3. Interview: Northzone’s Pär-Jörgen Pärson
One of the partners from the legendary GP behind Nordic unicorns like Spotify, iZettle and Kahoot! talks to us about the less favourable market conditions going forward, learning points from the pandemic, how they source futureproof companies, and his views on the next generation of Nordic entrepreneurs.
Argentum (A): 2021 was a banner year in the Nordic venture segment. As this interview occurs, there is more uncertainty in the market with a war in our neighbourhood and interest rates expected to increase. What is your take on the situation?
Pär-Jörgen (PJ): Before the war in Ukraine, we saw a substantial increase in inflationary expectations. The capital flow did not affect private equity as much as the public markets. Many companies have had a sizeable downward adjustment in the stock markets. The war has added to the uncertainty we were experiencing.
This uncertainty could lead capital to be moved out of equities and over to stable assets. We could see a broader downturn in the stock markets and an increased real interest rate. Financial advisers are unwilling to give forecasts and argue that the uncertainty will lead to a 'flight to quality.' I believe this will last for some years and that there will be a tough time on the public markets.
A: What about the venture market and Northzone's portfolio?
PJ: There is much capital in the venture market on the lookout for companies in high growth that are effective and deliver a forward-looking product. You frequently find these factors among start-ups and scaleups at a lower price.
We believe that our portfolio will reach the growth path we have expected, but with everything going on, with some delays. Compared to the financial crisis in 2008, people have not stopped buying things, which is crucial.
Einride, a manufacturer of autonomous electric trucks, is an exciting company that has gotten much traction. Anyfin, a company that provides loan refinancing services, has strong growth. Further on, Klarna has built a new category – buy now, pay later – and has become an essential product for businesses and customers.
A: We have put behind us two years of a pandemic. What are Northzone's learning points from these years of global lockdown?
PJ: One learning point is that the talent market has become more international. In the start-up and scaleup phase, Nordic companies work remotely to a larger degree, and they have gotten access to talent that was not available before the pandemic.
The development tool world has evolved in the spill of light, where developers can work from home and be integrated with the team. Their supervisor can measure their productivity better than before. They can see who is delivering even though they are not at the office, which is a wake-up call for many start-ups. The talent market has suddenly become less dependent on physical boundaries, and I believe the companies that capitalise on this trend will grow faster.
Another learning point is that the capital market has changed fundamentally. Companies in countries with less capital access are suddenly closing serious growth capital rounds, which I would not have guessed before the pandemic. We find examples in countries like Bulgaria, Romania and Portugal.
A: Northzone is a pioneer in the Nordic venture segment. You have been part of the journey since 2004. How have you evolved?
PJ: Today, we have around 30 % of our capital deployed in the Nordics. The total amount has been the same in the last 10-15 years, which indicates that the market grew rapidly but then stabilised. The Nordic region was a pioneer in digitalisation, and now other areas are following. In the UK, Germany, and the east coast of the US, large markets are digitising. This is where we experience the most significant push.
We invested in the region's first tech generation with companies like Spotify, iZettle and Kahoot!. To be honest, we had higher expectations for the next generation, but it has been somewhat quiet. I have contemplated whether Stockholm-based entrepreneurs have 'banged their own drum', almost believing there is something special in the water. Some have underestimated the level of work needed to turn an idea into success. The start-up lifestyle is not a walk in the park.
Why is Norway dominating the Winter Olympics? Not because there is something special in the Norwegian water, but because the country's athletes work harder than everyone else to win. It is the same with start-ups; the competition is global from day one. It is a massive advantage in our region that we have access to talent, capital, role models, and investors with experience.
A: We have seen an ESG revolution in the European financial sector in the last couple of years, with the EU leading the way with its 'Green Deal'. What is Northzone's take on this wave?
PJ: We have analysed our two latest funds internally regarding complying with the SFDR. We see that companies aligned with Article 9 are more sustainable and have higher TVPI multiples than companies that only align with Article 8 or 6. We have not figured out whether this is because tech companies are impacting in a good way, or we are biased towards impactful companies.
Our take is that there is no trade-off between impact and profitability, which many investors in countries like the U.S. seem to believe. Many European companies show that they can go hand in hand – they are wearing the race leader's jersey in this field. When we source deals, we will look at conventional financial and impact KPIs to evaluate a company's early potential.
A: We saw a record number of PE-backed IPOs in 2021. Among them, we find the Northzone company Trustpilot. Will this trend continue?
PJ: It is difficult to see the value of going public under these market conditions. We are in a period where the companies that do it need capital. Even if it is not 'their' fault, they risk getting punished because the tide is turning against them. It is more prudent to wait and see.
As an example, most SaaS multiples are down compared to 2021. Tech companies like Spotify have decreased between 40 and 50 % in value. In January, Klarna announced intentions to go public in 2022, and while we still have very high hopes for the company, the timing for an IPO is not ideal.
A: When will you close your tenth fund?
PJ: We usually raise a fund every third year. Our latest fund, Fund IX, was closed in 2019. Because we have longstanding relations with LPs, the uncertain market situation does not affect our ability to raise capital.
A: There was an upswing in VC-backed exits in 2021. Are you planning to exit any companies, and how do you evaluate the exit market?
PJ: The exit market was solid in 2021, and we exited Kahoot and Zervant and listed Trackunit. We have three to four companies preparing for exit, but the market conditions are not ideal. We conclude that it is better to wait and evaluate on a case-by-case basis. It is far too early to say for the rest of the portfolio. We believe that the exit activity will be slow in the next six to twelve months.