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I finally managed to finish Dan Senor’s and Saul Singer’s Start-up Nation: The Story of Israel’s Economic Miracle. It is truly an outstanding book, I have to say. I wrote about it before in my blog and I knew back then it was good, but boy was it good. It was based on over 100 interviews (disclosure: honored to be one of those among the interviewed) and shines with the amount of information it portrays.

Dan Senor and Saul Singer have managed to write the book in an extremely interesting manner. Despite the story going through various grapevines of Israel’s history it all comes together nicely in the end to create a complete, holistic story and a good understanding of the issues behind Israel’s current economic state.

I won’t spoil it for the rest of you, but strongly invite you to read the book. This is something I honestly hope was made a compulsory read for the Finnish people working with our so called “innovation system”. We have a lot of issues Israel is looking forward to, for example the high living standards among all of our population. However, despite the high number of patents and innovations created in our society – we have utterly failed to capitalise on them.

The unfortunate answer from the politicians seem to usually be the easy way out – increase funding for innovation activities, ie. throw more money on a system that clearly isn’t working. Dan Senor and Saul Singer have done an extraordinaire job in writing the book and giving a relatively detailed and complete view into the Israeli way of startups.

Five out of five stars (and I’d given that without my interview too – easily).

I thought of writing about this to ArcticStartup since it relates to the startup ecosystem so closely, but decided to post it on my personal blog as it is such a strong personal opinion.

Taxes in society work to distribute wealth, run governmental organisations to generate services for everyone, enable running of cultural services that wouldn’t be possible under market conditions, make education free in our country and for a ton of other reasons. In the end, they are in place to make our society a better place for everyone to live in.

Finland, like most civilised countries aim to treat all its citizens and organisations in an equal manner. This guarantees equal opportunities and rights for everyone involved. However, in some cases it is not favorable for the society as a whole to apply the same set of rules to everyone. Examples of this can be seen in our progressive taxation, the more wealthier you are the more you pay taxes in relation to your income. Everyone understands that while those being taxed more understandably do not prefer to be taxed more, but it works extremely effectively to generate more wellbeing for everyone else – thus justifying the unequal treatment of tax payers.

Like progressive tax, I strongly believe there is a case for a similar kind of unequal treatment in taxes for entrepreneurs. I’m talking about entrepreneurs here in general and not distinguishing between growth entrepreneurs and other kind. Unfortunately very few people in our society have realised the importance of this group to our social well being.

While two thirds of the Finnish population work at large companies, it may not be obvious to them that 95% of all companies registered in Finland are SMEs. Not only does one third of the population directly depend on entrepreneurship as their prime source of income, it is a key component of our economy in the way of generating employment, goods and services that larger companies will never engulf on. To generalise, we can say that entrepreneurs are a key component of welfare in our society.

In the recent years Finland has taken many steps toward making entrepreneurship more appealing, having finally realised its importance as large companies aren’t always employing as planned. However, there is a very simple yet extremely effective mechanism left unused that I strongly believe would only bring value to our society in the long term.

The mechanism I’m talking about, after the long prelude, is income tax for young companies. I have no understanding what so ever, when our government believes it is building a better society in the long term by taxing growing companies in the short term.

We have worked extremely hard for the past 2,5 years to build ArcticStartup the phenomenon it is today. We’ve put in tons of sweat and countless amounts of midnight oil to build it into a successful company. In 2009 we worked close to 10 months, alongside our day time jobs to make the machine turn – effectively keeping its costs down to a minimum. We also managed to sell quite a bit of advertising and visibility to our partners who have received very valuable coverage in a tough niche. All this hard work has resulted in us creating a profit for 2009, which does not carry over too well through 2010 as we’re putting in a lot resources to developing our business further.

All our hard work, countless hours and determination give us the opportunity to enjoy a very limited profit for 2009 which is then taxed on by the government. While I understand that taxing is in place to build more value, I believe in this case it does dramatically more harm than originally thought.

While the amount of taxes we accrued is very reasonable, I think there are justified reasons why young companies should not be taxed on their income during their first years of infancy. The very essence of effectiveness; startups have a chance at success because they create things thousand times more effectively than large organisations could ever do. This applies to the government as well, entrepreneurs make a lot more good with the money than our governments could ever do – at least on this scale.

It’s not recommended to whine in length about something if you don’t offer a solution. Here are my 2 cents. Any form of legal corporate entity that is under three years of age or has accrued less than 500 000 euros of profit and keeps that money in the company (as opposed to paying out dividends) – should not be taxed on their possible profit. While this might lower the amount of income tax the government collects from young companies, it supercharges them for success in the long term.

This single change in tax law, would make the Government of Finland our economy’s largest venture investor. This would create incredible implications in the long term through more possibilities for entrepreneurs to succeed, which in turn would make entrepreneurship more appealing and in the end – it would make our society a much better place to live in.

I haven’t disclosed this earlier, but now that the e-mails are out to wish our upcoming clients and partners happy holidays with more news about the concept itself – I’m excited to disclose that I’m one of the partners behind Kisko Ventures. While I’m one of the founding partners in the team, this is in no way endangering my role and work at ArcticStartup – I still continue to head the company and make sure we reach our goals with our team.

