I cornered Christian Motzfeldt at the 2008 annual Vaekstfonden meeting and he kindly accepted that we schedule an interview. I was later able to spend an hour with him talking about Danish entrepreneurial history, Vaekstfonden’s mission and what he looks for in an investment proposal. (May 2008)
“Entrepreneurship is deeply rooted in the Danes.”
– Christian Motzfeldt
Viking entrepreneurs, the genesis of Vækstfonden and how it functions
Alex Farcet (Q): There seems be a national obsession with innovation and ‘vækst’ (growth) in Denmark, why is that?
Christian Motzfeldt (A): I think that entrepreneurship is deeply rooted in the Danes. Although many believe that we have become a nation of salary earners, I still believe that basically we are a nation of entrepreneurs. Our forefathers were the Vikings who took on the most risky ventures of all, conquering the whole world with small boats. Our forefathers were a nation of fishermen and farmers – fishermen have always encountered very, very risky business, putting their lives on the line everyday. That’s who we are, we have a long tradition of being business men, buying, selling, we’ve done this trading for so many years.
There was a period where we became more like the continental Europeans, becoming more salary earners in large companies. But now the old spirit has woken up again.
(Q): What do you say to the criticism of Danish culture, janteloven and so on? The fact that you need a large ego to launch a big venture and that Danes are more concerned with equality than with promoting very successful people?
(A): Honestly, I don’t see it. There is an understanding of the importance of putting together a coherent society where we also take care of those who are less fortunate. But lately, we have seen acceptance of people becoming very rich. Not only acceptance but praise and promotion of these people. But all of this has been promoted by politicians for many years. It already started in the eighties when the Danish economy was essentially derailed, we had piled up a huge stock of debt in the public sector, there was a chronic deficit in the current account, piling up external debt. So we had this twin problem of deficit and debt accumulation. That was really a wake up call. We had moved too far in the direction of the government taking care of all citizens.
Business is about creating value and this is what we’re here for. So the whole culture changed. There was a huge turnaround in both the political culture and the culture of the labor market.
(Q): Was that the genesis of Væsktfonden?
(A): No, Vækstfonden was born in 1992. Already in the eighties there was this radical change in economic thinking. People are on the labor market to get a job, and they are obliged to take a job if there is a job out there. You can have unemployment benefits if you have no chance of getting a job. But we need a carrot and a stick. In the sixties and seventies there was this acceptance of those who avoided taking a job, but it suddenly changed in the eighties, there was this huge wake up call and that’s where it all started. We began to think in terms of entrepreneurship and innovation and new business policies.
(Q): So how did Vækstfonden come in the picture and can you explain how it works?
(A): Vækstfonden was founded in 1992. The government injected 2 billion kroner in base capital once and for all. The idea was simply to fund projects – risky projects – in small and medium size enterprises that companies found difficult to finance on commercial terms. It was project financing.
Later on, we embarked on a new strategy. Instead of financing projects within companies, we started looking at companies as whole. To grow new companies. Simply because we had had ten years of experience and discussion about how to promote entrepreneurship. And the way to promote entrepreneurship is to think about the company as a whole. When you focus on projects, you focus on a small part of an existing company. As from 2001 Vækstfonden became probably the major government instrument in promoting entrepreneurship.
(Q): So you are a non-profit and when you have successful exists you re-inject the money into another venture. But does any money ever go back to the government?
(A): No, it’s a recycling business. We are basically a non-profit but we are here to promote entrepreneurship, to finance more new growth companies. And in order to do this of course we like to see our capital being recycled as fast as possible. The more capital we get back, the more we can invest in new companies, it’s a simple as that. We do, in fact, care about profits for several reasons. One is that profit is a reflection of the success of a company and we like success not failure. Secondly, it does reflect the fact that the innovation is taken up by consumers which is ultimately a success. And then of course we get money back that we’re able to reinvest.
(Q): You’re covering your own costs and able to re-invest?
(A): Yes.
(Q): You don’t have to go to the parliament every year to ask for more funds?
(A): No, no. The government injected capital once and for all in 1992.
(Q): And you’ve been running on that since then?
(A): Exactly. We do however, administer some of the programs that are on the annual budget – small business loan guarantee schemes.
(Q): The Kom-i-gang loans?
