Europe has a problem. It’s falling behind both the US and China in innovation. If a European start-up gets off the ground they regularly decamp for the US where the market is bigger and more liquid. And the lack of VC funds coupled with thick red tape, make establishing a start-up more difficult than it should be.

But there is an exception. The tech-savvy Baltic States have been churning out start-ups that have scaled and quickly become world leaders. The VOIP telecoms company Skype is probably the most famous, but in recent years a growing number of niche products and services have sprung up making the three small northwestern republics an engine of innovation growth for the whole of Europe.

From a second-hand fashion unicorn to AI-powered wind-turbine robots, a new generation of Baltic companies is building global businesses from some of Europe's smallest markets

Second hand clothes

When Milda Mitkutė launched Vinted from Lithuania in 2008, she was not trying to build a unicorn. She was simply trying to clear space in her wardrobe.

Nearly two decades later, the second-hand fashion marketplace has become a unicorn and a flagbearer of Baltic innovation.

The three Baltic states account for fewer than seven million people combined. Yet they have produced a succession of internationally successful companies including Vinted, Bolt, Pipedrive, Printful and a growing number of deep-tech and industrial technology firms.

The explanation may lie partly in a characteristic repeatedly highlighted by entrepreneurs and investors at the EBRD Annual Meeting in Riga: necessity.

"We were hungry to reach things," said Mitkutė. "People working there were also hungry to live better than their parents." The result was a generation of entrepreneurs willing to take risks and think internationally from the outset.

Scaling up

Unlike founders in Germany, France or Italy, Baltic entrepreneurs cannot rely on large domestic markets to scale. Success requires exporting almost immediately.

"In the Baltics, all people, if they create a company, launch a company, they think global from the first day," said Mitkutė. "You just cannot afford to stay in the Baltics."

Private equity investors argue that this constraint has become a competitive advantage.

"The Baltics are so small we just need to go internationally," said Ernests Bordans, a partner at Livonia Partners. "For us it's important to find companies where we can believe that there is something special about them, that they can also win internationally."

That international mindset is increasingly producing companies that compete far beyond the region. Lithuanian packaging manufacturer Bagfactory exports 90% of its production to nearly 40 countries, while Latvia's Aerones has become a global leader in robotic maintenance systems for wind turbines.

The latter offers a glimpse of the kind of industrial innovation emerging from the region. Aerones has developed robotic systems that inspect and repair turbine blades, reducing maintenance times from around 10 days using rope-access technicians to as little as one to three days.

"If you combine technical capabilities with persistence and resilience, we are unstoppable," said Endijs Bernics, the chief of staff at Aerones.

The company has already serviced approximately 25,000 turbines globally and uses AI to analyse inspection data collected from wind farms across Europe, North America and Australia.

Aerones began life as a drone startup before discovering a larger opportunity in wind energy. The company abandoned its original technology of heavy lifting drones and rebuilt its business around robotic maintenance systems that climb and clean wind turbines. A human crew will take 3-10 days to clean a wind turbine, during which time it earns no money. The robots need 1-2 days. And it's much easier to train a technician to run the robot than it is an engineer to do the dangerous job of scaling a wind turbine tower, says Bernics.

That willingness to pivot quickly is frequently cited as an advantage over larger European economies. Bernics tells a story of a US company in Texas that tried to build a maintenance robot, but failed. They asked Aerones to take on the job and delivered a working robot in a few months.

“It’s because we are a small company, but nibble and focused on innovation and delivering technological solutions to practical problems,” says Bernics.

Baltic companies are typically smaller, leaner and less burdened by legacy structures. Investors say decision-making is often faster, while management teams are more willing to experiment.

"We have a great story," said Jonas Elvikis, CEO of Bagfactory, which makes high quality shopping bags and sells them around the world. "Being a small market, in the very initial stage you are forced to focus on how to sell internationally."

Bagfactory has focused on high quality sustainable bags. It developed an ultrasonic method of sealing the sides of the bags so that it doesn’t need to use glue. It also has a sophisticated printshop to make attractively designed bags for its customers, but again developed water-based dyes so that the bags are 100% recyclable without containing pollutants.

“It’s about being best in class and constantly improving the product,” says Elvikis, who took over the job two years ago to grow the international distribution. “Sustainability was initially a nice-to-have for the customers, but as the Climate Crisis unfolds it has become a strategic commitment for most big companies.”

Red tape

The region's innovation ecosystem is also becoming self-reinforcing. Former employees of successful companies are launching startups of their own, creating a pipeline of experienced founders, engineers and investors.

"Creators create other creators," said Mitkutė, who provides mentoring to other start-ups in the region.

Yet the Baltics' rise also highlights concerns about Europe's broader competitiveness. The Draghi report released in 2024 laid out in great detail how Europe has fallen behind after decades of chronic underinvestment and needs to spend a recommended €800bn a year over the next four years just to catch up with the US and China.

The EU is grappling with that. When he took office, German Chancellor Friedrich Merz raised €500bn for investments to kick start Germany’s flagging economy. A year on very little of that money has been spent as it is bogged down in permitting and bureaucracy. Mitkutė argued that Europe risks falling behind because regulation often stymies innovation.

"Europe has zero risk tolerance," said Mitkutė. "First of all we want to regulate and only then to let people create."

In this context the Baltics are a breath of fresh air in Europe's stagnant innovation climate. Whether its model can reshape Europe remains unclear.

"There is really almost nothing that we couldn't do," said Bordans. "Lately we're punching above our weight in terms of how huge some of these companies are becoming."

For a region once viewed as Europe's periphery, that may be its most important innovation of all.