However, I’m joining forces with Lauri Jutila and Antti Akonniemi, the co-founder duo behind Kisko Labs, as an advisor. We’re building a company that will help very early stage entrepreneurs with their services and prototypes. We focus in online and put in sweat equity to exciting ideas in the form very practical advice as well as service prototypes. While we work with very early stage entrepreneurs, we try to link the best we’re willing to invest in to our network of investors to help them take the company to the next level. I personally see this as helping out the entrepreneur and investor in getting a better deal with each other; the investor is able to lower risk and the entrepreneurs are able to get better valuations with a working prototype.

Goes without saying, but I’m looking forwards to 2010 working together with Antti and Lauri to put our mind and energy into some of the most exciting ideas out there. If you’re an investor or a passionate person with a great idea – don’t hesitate to drop us an e-mail. We’re more than glad to sit down and have a talk on how we can move things forward.

I was walking home last night from the Startup Christmas party in downtown Helsinki, organised by GrowVC and Aalto Entrepreneurship Society, I came up with an interesting way of looking at our innovation system from the national perspective. Innovation, as we all know, is an extremely hot topic among politicians as they try to dig into the best future sources of government tax.

As many know, I’m a huge fan of growth businesses and try to promote them through ArcticStartup with our team. I’m such a big fan of the whole ecosystem that I believe that we’ve only began to touch on the possibilities it has for our economies and ultimately, our society. We talked a lot about the Finnish innovation system in the Christmas party and while there were some appraisals, it was mostly criticism of some sort on how to make the system better. Pretty much the usual stuff if you look at anything in our societies these days.

This got me thinking about the difference in supporting innovation in regular entrepreneurship and growth entrepreneurship. While it is very hard to define the points in which a company becomes a growth company – let’s for the sake of this blog post decide that first and foremost it is the passion of the entrepreneurs that counts and after that the results the company has achieved on an annual level. Say a 10-15% increase in revenues annually could be thought of being a very growth oriented company.

One of the problems we face is that not many people are able to distinguish between these two – growth entrepreneurship and regular entrepreneurship. The latter could be said to represent the majority of the companies in Finland and in some way the capitalist system itself. Growth entrepreneurs are those who take incredible risks and have incredible ideas on how to change the world and make it a better place. Almost all fail, but a few successful ones are able to take incredible leaps and do wonders to the way we live.

Now, not to wander about too much, I’d like to focus back on innovation and how it is supported in many economies. While there are a lot of incentives and tools available for businesses to leverage risk with the help of the governments – they are usually equally shared among the entrepreneurs in the society. Some of the help goes to growth entrepreneurs and some of the help goes to regular entrepreneurs.

What’s wrong with this equation then? Well, my argument is this: innovation in large companies is like inflation – it’s natural and it always happens. If it doesn’t, the companies don’t stay big very long. All the competition in the field is innovating as well, to keep ahead of their rivals. It’s natural and built into capitalism for survival. Where as in growth entrepreneurs they are usually in non-existent markets where consumers don’t realise the need for such a product or service and there are always extremely high risks and non-existent chances of pulling the concept through.

So how does supporting innovation fit into this framework then? Well, if you look at large companies – innovation in them is like inflation, it’s built into the system – they are bound to do it anyway. My point here is that large companies should not be supported by government money that much compared to more disruptive and higher risk ventures. These are the unnatural companies looking to do something new, and a lot of life support is usually needed to lift these companies off the ground – if the idea in the first place is any good that is.

So to finalise my random rambling here, I do think we (and perhaps other countries as well) should look into our innovation system and take a few steps back to think about the ways we are spending our tax payer money. While I do believe these organisations are of great value, their clients could be thought out more specifically on the potential of return-on-investment. If you look at it, the returns on innovation in large companies are not usually that great compared to growth companies who are able to create thousand-fold returns in new or near non-existent markets. While many of the growth companies fail, I’d still bet my tax payer money on them in the future for innovation.

I’ve been working from home for about 1,5 months now. At first it felt really odd having to stay at home the whole day and not leave the house, but I’ve learned to live with this in a way that it feels pretty natural. I take occasional breaks and walks outside to clear my head. Not only would I need those working at an office as well, because I’ve found that I’m pretty productive working on my own.

However, I wanted to jot down some thoughts I’ve had in these 1,5 months on entrepreneurship and being in charge of every little aspect of your company. I also have to state that I’ve been the demon at ArcticStartup that argues, sometimes to the point of ridicule, to keep our costs down so we don’t use many external services to run our business. The only business service we use is a professional book keeper and all they do is the bare minimum of keeping our books in their proper order. So outside the domain of keeping our books sorted out, I take care of everything else there is to running a business.

While this may not sound like a very big thing, I do believe there is a larger question behind all this. When you’re forced to put your hands down and go through everything there is to know about running a business from taxes, government agencies, paying salaries to insurance and all the other stuff that there is – only then do you begin to understand the wrath of things you need to be on top to be successful. While it does not make any sense to do these things your self all the way to the multinational -company size – I believe it makes a lot of sense so that you understand how these things work together. Not to forget, there’s a lot of variety in each day.

The reason is pretty simple as well, when you understand the ins and outs of the machine completely you’re running, only then are you able to take well calculated risks and push the machine itself to the edge to take the most out of the opportunity you have at hand. That’s something I’m really looking forwards to, taking this machine called ArcticStartup for the ride of my lifetime.