different.

“Obviously, with oil and gas and how well that has gone for so many years, it has limited how much people are going to be focusing on technology.”

However, things have started to change, with many Norwegian graduates now preferring to work for startups rather than big corporates.

“Working at a startup is so much more popular and really competes when graduates are choosing a career, that’s a really important part of the ecosystem,” says Rikke Eckhoff Høvding, CEO of The Norwegian Venture Capital and Private Equity Association (NVCA).

Despite both interest and investment in the startup ecosystem growing massively in the past few years, there are still issues with attracting enough capital to scale the new companies.

Will Oslo be the next European ‘tech hub’?

“If you look back 10 years ago, there was a complete drought of capital in the very early stages,” says Høvding. “If you don’t finance ideas at an early stage, you’re not going to get good companies at a later stage. Our association, long before I started, lobbied to get more capital into that very early stage.”

In response, the government launched a number of seed funds where 50% of the capital was provided by the government itself and 50% by private investors. The Norwegian government has generally been proactive in supporting innovation and entrepreneurship, highlighted by initiatives such as Innovation Norway and its support for investment companies such as Investinor.

“Our problem now is the venture stage, the ‘later-early’ stage,” says Høvding. “We don’t have the capital to finance accelerated growth, and it really costs money to grow a company internationally.”

However, Daniel Korski, CEO and co-founder of GovTech venture firm Public, warns against Oslo attempting to emulate Europe’s already-existing tech hubs.

“Even in the next 10 years as the UK disassociates itself from the EU, London will remain ‘the’ capital, largely because the pool of funding is so great and because you can build a technology across any vertical,” he says.

According to Korski, the question then becomes what can Oslo do to become a key node in a much larger European ecosystem, and how, as part of that system, does it become known for things that are not accessible elsewhere?

One path highlighted is for Norway to become a test bed for new technology, which can then be exported to the rest of the globe. The idea is essentially for Norway to become an exporter of innovation.

“You can’t build your business on five million people, you’ve got to build a product that can be exported into other countries,” says Kjartan Rist, one of Concentric’s founding partners. “That is a huge opportunity because it is trialed and tested here and then you take it to new markets.”

Rist used the example of using Norway to test the transportation of blood over long distances – Oslo to the top of Norway is the same distance as Oslo to Rome – and then exporting to places where the technology is needed but difficult to test, such as the Democratic Republic of Congo.

“You want to build a local ecosystem, but if you start sending everyone out of the country, then it will never get those roots,” says Rist.

“At the same time, you have to address a larger market than Norway, meaning you have to leave Norway. You have to create the best of both worlds – you’ve got to have a country such as Norway that encourages companies to stay, but also encourages them to look abroad to sell.”

Høvding agrees on the need to locally anchor the startup ecosystem, suggesting that more local venture investors could help attract more capital, “someone for the international investors to partner up with, someone on the ground”.

She adds that more inter-Nordic collaboration could also help develop a locally rooted ecosystem. “So far the funds in Norway are too small, so maybe instead we need to build pan-Nordic funds, which will get a lot more international capital,” she says.

Remaining barriers for the ecosystem

Despite increased youth interest in startups following the collapse of interest in the energy sector, attracting enough human capital is as much of a problem as attracting enough economic capital, largely due to the tax system.

“If you give stocks to an employee, they’ll be taxed as soon as they get stocks in the future,” says Mikkelsen. “So if I give you a stock for 50K, when its realised, you will take 50% off that immediately, which screws up the whole system.”

This and other tax issues means there is little incentive to join and build a company as an ordinary employee. Founders, on the other hand, can pay nothing in tax if they re-invest the profit.

“[These tax issues] create a conflict in the sense that it’s better to have a US corp registered in Delaware that owns the Norwegian entity instead – it’s these sorts of things this incentivises, which is not good for creating a healthy, national startup scene,” says Mikkelsen.

Høvding went further, however, adding that Norway also needs to make it easier to travel and get work permits, as well as put in place attractive tax incentives for entrepreneurs similar to those in the UK.

Many were also of the opinion that the lack of Norwegian unicorns – private companies with valuations above $1bn – is also a barrier to the development of the startup ecosystem.

In 2018, a study from the National Bureau of Economic Research looked at 135 unicorns in the US, concluding that at least 65 of these were massively over-valued.

Although those interviewed agreed over-valuation was a problem that could potentially harm the wider ecosystem, due to impatient investors in search of massive exits not giving small companies time to grow and develop, many believed that – in the Norwegian context at least – a unicorn could spur on a massive expansion of the startup ecosystem.

“So unicorns are a cliché, but I think if you relate that back to Norway, it would be a seal of approval,” says Rist. “It creates a leading star, it is deemed as a success. People travel to Stockholm because Spotify is from Stockholm – Norway hasn’t had a Spotify.

“You have people who have been part of building Spotify, they’re now educated, they will now go out and build their own new companies in the tech space. They made some money so they can put their first money down themselves, so it creates liquidity, it creates reputation, it creates new entrepreneurs because they have become skilled from building a previous company,” he says.

This sentiment is shared by Mikkelsen, who adds: “I think the day [a unicorn] happens there will be a radical shift – so many people are involved in building a billion-dollar company, so the knowledge you get from that is invaluable.”

Mikkelsen concludes that a unicorn would therefore be the most effective thing that could happen to the Norwegian startup scene as, due to the capital, both economic and human, it would spread around.