By Marjo Ilmari
Innovative scale-up companies are vital drivers for productivity and sustainable growth, both on a national and global level, says Marjo Ilmari, Senior Director, Accounts & Industry, ICT at Business Finland, the Finnish government organisation for innovation funding and trade, travel and investment promotion.
Just before the coronavirus pandemic threw the global economy into turmoil, there was a lively debate in Finland about the need to boost the productivity and competitiveness of the economy. Research published by Matti Pohjola, Professor Emeritus in Economics at Aalto University, showed that Finland was suffering from a long-term decline of labour productivity in industry and had invested less in product development and digital solutions than its competitors.
Scale-up Statistics in the Nordics 2017, a report published in October 2019 by Nordic Innovation, also provided food for thought to economic policymakers in Finland and internationally. The report offered a fascinating insight into the contribution of fast-growing scale-up companies to employment and wealth creation in Denmark, Finland, Iceland, Norway, and Sweden in 2014-2017. According to the report, the Nordic governments have increasingly focused on enabling conditions for the scaling up of enterprises as a lever to boost productivity growth and competitiveness, which had also motivated the report’s mission to deliver more comprehensive statistics and analysis on scale-ups and their impact.
The depth of the harmonised data in the report and its approach were something new. Previously, the definition and analysis of scale-ups have mainly focused on their employment impact, no doubt reflecting governments’ priorities about creating new jobs and taxpayers. In the report, a scale-up is defined as a company with 10 or more employees and an annual turnover of EUR 2 million or more to start with, which successfully grows the number of its employees and/or turnover by more than 20% annually over a three-year period. Three types of scale-up enterprises are analysed in the report:
- Scale-ups by employment growth only (Employment Scale-ups)
- Scale-ups by turnover and employment growth (Turnover and Employment Scale-ups)
- Scale-ups by turnover growth only (Turnover Scale-ups)
The report’s findings show the growing significance of the scale-ups in the regional and national economies. In the period 2014-2017, a total of 6350 scale-ups were created in the Nordics, and they made a significant contribution to the region’s economy. For example, in the manufacturing and wholesale sectors, the Nordic scale-ups accounted for EUR 17.4 billion of goods in 2017, up from EUR 9.7 billion EUR in 2014.
However, only the Turnover Scale-ups experienced a positive development in their value added creation per employee, with an increase of 62% in the period 2014-2017. In fact, the Turnover Scale-ups generated an average of EUR 145,000 per employee in gross added value, which was 50% more per employee than the Employment Scale-ups.
Driving innovation and productivity growth
From Finland’s perspective, the report’s findings and Pohjola’s research represented an urgent call to action. Although Finland’s total of 1085 scale-ups in 2014-2017 was in line with the size of its national economy relative to the other Nordics, the statistics also showed that Finland lagged in last place in terms of its share of Turnover Scale-ups. The revelation that the Turnover Scale-ups create a staggering 50% more added value per employee than the Employment Scale-ups has raised awareness of their essential role as drivers for innovation and productivity growth in the future.
As the most productive businesses in the economy, the Turnover Scale-ups are also especially attractive to venture capital. A scalable business model, where the company’s turnover consistently grows faster than its cost structure while using as few human resources as possible, promises high returns to the investor. Business Finland’s latest statistics are more encouraging in this respect and show that in 2020 Finnish growth companies raised about EUR 1 billion in investments, which was a new record. The average investment also increased from around EUR 4 million to over EUR 6 million.
Growth companies can lead the rebound
It is crucial for Finland and all other countries that their scale-up companies survive through the current crisis. At Business Finland, we can already see that some young Finnish growth companies are playing an important role in the recovery from the recession. These companies have continued to grow even during the pandemic, increasing their sales by an average of 5% and their exports by 12%. This contrasts sharply with the general performance of Finnish export companies (about 50,000 in all), whose sales have fallen by an average of 9% and exports by 12%.
It is these growth companies that will also create many new jobs in the future. There is evidence that scale-up companies help create high-quality jobs with more satisfied employees and have a dynamic effect on local ecosystems, acting as role models and inspiring other companies. Their impact is multiplied when several scale-ups are clustered together, attracting and developing talent and building networks with the local ecosystem.
Some markets and industries will be transformed permanently by the time the pandemic is brought under control. The companies that have the vision and capacity to develop innovative solutions, services and products to meet the changing needs will be the ones that can succeed in the competition. Many of the most successful scale-ups operate in digital business sectors, and their significance is set to increase further in the coming years.
