What Can Estonia Teach Us About Building A Startup Ecosystem?

A tour guide dressed as a monk is leading a group of about a dozen foreign visitors around the streets of Tallinn’s medieval old town. It’s a scene that could be played out in just about any European city that happens to be blessed with a well-preserved historic quarter. Heritage is, after all, what tends to attract the tourist dollar.

But looking beyond the boundaries of the capital’s old town, Estonia’s government is keen 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 burgeoning 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, so far, originated a grand total of ten $1 billion tech companies. On a per-capita basis that represents the highest concentration of unicorns of any country in Europe, although not all are headquartered domestically. In total there are 1,456 startups and the sector is growing at 30 percent a year. Building on that policymakers are determined to establish Estonia not only as an important innovation powerhouse but also as an attractive destination for foreign founders and tech staff.

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

Building From Zero

The first thing that has to be said is that Estonia’s entrepreneurial trajectory looks very different from that of most western European companies.

“In 1991 we had to build everything from zero. We had to change the mindset to the effect that the state was now hours. We had to build the rule of law,” says Prime Minister Kaja Kallas, speaking at a press briefing.

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

Building Blocks

But what has that meant in practice? Martin Villig is co-founder of Bolt – one of Estonia’s unicorns. Essentially, Bolt began life as a rival to Uber, offering taxi services. Today, it offer ride hailing in 45 countries and also provides scooter and bike hire . The aim is to provide a comprehensive urban transport solution. “We define ourselves as a European mobility super app,” he says.

In Villig’s view, there are a number of factors why his country’s startup scene has flourished. Some of these are historical For instance, one positive legacy of Soviet times was a focus on math and hard science education. There was, he says – echoing the Prime Minister – a hunger to use that education in support of entrepreneurship. Further down the line, the success of Skype – Estonia’s first tech break out company – not only provided inspiration it also made a lot of people rich when it was sold. People who went on to start new companies or back other startups.

Investment has also risen. Villig says there are currently around 300 active angels and 8 VC funds. Government figures suggest investment came in at around $1 billion last year. Not a huge sum by the standards of, say, London, but it has to be seen in the context of a 1.3 million population.

But Villig stresses that while investment is necessary, the entrepreneurial mindset in Estonia is somewhat different from elsewhere in Europe or in the US. “We don’t have the philosophy of fail fast,” he says. “When Estonian companies don’t get the funding they need, they bootstrap and carry on – for maybe as much as five years.”

He also points to a certain frugality. VC and angel cash is spent carefully. He cites Bolt, which he says has generated a better ratio of revenue to cash invested than its rivals.

The People problem

But while Estonia plans to grow its startup economy, there is a potentially very large problem. With just 1.3 million people, the talent pool is small. Consequently, attracting skilled people from elsewhere has been a priority. One key measure is the Startup Visa Scheme, which provides a fast track right to work for overseas talent. To date, it has attracted more than 4,000 people, which by my calculation is more than the comparable U.K. scheme.

Meanwhile, an E-residency initiative allows founders from elsewhere in the world to take up virtual Estonian citizenship – including benign corporate taxes – without necessarily living there. Importantly, it also provides a cost-effective means to start a business within an E.U. country. According to officials, there was a rise in British industry following the Brexit vote.

A case in point 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 against illicit trading. Originally, the company was based solely in Scotland. For a business that was accustomed to working with and selling to state agencies, Brexit created a potential problem in terms of bidding for contracts, so Brock considered a second base in a European country. Ireland and Stockholm were options but Sweden was too expensive and setting up in Ireland would have required a 300,000 euro bond.

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 entities in both Scotland and Estonia. I ask Brock how that played with U.K. investors.

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

Something to Learn

But do startup hubs elsewhere in Europe have anything to learn from Estonia’s experience? It has to be said that some of the challenges it faces – not least, attracting skilled people in a global marketplace – echo those of other hubs. In that respect, the innovate E-residency scheme could be mirrored elsehwhere, assuming the technology that underpins it could be put in place.

But Villig points to the close government’s role in building the ecosystem as something that could also be replicated. He cites roundtables twice a year with the prime minister during which entrepreneurs can talk about ways and means to overcome the obstacles they face. “I would say something that other countries can learn from is government support and direct contact. If you have legislation that is not supportive – for instance, around stock options regulations – you struggle with motivation. If you convince politicians that it is important to build a knowledge economy, you can begin to make progress,” he says.

There is perhaps one more factor that can’t be understated. Everyone seems to agree, you can’t build a big business in Estonia. As Villig stresses, to make a platform-based business work, you have to go global.