(A): Kom-i-gang and Vækstkauktion, which are small business loan guarantee schemes. These are very difficult to make a profit on. But when it comes to the venture market it’s all based on commercial contracts and we expect to earn a return that is the comparable the market average.
(Q): How distant is the government from your organisation? You being the director for example, are you a political appointee?
(A): The government has appointed a number of business men on the board, and this board is ultimately deciding on the strategy of Vækstfonden. There is an act for Vækstfonden that allows the director to operate but the board has final decision.
(Q): You’ve been vocal in the media – do you think you have a lobbying role to play in representing the needs of the Danish venture community?
(A): And entrepreneurs as well. The government now and then calls us to understand what the community needs to move ahead. Our strategy’s starting point is always a thorough analysis of the market. It might be the market for cleantech startups; how can we map it, what are the needs, where are the pitfalls, the gaps?
(Q): There’s a research and a monitoring element?
(A): Yes. Our mission is to create more new growth companies. And our final vision is to create the best market for innovation finance in Europe. And for that end, we do a benchmark study every year. We compare the Danish market against other European markets. And ultimately we’d like to see the Danish market being the strongest in terms of being able to support new startups.
[pagebreak]
Where to start with Vækstfonden and who it partners with
(Q): If I’m an entrepreneur in Denmark today, where do I start with Vækstfonden – you have many products?
(A): On the surface it might seem complicated. We do not see ourselves as a isolated investment unit. We cooperate with the market. The market for innovation finance needs leverage to reach a level of critical mass. There is insufficient capital and capacity to assist companies in growing on the world market. And in order to assist this market in being self sustainable, it needs leverage and that’s where we come in. We invest in VC’s [Venture Capitalists] who are dedicated to a particular segment of the market. We’ve invested in 19 investment units.
(Q): Which themselves are private and for-profit?
(A): Yes. We’re leveraging their business by providing capital on commercial terms so we have LP [Limited Partnership] contracts, of the same type as the private sector.
(Q): And isn’t the opposite true in that you sometimes invest directly in a venture and you demand that there is a private partner that comes in?
(A): Yes, always. We might decide to invest directly in a company, together with other private investors. Or we might decide to invest in a VC together with other LP’s, for example a pension fund.
(Q): In a specific area you are trying to promote.
(A): Exactly, for example it might be a dedicated biotech VC unit. We know that the biotech VCs in particular need a very large capital base because the portfolio companies often require capital to the tune of half a billion before they are mature for an IPO [Initial Public Offering]. In order to provide capital for a handful of these VC’s, they need Vækstfonden as strong investor.
(Q): Back to my question: practically, if I am an entrepreneur with an idea, how do I approach Væskstfonden?
(A): If you are an entrepreneur and you don’t know where to go, call Vækstfonden and we’ll tell you where to go. Now, if you’re starting a new shop selling clothes, we would advise you to go to your bank. If your bank is not willing to take this on their books it can buy a loan guarantee from Vækstfonden. So for that segment, we have this product.
(Q): But that’s not your main target?
(A): We provide risk capital for all sorts of entrepreneurs. We can start at the bottom where the capital need is quite small and there’s a short time to the first invoice. For those companies that are in the lower risk range, we have this ‘væksauktion’ loan guarantee and our partners are the banks. They do the paperwork for the entrepreneur.
If we’re talking about share capital for companies that have a longer time to the first invoice and need more capital then we might invest directly in the company. Or we might decide that they need specialist investors to help them, for example a biotech. The biotech field requires that you really understand the science and the market. We have invested in a number of partners who are specialists in doing biotech investments. In such a case we would tell them who are the specialists VC units for this particular field. If they are in the hardware space, we also have some partners there. So we have lots of partners trying to cover the whole spectrum.
(Q): I’ve heard many VC’s say that they get piles of business cases on their desk but those rarely lead to investments. Most actually come from referrals. Is it worth it to send you a business case?
(A): It is worth it. We would have a look at it and we might be able to send you to the right VC unit or we might invest in some directly. [pagebreak]
The investment decision process, how Vækstfonden gets involved, and who it partners with
(Q): What’s the process? Do you have a team of people who do nothing else?
(A): We do. If a business plan in medtech comes in we know that this goes to Tonni – he’s our man on medtech. If it’s biotech then we know we have no one here in Vækstfonden who is a specialist but we know exactly who in the market are skilled in, say, diabetes II diagnostic tools. So we know the whole market and we know who to refer you to.