The smart way to recover and rebound from the recession is to support business renewal in the face of the global economy’s structural changes. The EU’s Green Deal can benefit from and accelerate the scale-ups’ dynamism. The aim is to mitigate the pandemic’s economic and social impact and to kick-start our economies towards a more sustainable and resilient future by grasping the opportunities of the green and digital transition.
According to Pohjola, innovation is the critical factor for sustainable economic growth. On a policy level, he calls for more investment in education and new technologies, policies to promote deregulation and more competition, and all possible measures that support the creation, introduction and spread of new ideas and the transfer of production resources from declining to thriving industries.
Scale-ups’ strengths and strategies for internationalisation
Each scale-up forges its unique path in terms of practical business strategies for fast growth and internationalisation. The qualities that often distinguish the scale-ups from other businesses include a ‘born global’ mindset that drives their vision and high ambition level for growth and internationalisation. For example, Finland’s domestic market is relatively small, so our innovative startups think internationally from day one. Their talented teams often include people from diverse backgrounds, which brings more credibility with international customers and the benefits of broader networks. For example, having an international expert on the company’s board or advisory board can open many new doors.
Other key strengths include an unfaltering customer focus combined with the adaptability, scalability and replicability of the company’s solution or service. The fastest-growing Finnish companies have based their business on solving the problems of the world’s leading companies. When a scale-up can bring unique value and solve an acute problem for a global leader, the solution can later be scaled to other companies, segments and markets. A successful company also understands that each new market requires adaptation and change. It chooses the target group where the value proposition and competitive advantage is most significant in that specific market while taking the competitive situation into account.
Fast growth is often also rooted in a truly data-driven approach and analysis where the company’s solution is continually developed and directed based on results and market feedback. Marketing performance is closely monitored based on metrics such as customer acquisition costs, customer value and churn.
Turning great ideas into business
Early-stage public innovation funding has been one of the most important enablers for many Finnish scale-ups, making it possible to share the risk related to their R&D activities. The exponential growth of Finland’s game industry from its humble beginnings is a powerful example of what is possible in this regard. Business Finland supported almost all the Finnish game startups with innovation funding when they worked on their first games 10-15 years ago. Today, the most successful companies like Supercell and their owners are some of Finland’s biggest corporate and personal taxpayers, business angels, startup investors and benefactors to society. In fact, the Finnish game industry contributed the most corporation tax to the government coffers from all the economic sectors in 2017 – an incredible achievement for this innovative group of companies whose line of business was not even on the radar of more traditional investors and industrialists for many years.
Today Business Finland is looking for the next global success stories and helping to make them happen. We want to make Finland the best possible location for starting and scaling up all kinds of businesses, from quantum computing to new types of food production and circular economy solutions – or something completely different. Business Finland is also actively attracting entrepreneurs from countries outside the European Union through the Finnish Startup Permit, making it possible for international growth entrepreneurs to build a company in Finland and become part of Finland’s vibrant startup ecosystem.
Higher productivity can also enable higher aims
The demand for new ideas, technologies and approaches has never been greater. Beyond the immediate challenge of protecting people’s health and livelihoods, we need solutions to combat climate change, for more sustainable business, production and consumption, and smarter services of all kinds.
According to Pohjola, productivity is the simplest and most useful indicator for a national economy’s success and the foundation for economic growth. Higher labour productivity is the result of technological progress, innovation and structural renewal of the economy.
Scale-ups are at the forefront of creating new services and more efficient ways of doing things. They are already doing good business in a fast-changing world. With more support, scale-ups can also become significant agents of change in the broader transformation of our economies, societies and the planet as a whole.
About the Author
Mrs. Marjo Ilmari, Senior Director at Business Finland is the leader for ICT Industry and Account Management. Business Finland is the Finnish government organisation for innovation funding and trade, travel and investment promotion. Marjo is also in charge of the ownership steering of Business Finland Venture Capital Oy, which invests in early stage venture capital funds. Before joining Business Finland, Marjo pursued a career in management consulting, M&A advisory and business development in global telecom industry. She holds a Master’s degree from the Aalto University School of Business.
- Technology, investments, structural change and productivity – Finland in international comparison (in Finnish), a report by professor Matti Pohjola, 4.2.2020.
- Productivity improvement should play a central role in social policy, a blog post in English by Seppo Kangaspunta, Ministerial Adviser, Ministry of Economic Affairs and Employment, 14.2.2020
- Scale-ups in the Nordics, a report published by Nordic Innovation