Estonia Startup Ecosystem Report

Startup Genome
on October 01, 2015
The full Estonia report including ecosystem metrics and benchmarks can be downloaded here. This report builds on the wealth of data compiled for the Global Ranking 2015 with the support of CrunchBase and more than 65 partners.

While small, the Estonia startup ecosystem is growing very rapidly, building on the several success stories it has produced. Skype, the world’s largest P2P communications platform, is often considered the trigger of Estonia’s emerging startup ecosystem. Skype’s acquisition by eBay for $2.6 billion in 2005 put the Baltic state on the global map of innovation and fuelled it with financial resources and startup experience. The FinTech startup TransferWise, among others, re-confirmed that Estonian startups can be globally competitive with a $58 million Series C round in January 2015 led by renowned Silicon Valley firm Andreessen Horowitz.

Whether directly or indirectly, the government has been supporting the ecosystem and has helped it gain momentum. Initiatives such as e-government, the digitization of public agency processes, and e-Residency, offering foreigners a government-issued digital identity and the opportunity to run a trusted company online, have been well-received by the startup community. Accordingly an impressive 66% of Estonian startup founders expressed satisfaction with regards to the national government whereas the global average lies at only 25%.

The private sector has been very active as well. The establishment of many accelerator programs and co-working spaces as well as the development of a growing investor community have been crucial in fuelling the ecosystem with know-how and capital. The contribution of Skype alumni is notable, with several early employees becoming angel investors and the co-founders starting an active venture investment group.

The Estonian Business Angels Network now counts more than 100 members. While this has meant improved funding for startups, the average investment amount for seed rounds is, at $0.45 million, still significantly below the European average of $0.62 million.

Beyond Series Seed only one local alternative exist: SmartCap. The investment arm of the Estonian Development Fund invests up to €3 million in startups with high growth potential on equal conditions with a private co-investor. Until today, the fund invested in 22 startups. This underlines the limited local funding activities, with many startups choosing to raise money in other ecosystems such as London and Silicon Valley. For this reason Estonian startups receive on average $4.75 to 5 million for Series A, only slightly less than the European average ($5-5.0 million).

In addition to VC financing, Estonian startups have to focus outside the country for two other key elements. First for customers - in comparison to many other ecosystems around the world, its local market of just over 1 million people forces startups to think global from the onset. As was explained in Compass’ Startup Ecosystem Report on Waterloo, Canada, this can play to an ecosystem’s advantage. Estonia’s early-stage startups have an average 60% of foreign customers, which is 4% higher than the European average. However, considering its local economy is even smaller than Israel’s, a percentage equal to or above Tel Aviv’s (74%) would correspond to a healthier level of global focus.

Secondly, Estonian startups have to look outside their country to find talent. Estonia has produced some great entrepreneurs and top talent but across skill sets stakeholders agree that the quantity is insufficient to meet the growing need. In order to close that gap with a small population, immigration must be part of the solution. With only 24% of foreign employees versus 53% for London, much can still be done. Having achieved a high immigration success rate and short visa response time, efforts have turned to attracting high-quality technical talent, especially from Russia and former Soviet Bloc countries where large pools of top quality talent are looking for exciting startups to join. The last two years have seen an increased influx of such talent. However, Andrei Korobeinik, entrepreneur and Board Member of the Estonian Business Angels Network, explains, “There is a lot to do to ensure that our ecosystem continues to grow sustainably. Latvia and Lithuania have much better immigration policies in place, which is going to hurt Estonia’s competitiveness if we fail to take immediate actions.”

Given the ecosystem’s small size and the considerable amount of startup success stories, it is not surprising that Estonian startups have slightly more employees with prior startup experience (41%) than the European average (39%). This is also reflected in the percentage of founders with hypergrowth experience where Estonia scores 2% higher than the European average (15% versus 13%), but much lower than London (23%). Yet, experts consider the depth of experience to be relatively shallow. The number of advisors with equity for example currently lies at only 0.76, versus 1.05 for the European average.

In conclusion, while Estonia has some of the special ingredients that make an ecosystem successful, more work needs to be done to close its Funding and Talent gaps so that high potential startups can grow without moving to the U.S. and London.

For key findings and more metrics and charts, download the report here.

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