Finland was once dominant in mobile with Nokia and now is making a comeback with virtual reality

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Finland is a country of 5.5 million people and is often associated with snow and saunas.

But under the icy exterior is a hotbed of start-ups looking to become major players in the young but fast-growing areas of virtual and augmented reality.

Finland has played a role in pioneering some of the biggest areas of consumer technology - Nokia was once dominant in phones, while "Angry Birds" maker Rovio and "Clash of Clans" creator Supercell have put the country on the map for mobile gaming.


And the Nordic country's next wave of young firms want to be the biggest contenders in VR and AR.

"I think there's a lot of activity, there's a whole bunch of gaming studios in Finland and there's this tradition of gaming that spans over 20 years. Many of these people are now experimenting with VR and some with AR." Moaffak Ahmed, investor at Superhero Capital and Sisu Game Ventures.

"And in addition to gaming, we have a very influential 3D graphics industry. When these two worlds meet there's a lot of interesting stuff happening."

Oculus VR CEO: VR is now a reality

Hardware revenues from VR headsets, peripherals and 360-degree cameras will reach over $50 billion by 2021, up tenfold from an estimated $5 billion in sales this year, according to research firm Juniper. This means there could be a big market for software and services to go with that.

Many of Finland’s VR and AR start-ups have gathered at Slush - a tech conference in Helsinki that attracts 15,000 attendees. It's quickly becoming an important event in Europe’s tech scene. One company present is Arilyn, an augmented reality start-up. AR refers to digital images superimposed on the real world, often via smartphones or a form of headset.

Arilyn recently closed a 500,000 euro ($532,000) funding round led by Superhero Capital and is expanding. The availability of talent is helping companies in the AR and VR space grow.

"There is a booming start-up scene in this area, there is a lot of talent and thanks to gaming companies and Nokia. There are a lot of people who have founded their own company or are thinking about becoming an entrepreneur so it’s an interesting situation,” Arilyn CEO Emmi Jouslehto, told CNBC in a phone interview.

The start-up recently did a campaign in partnership with Washington D.C.’s Union Station to use its technology to tell a story about the history of the building. Commuters could use tablets and look at certain parts of the station to learn more about its past.

Arilyn has immediately gone to the U.S. and this mindset is built in to Finnish entrepreneurs from the start. Anna Rosa Lappalainen, the co-founder of Finnish VR start-up Vizor, said entrepreneurs in the country need to quickly look at larger countries for expansion due to the smaller opportunity in Finland, particularly in virtual reality.

"Our team is very international, we have all lived abroad, mentally it's global from the start," Lappalainen told CNBC in a phone interview earlier this week.

"We want to be very present in the Silicon Valley VR right now, and we are part of that. There is more opportunity in the U.S."

Finland attracts US VR firms

Finland has also become a key base for larger VR companies looking to tap the talent present. U.S. firm Unity for example - which earlier this year raised $181 million - bought Finnish start-up Applifier in 2014. It has created software that allows users to share and record videos of mobile games. Unity is a game making platform that has expanded into VR. Working with Finnish gaming companies could be an interesting way to combine social gaming with VR.

"We believe in social and multiplayer gaming, and that includes VR games. Currently the key driver is mobile games. The biggest growth is coming from mobile games," Sonja Ängeslevä, Helsinki-based product director at Unity, told CNBC by phone earlier this week.

Magic Leap, a U.S.-based AR company backed by Alibaba and Google has also set up shop in Finland. And Finnish network equipment maker Nokia has also delved into the world of VR, releasing its own camera called Ozo which is designed to shoot 360-degree video.

‘Tipping point coming’

Still, Finland's young VR and AR companies will have to compete against a slew of well-funded U.S. rivals in a market where monetizing the product is still a challenge. And this could mean a tougher funding environment in the future for start-ups in this area, which is already playing out. In the fourth quarter of 2016 so far, virtual reality start-ups across Europe have managed to raise $27.31 million from VCs, according to Pitchbook, a company that tracks deals. But this is down from the $50.89 million seen in the same period last year.

"There was a big boom a year ago and two years ago when loads of people came from VR looking for funding and that's when we did those first investments. Now if you are coming with a new VR game it's difficult to get funding. We are still waiting for the tipping point in VR, it is exciting but the big market is not there yet. Our advice for companies in gaming is raise as much capital as you can and stay frugal. Everyone knows the tipping point is coming but we don't know when. That is the billion dollar question," Ahmed told CNBC.

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