What can Estonia teach us about building a startup ecosystem?

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A guide dressed as a monk leads a group of about a dozen foreign visitors through the streets of Tallinn’s medieval Old Town. It’s a scene that could be set in just about any European city blessed with a well-preserved historic district. After all, heritage is what attracts the tourist dollar.

But looking beyond the borders of the capital’s old town, Estonia’s government is eager to tell a much more contemporary story. Just over thirty years have passed since the country gained independence from a collapsing Soviet Union and since then it has been building its economy from the ground up. Today, a fast-growing startup scene is seen as one of the keys to future prosperity.

So how’s that going? Well, with a population of just 1.3 million people, Estonia has founded a total of ten technology companies worth $1 billion so far. Per capita, this represents the highest concentration of unicorns of any country in Europe, although not all are headquartered in their own country. In total there are 1,456 startups and the sector is growing at 30 percent per year. Building on that, policymakers are determined to establish Estonia not only as a major innovation powerhouse, but also as an attractive destination for foreign founders and technical personnel.

So what are the factors underlying this ambition and can aspiring tech hubs elsewhere in Europe learn from the Estonian experience? That’s what I hoped to find out when I visited the country last week.

Build from scratch

The first thing to say is that Estonia’s entrepreneurial trajectory is very different from that of most Western European companies.

“In 1991 we had to build everything from scratch. We had to change the mentality so that the state was now hours. We had to build the rule of law,” Prime Minister Kaja Kallas said during a press conference.

In theory that should have been a handicap, but according to the Prime Minister, the reconstruction has fueled an entrepreneurial fire. “When we had this freedom, I felt the entrepreneurial mindset had a chance to take root,” she adds.

Bbuilding blocks

But what has that meant in practice? Martin Villig is co-founder of Bolt – one of the unicorns of Estonia. Essentially, Bolt started his life as a rival to Uber, offering taxi services. Today it offers rides in 45 countries and also rents scooters and bicycles. The aim is to provide a comprehensive solution for urban transport. “We define ourselves as a European mobility super app,” he says.

According to Villig, there are a number of factors why the startup scene has blossomed in his country. Some of these are historic. For example, a positive legacy of the Soviet era was a focus on mathematics and hard science education. There was, he says – following the Prime Minister – a hunger to use that education to support entrepreneurship. Moving on, the success of Skype – Estonia’s first tech breakout company – not only provided inspiration, it also made many people rich when it was sold. People who started new businesses or supported other startups.

Investments have also increased. Villig says there are currently about 300 active angels and 8 venture capital funds. Government figures suggest that investment was around $1 billion last year. Not a huge amount by the standards of say London, but it has to be seen in the context of a population of 1.3 million.

But Villig emphasizes that while investment is necessary, the entrepreneurial mindset in Estonia differs somewhat from elsewhere in Europe or in the US. “We don’t have a quick failure philosophy,” he says. “If Estonian companies don’t get the funding they need, they start up and keep going – maybe for five years.”

He also points to a certain austerity. VC and Angel Cash are carefully spent. He cites Bolt, who he says has generated a better ratio of income to invested money than his rivals.

The people problem

But while Estonia plans to grow its startup economy, there is a potentially very big problem. At just 1.3 million people, the talent pool is small. Therefore, attracting skilled people from elsewhere has been a priority. An important measure is the Startup Visa Scheme, which offers a fast track right to work for foreign talent. To date, it has attracted over 4,000 people, which I calculate is more than the comparable UK scheme.

Meanwhile, a E-residence initiative allows founders from elsewhere in the world to take up virtual Estonian citizenship – including benign corporate taxes – without necessarily living there. Importantly, it is also a cost-effective way to start a business in an EU country. According to officials, there was a surge in British industry after the Brexit vote.

An example of this is Vicky Brock, CEO and founder of Vistalworks, a company that provides tools and data to enable police and regulators to identify and take action on illegal trade. Originally, the company was based solely in Scotland. For a company used to working with and selling to government agencies, Brexit presented a potential problem bidding for contracts, so Brock considered a second base in a European country. Ireland and Stockholm were options, but Sweden was too expensive and a branch in Ireland would have demanded a bond of 300,000 euros.

Setting up as an e-resident in Estonia cost just 80 euros and provided access to a range of state services, including streamlined systems for settling taxes, paying employees and setting up their health insurance.

Today Vistalworks has offices in both Scotland and Estonia. I ask Brock how that played out with British investors.

“From day one I was straight with the Scottish Investment Bank,” she says. “They had a choice whether we were small or whether they could trust us and we could grow. We have an agreement that we will not do anything with one company that endangers each other,” she says.

Something to learn

But do startup hubs elsewhere in Europe have anything to learn from Estonia’s experience? It must be said that some of the challenges it faces – not least attracting skilled people in a global market – match those of other hubs. In that regard, the innovative E-residence scheme could be mirrored elsewhere, assuming the technology underpinning it could be introduced.

But Villig points to the local government’s role in building the ecosystem as something that can also be replicated. He cites roundtables with the Prime Minister twice a year where entrepreneurs can discuss ways and means of overcoming the obstacles they face. “I would say that other countries can learn from government support and direct contact. If you have legislation that isn’t supportive – for example around stock option regulation – you struggle with motivation. If you convince politicians that it is important to build a knowledge economy, you can make progress,” he says.

There is perhaps one more factor that cannot be underestimated. Everyone seems to agree that you can’t build a big company in Estonia. As Villig points out, you have to go global for a platform-based business to work.

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