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Pekka Soini, Director General of Tekes

Government Funding Encourages Companies to Take Risks

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Government Funding Encourages Companies to Take Risks

Source:CW

A self-described risk taker whose philosophy rests on encouraging imagination through play might seem more like PIXAR or Tesla than a government agency. But Tekes, Finland’s state funding agency, is different.

Government Funding Encourages Companies to Take Risks

By Liang-rong Chen
From CommonWealth Magazine (vol. 614 )

Finland is the world’s most innovation-focused country. Tekes, the Finnish Funding Agency for Technology and Innovation, with a staff of 400, plays a central role in circulating the blood of innovation through every capillary of the industrial ecosphere.

As recounted in the book 100 Social Innovations from Finland, Tekes is the crystallization of business and government leaders’ recognition of the vital importance of public-private sector cooperation to formulate research and development approaches. With this in mind, the Finnish government established Tekes in 1983 to act as an intermediary between research and development agencies, enterprises and universities to help synchronize the pace of innovation.

Finns are especially proud of Tekes’ instrumental role in the 1980s and 90s in getting universities and research institutes on board in digital and telecommunications technology development. These efforts were key to establishing the impressive technological and human resource foundation behind the rise of Finnish company Nokia.

At present Tekes has made supporting new startup companies its chief mission. The institution’s 2015 annual report relates that it currently helps fund nearly 2,000 projects with an annual budget of around 575 million euros.

Nine of Finland’s 10 fastest-growing high-tech companies have benefited from Tekes funding or loans. The institution proudly claims to have funded 65 percent of Finland’s innovation.

Tekes functions similarly to a large venture capital firm, drawing members from private enterprise, many boasting extensive professional experience. Among them, Tekes Director General Pekka Soini, a Nokia veteran, was personally recruited in 2012 by the then Finnish Minister of Economy and Employment to take the helm of Finland’s “heart of innovation.”

Following is our exclusive interview with Mr. Soini, edited for clarity and brevity.


CommonWealth: In a few words, how would you describe Tekes’s contribution to the startup boom in Finland?

Soini: We have enabled even riskier ideas to go forward. We have encouraged risk taking, and that is probably the most important thing in the startup scene. This scene has not existed for long - only maybe the last 10 years. These days if you went to a university and asked students if they would like to start their own company after graduation, probably half of them would raise their hands. But 10 years ago you would only see a few raised hands. So it has changed, and I would say that this is because it is a global phenomenon, as digitization has enabled startups to become global almost from day one.

The gaming company Supercell is a good example. Good examples have helped young people to see how things can be done and how the Internet can be used to grow a business. That has enabled a lot of people to think differently, and globalization has definitely enabled that because people are more capable of doing things via the Internet, such as skills like coding.

Letting imaginations flow and grow

But imagination is also critical, and very often when we compare education in different countries, oftentimes we see how Finland takes a looser approach, allowing a lot of room for playing and imagination, rather than requiring a lot of homework in the early stages of schooling. We encourage a lot of playing, which allows people’s imaginations to grow. Finland’s position in the gaming industry probably has something to do with this.

Over the last 15 or 20 years, a kind of game culture has been created, and our role has been significant in enabling the gaming industry to develop and helping a number of companies. We have invested around 70 million euros in this area over the last 10 years, and Supercell alone has returned that investment in their corporate taxes. In fact, Supercell is the biggest taxpayer in Helsinki at the moment. So all it takes is one big success story to pay back everything we have invested as a government and as a country. And we can look forward to further success stories in the gaming industry in the future, as there are now hundreds of companies, and the skills from this sector, known as “gamification,” are changing companies, education, and healthcare.

CW: How does Tekes help foster innovative companies?

Soini: Our chief role is sharing risk. So if a company has significant risk and there are no private investors around, with an entity like Supercell with some money of its own, we can come in and help share the risk. That helps a company like Supercell to get moving forward, and demonstrate to private investors that it is in good shape. So we are an early funding agency that gets involved when the risks are highest, and our involvement in turn is a stamp of approval that demonstrates to private investors that a venture is worth funding.

CW: In the East Asian model, the government has great power to invest a lot of money and gamble big on various flagship programs like LCDs, 3G or 4G. But Tekes seems to take a different approach.