(Q): And it’s likely to be someone you’re partnering with?
(A): Yes.
(Q): You also invested in Sunstone Capital and SEED which are very different.
(A): We have been involved in all capital startups during the last seven years. It’s really about building up a market. We’d like to see Sunstone being able to raise new funds without our backing. That would be the ultimate success.
(Q): What about investment decisions? Do they all cross your desk? Do you have an investment committee?
(A): All direct investments will pass through our investment committee. All direct investments and all indirect investments in VC funds.
(Q): What kind of profiles do you have on your team? There seems to be a lot of financial people in VC companies who are good at managing portfolios of investments but who are not necessarily practitioners. Is it the same for you?
(A): No. They are practically all industrialists. The preferred profile is a person who has been involved in startup businesses before and who has also been involved in large businesses so that they know the market. Most of them have 5 to 25 years of industrial experience and have a strong global network so they are actually capable of bringing companies to customers in the US for example. They are people who can provide strategic advice to their companies.
(Q): How many companies do they have in their portfolios?
(A): About 5.
(Q): And they’ll sit on the board?
(A): Typically yes. Which of course limits the number of companies we can invest in so we have come up with a new product that we call Partnerkapital. In Partnerkapital we invest with business angels who can sit on the board for us and in this way, we just make a thorough due diligence on the business angel. In this way, we leverage the business angel community.
So all in all we have a direct investment portfolio of about 35 companies and an indirect portfolio with partner VC’s with approximately 165 companies. So all in all some 200 companies.
(Q): What’s the lifespan of your investment?
(A): Typically 5-6 years.
(Q): At which point you are looking for an exit?
(A): Yes, typically an IPO or a trade sale.
[pagebreak]
Vækstfonden’s evolution, Skype, investing in foreigner-led Danish companies
(A): In theory. We would like to see the market for risk capital grow and be self sustainable. So in theory we would like one day to go back to the government and say, “You gave us 2 billion kroner, we have grown 1000 new companies, here’s 4 billion kroner – mission completed.”
(Q): “We’re not needed on the market anymore.”
(A): Right. We’re testing constantly on the market whether we’re needed anymore. But maybe some segments will mature within 5 to 10 years. It might be the communications or the medtech market. But by then there will be new markets coming in, the cleantech market for example. So we would pull out of the more mature part of the market and concentrate on the less mature part.
We’re always on the leading edge, where capital is most needed.
(Q): Your mission is to work yourself out of a job.
(A): Exactly.
(Q): Have you ever had companies you declined to invest in but later regretted not doing so. For example did Skype come to you?
(A): No unfortunately Skype didn’t come to us. But I’m not sure if we would have been able to invest in them. It’s a common misconception that Skype is Danish but actually there was a Danish and a Swedish founder, the company, as I remember, was registered in Luxembourg, headquartered in London and most of the staff were located in the Baltics. So what was Danish? It was a global company to start with.
We do require a somewhat stronger Danish presence.
(Q): That’s a good transition for my next question: what is your requirement? What if a foreign citizen comes to you with a great idea, will you fund the project?
(A): Many of the companies we like to invest in are born global. So we don’t really care, as long as there is a substantial activity in Denmark. Many companies start with sales force in Sweden, production in China, headquarters in the US and what is left in Denmark is the research activity. That’s alright for me. What we like to see is a substantial and very interesting share of global companies. If we could take the part that has the highest value add, that’s even better.
(Q): Is there anything about Danish entrepreneurship that is different? Is there a Danish recipe?
(A): There is no Danish recipe. There is a global recipe. You have to be aware of the customer. In particular in continental Europe there are engineers who are not customer focused sufficiently early in the process. What does the customer need? Are there sufficient customers out there who have such a painful need that they’re willing to give their arm to have it solved? Very often it’s just a gadget that the engineer or entrepreneur believes that it must be necessary for someone out there. But they don’t know, they never speak to the customer. We often ask whether they’ve spoken to the customer, “do you know who are your customers?”
(Q): “But the product is cool, it will sell itself!!”
(A): “They say the market is worth billions!” I would like the entrepreneur to tell me it’s not a huge market, the whole market is huge but we target only 10 percent of the market, but within that segment we can be the market leader and lock 30 percent of the segment. And it’s a no brainer because we have narrowed our scope to this part of the market, we know it, we spoke to the customers, they love it and they’re already signed up. So we like the entrepreneur to be very aware of the customer.
