The SMB growth dilemma


A study conducted by the Technical University of Helsinki showed that the ratio of international sales by Finnish software companies has risen to almost 39% (504 million euros) of the total 1.3 billion euro volume. This is an almost 25% growth from the previous year (overall growth was 9.2%). Yet total employment by the eleven hundred company sector remained at a bit over twelve thousand and profitability on average is only 2.8%.

Professor Jyrki Kontio commented in an article that investments made into productization and internationalization are paying off. If the industry keeps on "internationalizing" at this rate and domestic growth stays at the 1.29% range, international sales will grow to over one billion euros in the next three years at close to 60% of total sales.

I personally don’t see this happening. My interpretation of the figures from a field perspective would be that:
– the growth has come from mobile applications and games (see Pelit ja Mobiili vetavat ohjelmistovientia). Mobile consumer applications ad games are sold through international web based distributors, operator web sites and established mature consumer gaming product distribution channels. Such channels can be built from Finland without a local precense, as the solutions don’t require customization or support. When we look at growth figures for software solutions that require vertical customization and lifecycle support, then the growth figures are very moderate. This leads me to conclude that there are still problems in internationalization and market entry funding. On a side line note, I don’t think it’s a coincidence that the companies that have succeeded in the mobile/gaming sector in Finland have received international interest and some have taken a fairly early exit (BitBoys and Hybrid).

– Only a handful of the 649 companies with international sales are well funded by IPO’s from before the crash. The rest gained the international stamp by using first round funding to enter neighboring markets. Those companies have used up their growth funds, exceeded their income in the past years and only now are back in the black with an average 2.8% profit margin. Most companies in this category are sub 10 million euro in annual turnover companies, which doesn’t leave much for globalization. I believe that market entry and reaching funnel maturity takes a few years and that cycle has passed and we are seeing the fruits of that bold first wave of internationalization for neighboring markets. Timo Savolainen writes in his article that many companies are looking towards venture funds for growth capital, but the problem is that none of the Finnish venture funds have enough capital to match the 30 million euro IPO’s of the late nineties. In summary I agree with Professor Kontio in principle that fruits are being harvested, but I feel that we should be talking about what next.

– My Finnish funds have grown at nice rate of 60% during the past year, which reflects earnings and hopefully has had a positive impact on IT spending. In this type of a climate if we can only muster up a 1.29% domestic software sales growth, then I do not see too much room for improvement in the next few years. Unless we are able to solve the growth funding dilemma of domestically mature growth companies I foresee international sales growth slowing down, which will stagnate profitability growth in the software sector and as well as employment. Wit Nokia and Nokia derivatives outsourcing more and more to India, China and the Latin Americas I believe the equation will be negative for the Finnish job IT job markets in general. The first affected will be smaller cities like Oulu, Turku, Tampere and Jyvaskyla, where there is less overall demand for IT workers.

These problems are not only of Finnish origin, but an issue for all smaller European markets. I do not believe that the answer will or should come from the government in the form of tax incentives for growth companies… not that they wouldn’t help. I also do not believe that we should be pressuring venture funds to merge with larger international funds… not that it would be a bad idea. I believe we as executives and board members need to examine ourselves. Are we internationally minded enough to lead our companies in a global economy. This raises a number of questions:
– am I willing to move closer to my growth markets to lead from the front
– am I open to foreign influences in my board and management group
– am I open transferring IP closer to larger venture funds to finance my growth

 

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