How Startup Clusters Emerge

Other regions are further, Stockholm for example. At first glance, Sweden and Switzerland have a few things in common: the population is of similar size, the infrastructure is well developed, both countries produced well-known entrepreneurs in the early days and both countries are often confused with each other. Although Sweden has produced a similar number of start-ups as Switzerland, it has 15 unicorns, three times as many with billion-dollar valuations. What are the reasons why so many innovative, successful start-ups are emerging in Stockholm?

From generation to generation

In Sweden, Ericsson developed into one of the leading mobile phone companies in the 1990s. Some of their well-trained and motivated employees wanted to found their own start-up sooner or later. The real spark for the startup ecosystem in Sweden was Skype. Skype was, among other things, developed by former Tele2 manager Niklas Zennström, based on the peer-to-peer principle of Kazaa, which he also founded. After Skype was sold to eBay for USD 2.5 billion in 2005, thanks to employee shares, numerous Skype managers suddenly had a lot of money, which they reinvested in new start-ups in Stockholm.

Zennström, for example, founded Atomico, now one of Europe's top VCs. This is how a second generation of successful start-ups emerged with Spotify, King, Klarna and others. Their founders in turn invested in the third generation with NaturalCycles, Kry, etc. and they are already supporting the next start-up generations.

Courage for mediocrity

But there are more reasons for the success of the Swedish cluster than just the Skype initial spark. In addition to good universities and a long engineering tradition, the courage to mediocrity is strongly anchored in Swedish culture: in Swedish there is even a word for it, “lagom”. Unlike us in Switzerland with our penchant for perfection, Swedish start-ups also like to release half-finished products. In this way, feedback can be collected much earlier and the product can be improved based on it. The Swedes had already internalized what the lean startup framework had only introduced into entrepreneurship around ten years ago - a major advantage for young companies.

Strong digital skills and very good English skills

In the 1990s, the Swedish government subsidized desktop PCs for private households. Of course, the younger generation used these PCs to explore the Internet and play games. Young people in Sweden developed strong digital skills much earlier than in other countries. Many of them did not want to be satisfied with the role of consumer. They began to develop applications and games themselves. Quite a few of them later founded successful digital companies.

Communication in the mostly very international start-ups and also with customers is usually in English. The very good English skills of the Swedish population have certainly played their part in ensuring that Swedish start-ups scale internationally more quickly and successfully.

Lean and digital administration

The Skype initial spark ignited the start-up fire not only in Sweden, but throughout the entire region. In the nearby but significantly cheaper Estonian capital Tallinn - where programmers developed the code for Skype - there are particularly good conditions. After the collapse of the Soviet Union, Estonia decided to build a slim state with just 1.3 million inhabitants. As an alternative to the excessive bureaucracy of communism, the country relied on a transparent and, above all, digital state from the start. All administrative procedures have long been able to be completed online, such as land register entries or company formations. The state also provides a platform for secure identification. This can be used to quickly open bank accounts or to verify eCommerce transactions.

Perfect conditions for online start-ups. This is also reflected in the statistics: With 865 start-ups, nowhere are there more start-ups per 1 million inhabitants than in Estonia. A strong ecosystem has also developed here. The “Estonian Startup Mafia” is now notorious: a syndicate of extremely successful business angels who regularly produce top start-ups such as the ride-sharing platform Bolt, the CRM Pipedrive or the peer-to-peer money transfer platform Wise (formerly TransferWise).

Switzerland is on the right track

In Switzerland, the climate for start-ups has improved significantly in recent years. Thanks, among other things, to initiatives such as “Digital Switzerland” or business angel associations such as SICTICT, the scene has become significantly more professional. However, Switzerland is still a long way from having a high school diploma like in Stockholm or Tallinn. One of the reasons for this is that there has not yet been an exit on the scale of Skype in Switzerland. The financing rounds in Swiss start-ups tend to be smaller than those abroad, and the valuations are lower. Many entrepreneurs invest as business angels after selling their start-up - but often in foreign start-ups. The VCs based here also rarely invest in local start-ups, but mainly use the tax advantages for their international activities.

As soon as Switzerland celebrates its multi-billion dollar exit, a strong “Swiss Mafia” will emerge - and then the startup nation of Switzerland will really get going.

This article first appeared in Yea(h)rbook 2022 of the Institute for Digital Business at the HWZ Zurich University of Applied Sciences.