(Q): There are a few Bill Gates who start their company at 19 and have always been successful but there are others who fail two or three times before becoming successful, which is actually more glamorous in the US at least. Denmark is such a small community, so if you fail, do you get another shot? Would you invest in someone who’s failed before?
(A): It has been difficult but it’s getting easier. We have learned this from the US. I would rather invest in someone who’s failed before, provided he or she can explain why. If they just blame others, I wouldn’t invest. It depends on whether they learned from the experience.
(Q): What do you think is hot in Denmark right now?
(A): Being a very small country, you just need a tiny piece of a particular part of the world market to be successful. I don’t have any favorites. I think it’s important to have a stronghold in your field. You need to have skilled staff, and we know that in some areas we have a stronger base in Denmark so it’s easier to find the right staff – which is an advantage if your business plan is right in the middle of an area of strength.
(Q): What about your lobbying agenda, your wish list for the government?
(A): Number 1: capital. It’s about critical mass. We speak about the wheel of fortune (Christian draws a wheel). You have startups; these build value; this leads to exits with high multiples and high IRR [Investment Rate of Return]; we return the capital to LP’s and investors; they enjoy it and put more money to venture teams, providing a strong capital base for new investments in startups.
If you take on too many startups with too little capital you don’t have enough money to build value sufficiently fast to earn a high IRR. When the LP’s become disappointed, they will invest less in GP’s [General Partners], who will become second tier and have a poor capital base. This is a negative cycle, the continental European cycle. What you need is strong LP’s backing up very strong GP’s who have years of experience, who can provide not only capital but can also assist the companies in growing the business and building value fast. A strong capital base means that you can not only invest in early stage companies but can follow on until the IPO. You’re not forced to step out of the company at a particular point of in time where you would be diluted and earn a poor return.
(Q): Are you actually looking for a capital injection from the government?
(A): What we say that if we really are to build up the best market for innovation finance we would need to see much more capital going into the market. Here you could think of multiple sources: foreign investors, private investors, institutional investors or the government.
(Q): Are you also of the opinion that pension funds have been too shy in this area? There’s been a debate on this topic in the media.
(A): Yes and no. I understand why they want to see a strong track record. It’s understandable, they’re investing other people’s money. They need a very strong reason to invest in a particular VC. If you have no track record, all you have is arguments, ‘birds on the roof’ and hope. So I understand them. But there is a dilemma. You have a system with high taxes, fairly equal distribution of wealth, a few very rich individuals who invest their own money – and we know that private investors have a more forward-looking investment philosophy whereas institutional money has a more backward-looking philosophy. If you have a system with relatively large proportion of the total pool savings in the economy in the hands of institutional investors, you have a bias toward backward-looking investments.
(Q): One of the panelists at your annual meeting argued for lowered taxes to incentivise wealthy people to invest more in ventures, what do you think of the idea?
(A): That might be an avenue. That is tax breaks either for individuals or pension funds. You might also use the stick on the pension funds. And you might inject more capital in a vehicle like Vækstfonden order to provide leverage to the market.
(Q): What you’re saying is that the initial 2 billion that you’ve managed to grow since 1992 is now invested.
(A): It is fully invested.
(Q): So you have no kroner to invest tomorrow?
(A): Yes and no. We do have some capital returning now.
(Q): You need some exits between now and the commitment time windows.
(A): Exactly.
(Q): Now about yourself. Have you ever been tempted before to switch to the other side of the table?
(A): Yes, I have been tempted to join a startup, not a VC. I do not have the 10 to 15 years of experience in biotech or software. You need very focused people to be investors. What I can do is invest in people who can invest in companies. And to some extend Væksftonden is a entrepreneurial business. So yes it could be interesting to join to start up in a team at some point.
(Q): What did you do before?
(A): I started at the central bank of Denmark, of all places. I’ve been employed by the EU commission, doing analysis on the German, French and Danish economies, surveillance of capital markets. I’ve been with Danske Bank doing portfolio investment and I’ve been with the ministry doing business policies, among which risk capital markets.
(Q): Which ministry are you attached to?
(A): Business and Economic affairs.
(Q): Final question: what would be your message to an entrepreneur in Denmark?
(A): There are great opportunities in Denmark. We see so many great business plans. Almost everything is possible. If you find it too hard, come to Vækstfonden, we will help you out.
Thank you very much!
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