You invest 50%, I’ll invest 50%

Soini: We do have certain large-scale programs, such as 5G, for which we reserve funding. However, this is done with the expectation that other companies will join various research programs under that theme. They contribute 50 percent, and we match that 50 percent in projects under that program. In this way we stimulate certain areas, like 5G, the Internet of Things, digital health, biotechnology, and clean technology. At the same time, half of our funding is bottom-up, for whatever kinds of ideas are proposed to us. We are most interested in maintaining the freedom to innovate, since we cannot always say which idea, model or company will fly.

In the very early stages, a new company may use various funding mechanisms or family money, and as long as they provide 10,000 to 15,000 euros, we can give them a small sum like 50,000 euros at the beginning for them to pilot the project before moving on to the R&D phase. When that happens, we expect private investors to start getting on board. In the case of 5G, there were around 20 companies that approached us and said we need a Tekes program, because they believed that 5G would be very important to them for the next phase.

In some other areas, we trigger programs in areas we anticipate having a need in the future, even though no companies exist yet. Electric cars is one such example where we got involved five years ago and established a program to get various companies and researchers to come together. And digitalization, which is a big part of what we do, occupies about one-half of our project funding at the moment.

Digital health is another interesting area with a lot of demand globally and a lot of potential, where digitalization and health knowledge come together. We see a lot of the Nokia spinoffs, or startups that came after Nokia, playing an important role fostering innovation here.

CW: How would you compare Tekes to the models followed by agencies like METI (Ministry of Economy, Trade and Industry) of Japan or DARPA (Defense Advanced Research Projects Agency) of the US?

Soini: Our model is unique because we do not fund everything in the same way. Not to say that DARPA is funding everything, but they undertake very targeted, almost challenge-based missions, like creating a robot for disaster recovery. We also take a challenge-based approach in some cases, but no single agency is exactly the same.

A Spillover Effect

Perhaps the greatest difference between us and those agencies is that we engage companies in dialogue before we fund them. And we seek to understand their growth vision and what kind of R&D needs exist before we go ahead with funding. You could call this their “growth vision,” much like a venture capital firm’s approach. However, as we are not a VC firm, we seek to help them get to the next level, as our funding model uses grants and loans, rather than Tekes taking company shares. We have separate approaches for startups and SMEs (small- to medium-size enterprises). For SMEs and large companies, we have an integrated approach, where we want to see how they network with universities, research institutes, and SMEs. When we fund large companies, we also require collaboration with universities and SMEs. Therefore, what we seek is a spillover effect. If we are funding universities or research institutes, we require tie-in collaboration with companies.

CW: You employ VC-level talent at Tekes. How do you attract such expensive talent into this official network?

Soini: We are not a typical bureaucratic agency. We have always collaborated very closely with companies, and we teach our people how to deal with customers. They expect companies to know how to grow with our funding, and if they don’t have that sparkle and growth-vision, we do not fund them. While our salaries are not at the VC level, let’s say they are pretty close to the private sector, or a little bit like consultants. We do not attract people to come to Tekes with salaries, but as a place that gives one a 360-degree view of industries and companies in Finland - and they can help these companies to grow. So we seek people with a vision that goes beyond their salary.

One important element is that we are a very customer-oriented organization…So we dialogue with the companies before they get funded, and get to know them before we go ahead and fund them. In terms of transformation, such as when Nokia started to lay people off, we figured out quickly what kind of tools we had to create something new. That means that Tekes must move very rapidly to find new mechanisms, new funding tools, and new services. For example, in Nokia’s case we had a program known as the Innovation Mill that enabled people leaving Nokia to get established very quickly. And now through that and similar programs, hundreds of companies have been created in Helsinki and other cities.

Another issue is that we would like to foresee what next trends are emerging, so we can create programs around these new trends and invite different companies as well as research institutions, universities, and different actors to get together, fund each other, exchange ideas, and possibly form new companies.

A good example is the gaming industry, with which we’ve been involved in many ways. Supercell, for instance, was first funded by Tekes.

However, we also do bottom-up funding for anyone with a business idea that approaches us. So we are not backing just a set type of company, but any company from high tech to services, or any business model, as innovation can come in any given area. When we see opportunities, we are wide open to them.

Transcribed and edited by David Toman.

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