Start-ups in Estonia - Crouching Baltic Tiger or Paper Dragon?

By bne IntelliNews February 23, 2012

Sherelle Jacobs in London -

Estonia's 20-year transformation from obscure soviet satellite to rising Baltic tiger has meant it's rapidly cultivating an image as Europe's start-up hub. Yet behind the big-name technology success stories lies a more complex picture.

Skype, created by a team of Estonian software developers in 2003 and sold to Microsoft in 2011 for $8.5bn, is the most famous example. Another is Erply, dubbed the "Skype of business software" and acclaimed as one of the top-10 European start-ups to watch in 2012. Then there's ZeroTurnaround, which designs Java tools. Since it was founded three years ago, it has accrued an impressive customer base, which includes HP, IBM and Disney. That some of the best start-ups have bordered on the eccentric has only heightened excitement about Estonia., a virtual fitting room provider, is a case in point. It made headlines with its robotic mannequin for online clothes retailers, which shows browsing customers how clothes fit.

Moreover, a number of Estonian companies, including Erply,, Fortumo and GuardTime, have boosted their global profiles by opening offices in the US and UK. Impressive rankings in a host of economic reports has further bolstered Estonia's profile: World Bank figures up to 2009 suggest that Estonia has the best entrepreneurial track record in the developed world. It also ranked 16th in the 2012 Index of Economic Freedom by the Heritage Foundation, above Germany and France, and a respectable 23rd in the latest Global Innovation Index from INSEAD business school.

Experts claim that the recession has been a powerful trigger for recent entrepreneurial activity, pushing Estonians out of comfortable jobs and forcing them to consider self-employment. They also point to broader factors. One is the surgical transformation of the country's economy when it gained independence in the 1990s; measures including privatisation and elimination of trade barriers have delivered Estonia two decades of steady growth and low inflation. The psychological impact of history may also be important. "Estonia is not unlike a start-up itself - the only country in the world with the singing revolution, then reinventing itself from being part of the USSR. It took the same qualities to achieve that as founding a start-up would," explains Heikki Haldre, founder of

Less tangible theories about the impact of Estonia's Nordic culture also offer interesting food for thought. "Estonians love privacy and physical distance from each other, and, hence, have more time to tinker with wonderful ideas. The Finnish culture, similar to Estonia's, has created one of the biggest companies in the world, capitalising on the distance of people, Nokia. Skype has perhaps gained a lot from the same cultural principles," muses Haldre.

Behind the headlines

Yet beyond the heady narratives lies a more complex reality. Puzzlingly, a lack of entrepreneurial culture is widely seen as a serious Estonian shortcoming. A few years ago, a government survey found that 61% of Estonians had never considered owning a business. A European Commission report from 2010 also suggested that Estonians are more put off self-employment by capital issues, the prospect of failure and lacking necessary skills than other Europeans.

Moreover, survival rates for start-ups are surprisingly low - only 57% of small companies are viable three years after being founded. Experts say ineffective stock management and heightened vulnerability to fluctuating economic conditions are partly responsible. The country's small work pool (the total population is just 1.3m) is also seen as a serious stumbling block.

This less sanguine narrative sits awkwardly alongside Estonia's vibrant anthology of success stories. Nonetheless, this should not necessarily be seen as a contradiction.

Most achievement has been limited to the information and communications technology (ICT) industry, where many of the common barriers to start-ups are less relevant: fears about lacking skills to form companies are lower in the sector because technical skills amongst Estonian workers are unusually high. "Practically anybody who is interested in learning IT can do it for free," explains Rene Joeleht, the CEO of Startup Garage, an Estonian support network for would-be entrepreneurs.

The success of Skype has also helped foster strong faith in the sector and allay fears of failure. "ICT is especially popular amongst young people and many of them want to follow Skype's example," says Tonis Mets, an associate professor at the University of Tartu's Centre for Entrepreneurship.

Observers suggest that one of Estonia's biggest problems may, therefore, be its inability to diversify beyond ICT. "In other fields the tables are turned; we do have engineering and design-related human capital, but lack experiences, contacts and capital," explains Joeleht of Startup Garage.

Any dramatic outbreak of entrepreneurial activity outside of the technology sector may, therefore, be far off. Experts suggest that an incremental diversification of Estonia's technological portfolio is more likely. Research in the nanotechnology industry is ongoing at a centre set up in partnership with Estonian manufacturing companies. Interest in biotechnology is also growing; there are hopes the sector will move beyond its current incubation stage by 2013 to achieve an annual turnover of around €85m.

As progress will require high investment in R&D and training, it could take several years for activity to increase in these sectors. Yet given Estonia's strong track record in economic strategy, and the appetite for innovation demonstrated by its entrepreneurs, it's a distinct possibility.

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