Strengthening early stage private venture capital and reforming public venture capital
Compared to other EU countries, Sweden is performing reasonably well when it comes to the overall level of venture capital investment relative to GDP. In 2013, Sweden ranked behind Denmark (0.1%) and the UK (0.12%), on par with Finland (0.08%), above the EU-28 average (0.06%) and well before Germany (0.04%). Latest data show promising signs for 2014 with private venture capital investments increasing by 57% compared to 2013. Public investment declined at the same time. Overall, total venture capital investments rose by 27% between 2013 and 2014. In global comparison, overall venture capital investment as a share of GDP is at the top of the OECD middle range.
However, total investments are still well below 2008 levels and the World bank's Doing Business indicator 2015 ranked Sweden only 61st for "getting credit" (overall rank: 11th) with the ease of getting credit worsening over time (rank 42nd in 2013). The market for private venture capital reveals gaps in early-stage investment and available support is still skewed towards public venture capital. A 2014 report by the Swedish National Audit Office pointed to risks of crowding out of private capital as a relatively large share of the public venture capital was invested in the parts of the venture capital market where private actors are most active. Over 40% of the government capital was invested in companies in expansion phases and mature companies whereas companies in the seed stage only received 0.2% of public venture capital. In addition, most state owned actors were found not to have any cost efficiency targets.
Current Swedish programs to support SME access to finance are managed primarily by large public agencies, e.g. ALMI, Norrlandsfonden, The Swedish Industrial Development Fund, Fouriertransform, Inlandsinnovation and the Energy Agency. Additionally, the Swedish pension funds continue to be a source of venture capital but not generally for early stage investment. It should also be mentioned that 2014 saw a drastic reduction in the level of tax deduction for private savings towards pension.
Early 2015 saw the formation of a new Innovation Council at highest political level chaired by the Prime Minister. One of its first tasks was to consider how to best promote collaboration between the private and public venture capital initiatives.
Following the government inquiry on "a fund structure for innovation and growth" in 2015 the Swedish government announced reforms of public financial support to SMEs in the budget bill for 2016. The reforms announced include the ambition to establish a new public state-owned company incorporating the two existing public venture capital companies Inlandsinnovation AB and Fouriertransform Aktiebolag forming a new public company with a larger financial base and without predefined sectoral and regional limitations in investment focus. The investment technique of the new company will be fund-of-funds, i.e. it will co-invest with private capital In venture capital funds. The main objective of the new company will be to co-finance early stage venture capital investments in innovative Swedish enterprises with high-growth potential. Another objective is to contribute to the strengthening of the overall financial ecosystem in Sweden. A more detailed propositions of the reforms was presented to the parliament in spring 2016. If accepted by parliament the changes will take force from January 1, 2017.
Other developments include the introduction in 2013 of a tax deduction for investment in companies that are not stock market indexed and have less than 50 employees. Another new instrument is the investment savings account which is in effect a reduction of capitals tax for investors. This instrument allows individuals to maintain a personal account for shares, bonds, etc. which is taxed at a much lower rate than capital tax and there is no tax per transaction.
The challenge has been recognised and prioritised at the highest political level. It is yet too early to assess the effectiveness of the recently introduced measures. The tax deduction for investment in not stock market indexed companies is very limited since only companies with 50 or fewer employees are eligible and the deduction must be repaid on sale of the shares. The new investment savings account could become an effective stimulus for the private venture capital market. It is possible that the potential reduction in personal savings due to the de-facto abolishment of tax deduction for private savings towards pension might be compensated by the introduction of this new savings account. However, it is not likely that these accounts will play a larger role for the private venture capital market than the private pension funds did. Currently, personal savings are low and mostly tied up in pension funds and real estate. The marked increase in private investments in 2014 is a very promising sign.