Estonian startups pack a punch, but need to bring in more talent
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Tallinn, old and new (CC BY 2..0 ethan lindsey via Wikimedia Commons)

According to Startup Compass’s latest report, Estonia is punching above its weight for a country of just 1 million, bringing up the rear behind Latvia and Lithuania in gilding the Baltic countries in silicon

A small country with a big, mechanical and machine learning infused heart, Estonia has a lot of untapped potential. That’s the conclusion of Startup Compass in a report released Friday.

Home to technological patriarch Skype and now making headlines thanks to fintech prodigy TransferWise (and its $58 million Series C last year led by Andresseen Horowitz), Estonia is fairly far advanced for the startup world, with somewhere between 500 and 700 startups despite its small population. Still, it could be doing more.

As with other small markets, they need to think abroad quickly. Sixty percent of their customers are foreign, similar to Waterloo, Canada but behind the 74% figure put up by Israel. Their top markets are the United States and United Kingdom, but neighboring tech hub Finland also figures into Estonians’ export strategy.

The local ecosystem is worth between $1.2 and $1.45 billion, about a tenth the average in Europe. Founders range younger (32 years) than other European states, but lag slightly behind their European bros in female founders (16% vs. 17% in Europe generally). But 26% of all startup employees are female, besting Europe (22%) and left-coast tech mecca Silicon Valley (21%).

Estonian venture capital grows

Startup Estonia hosts the Loomehäkk hackathon in early February (image, Startup Estonia / Twitter)

Startup Estonia hosts the Loomehäkk hackathon in early February. Photo credit: Startup Estonia / Twitter

The average seed round is somewhere between $400,000 and $450,000; half of Silicon Valley and behind the $600,000 to $650,000 European average. Series A funding rounds are slightly healthier ($4.5 million to $5 million), but still behind what startups usually get in Europe. You can likely thank the input of Skype’s founding team in their angelic funding of the Tallinn startup ecosystem: Their former Chief Technical Architect, Ahti Heinla, has invested in since-acquired GrabCAD, Fleep, Swap.com and Utopic, among others. The Estonian Business Angels Network (EstBAN) now has over 100 members.

But the most prolific late-round investment partner is actually SmartCap, the investment arm of the government-run Estonian Development Fund, which gives up to €3 million with high growth potential and a private investor lined up to co-invest. Twenty-two companies have gotten money from the fund. However, that’s not going to be enough going forward, the report suggests. A staggering 51% of rounds have been done with local investors, more than double the European rate (23%).

“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,” which starts at $5 million.

Estonia’s got strong tech talent, but still not enough of it

Estonia has registered over 7,000 people via its e-residency program (screenshot, e-Estonia / YouTube)

Estonia has registered over 7,000 people via its e-residency program. Photo credit: e-Estonia / YouTube

But that funding still underlies one of the most positively regarded governments among tech entrepreneurs in the world. Up to 66% of Estonians surveyed were happy with policies to help startups, far higher than the global average of 25 percent. This might also bode well for a government response to suggestions it needs to bring in more immigrants. And with some of the most advanced digital government services in the world, Estonia seems positioned to catapult itself into the future and leave its faults far behind. The most prominent is Estonia’s e-residency program, which registered 7,000+ people through the end of 2015.

That program segues well into the Startup Compass’ most critical recommendation, which is to import more talent. Fully 24% of tech workers are not native Estonians, but the report posits this just isn’t enough considering the limited human resources Estonia has to offer.

While it might not be best to consider Estonia in a regional rivalry with its equally-sized neighbors Latvia and Lithuania, the Ls have the advantage in immigration policy. The three countries are all likely to compete over the same pool of immigrants as well: Russians and expatriates from other former Soviet states.

A community meeting hosted by Startup Estonia to discuss the report saw concerns about high taxes locally and a lack of awareness about the country’s e-residency program for foreign residents.

“There is a lot to do to ensure that our ecosystem continues to grow sustainably,” Andrei Korobeinik, former Estonian parliamentarian and member of the Estonian Business Angels Network, told Startup Compass. “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.”

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