In its own way, Stockholm is like Silicon Valley. At the incubator SUP46, located on the fifth floor of a nondescript office building, all the ingredients are there: colourful walls, a large kitchen in which everyone can grab coffee and cushy sofas with young workers pounding away on their laptops. And of course a ping-pong table and foosball. This buzzing workspace, which opened in late 2013 and is now home to about 50 young tech companies, has quickly grown into the nerve centre for Sweden’s start-ups.

SUP46 members include FishBrain, a social network service for fishing buffs, with an app that has been downloaded more than a million times. Another resident company, Instabridge, has attracted attention through an app that finds the free Wi-Fi networks available in a user’s vicinity, anywhere in the world. “The start-up ecosystem used to be fragmented,” says Jessica Stark, director of SUP46. “We were driven by the need to create a real community.”

The Swedish start-up scene has shown incredible energy over the past few years as Stockholm became one of the hottest tech hubs on the planet. Five companies exemplify this surge: Spotify, Skype, Mojang, King and Klarna (see box). These “unicorns” the name given to start-ups worth more than a billion dollars – have all come out of this little Nordic country and inspired a new generation of entrepreneurs who now dream of achieving worldwide success.

Subsidised PCs

This phenomenon is no accident. Sweden has a long tradition of innovation, fuelled by a quality education system with strong engineering programmes. The three-point safety belt, milk cartons and the build-it-yourself furniture that made Ikea famous are just a few examples. “Innovation is a mind-set,” says Thomas Brenier, a Scandinavian market specialist at Lazard Frères Gestion. “It’s vital for a small country that has always had to set itself apart from international competition.” The OECD reports that 3.3% of Sweden’s GDP goes to research and development, vs. an average of 2.3% for all member countries.

Another important element is that, in an economy that relies heavily on exports, “thinking globally” is in Sweden’s DNA, and start-ups have integrated that remarkably well. “Sweden’s social model also plays an important role,” says Stark. “The entrepreneurs starting out know they’ll never wind up on the street. They can take risks and dare to be creative.” Swedes also have a conspicuous penchant for new technology. More than 90% of households have Internet access, and the number of mobile broadband Internet subscriptions is 115 per 100 inhabitants – well ahead of OECD averages. “There’s a historical reason for that,” says Marta Sjögren of Northzone, a local venture-capital firm. “In the 1990s, the government subsidised home PC purchases so that all households could be equipped with a computer. The young people now creating start-ups grew up with that culture.” In the 2000s, the city of Stockholm also funded an ambitious fibre-optic network. Furthermore, Swedes’ love of technology and their early-adopter mindset have turned the country into a laboratory where major international companies eagerly test their products.

The New El Dorado?

With world-famous tech companies, efficient infrastructure and an innovation-friendly ecosystem, could Sweden be the new El Dorado for European start-ups? Even if Stockholm is undeniably one of the most dynamic tech clusters, it still must compete with London and Berlin. Some Swedish start-ups have followed the example of online music platform SoundCloud, which relocated to Berlin in 2007 to cut costs. The lack of housing and astronomical rents, not to mention numerous tax and legislative obstacles, are blamed.

A group of techies who believe that government policy is skewed toward large corporations launched the “Swedish Start-up Manifesto”, which aims to make Sweden the “best country in the world” for young companies to grow. The government has heard the wake-up call, says SUP46’s Stark. “The reaction has been positive. Politicians have begun to listen and understand the importance of start-ups for the country’s future.”

“Money is pouring in at record-breaking levels”

Sabina Wizander, investment manager at Creandum – a Stockholm-based private equity firm – discusses opportunities for investors.

Technologist: How are investors reacting to the boom in Swedish start-ups?

Sabina Wizander: The market has entered a mature phase, and money is pouring in at record-breaking levels. The funding comes from a wide variety of sources. The founders and early employees of successful companies started five or 10 years ago, like Spotify, King and Klarna, are now investing in the ecosystem. In addition to these “super-entrepreneurs”, more business angels are coming on board, and there are other investors now that weren’t previously drawn to new technology.

T. Are you worried about a bubble?

S.W. With all that fervour, there is some talk of a bubble. However, we believe that most Scandinavian companies with high valuations are stable, generating solid revenues – signs of a flourishing market rather than a bubble.

T. Is the Swedish market attracting investors from other countries?

S.W. Foreign investors, mostly from the UK and Germany, are showing huge interest in Scandinavian start-ups, but they get involved in the later stages of the start-up life cycle. Most don’t yet have offices in Sweden. It’s hard to pick out the promising companies at an early development stage when you come only for short trips.

The five unicorns

Spotify

The world’s top music-streaming service was launched in 2008. Today it has 75 million users spanning 58 countries. In June 2015, Spotify raised $526 million, bringing its valuation to $8.53 billion.

Mojang

The video-game developer founded in 2009 is behind Minecraft, one of the world’s best-selling games. Microsoft bought Mojang for $2.5 billion.

Skype

Swedish entrepreneur Niklas Zennström co-founded the online voice call and video chat service with Estonian programmer Jaan Tallinn. After first being snatched up by eBay, Skype was eventually acquired by Microsoft in 2011 for $8.5 billion. Klarna
Three students teamed up in Stockholm in 2005 to start the online payment service now worth $2.25 billion. With 35 million users, Klarna differentiates itself from PayPal and similar services by debiting payments from a buyer’s account only after the goods have been delivered.

King

Founded in 2003, this video-game company has created more than 200 games, including Candy Crush Saga, Farm Heroes Saga and Pet Rescue Saga. King now has 475 million unique monthly users. The firm is listed on the New York Stock Exchange with a market capitalisation of $5.5 billion.