Baltic states want to ensure the golden goose keeps producing unicorns

Baltic states want to ensure the golden goose keeps producing unicorns
Startup Wise Guys, which was founded in 2012 in Estonia, has now invested in more than 185 early stage startups with founders from more than 40 countries.
By Linas Jegelevicius in Vilnius May 5, 2021

Over the past 20 years, Estonia, a country of just 1.3 million people, has given birth to an astonishing seven unicorns, this year’s crop being Zego, which insures commercial vehicles,, which offers personal identification solutions, and Pipedrive, a cloud-based CRM tool.

The other Baltic states, Lithuania and Latvia, have been no slouches either. Lithuania in particular is enjoying a startup boom, with Vinted, the secondhand fashion marketplace, becoming its first unicorn (a startup with a value of more than $1bn) after a funding round at the end of 2019.

Nor is the region resting on its laurels. According to a report from Startup Wise Guys and EIT Digital, in the first half of 2020 the region saw significantly more funding than in the same period of last year (see chart at bottom).

Overall, the number of startups per capita in the Baltic states has increased, especially in Estonia where there were 39% more startups than last year. Latvia and Lithuania also recorded increases of 15% and 4% respectively.

“I would be brave enough to say that coming from the Soviet past the Baltic states are a unique phenomenon, if not globally, than on the European scale for sure,” says Zane Bojare, Head of Marketing & Communications at Latvia’s  Startup Wise Guys, one of the leading B2B accelerators in Europe.

The three Baltic states may have been incredibly successful at hatching startups – particularly given their size and communist heritage – but some big names in the local investment scene are now warning that they may be running out of steam, given the limited size of their local talent pools.

“Despite some challenges and setbacks, the Baltics, including Lithuania, are indeed a good place for startups. But it is worse now than it was five years ago,” says Ilja Laurs, a Vilnius-based serial entrepreneur and venture capital investor who chairs Nextury Ventures. “I believe that Lithuania is starting to lose ground on many aspects against Estonia, Poland and the hot startup countries beyond the region, like, for example, Singapore.”

Making a splash

In interviews, top figures from the local startup scene told bne IntelliNews what makes the region special and shared their thoughts on whether and how it can maintain its incredible record.

Although all three Baltic nations are A-listers on the startup stage, it is Estonia that has made the loudest splash internationally. Like the other Baltic states, it had the benefit of a strong Soviet educational background, especially in sciences, and the links the countries reforged, first with the Nordic states and then with the rest of the European Union after accession in 2004.  But Estonia was also quicker to make business-focussed reforms and encourage inward investment.

Perhaps most importantly, with Skype communication software, which launched in 2003, Estonia made a spectacular start, helping it to build a tech cluster and develop an investment community.  Skype’s success spurred the emergence of the next wave of entrepreneurs who had had experience of a unicorn, as well as a whole generation of angel investors with a tech entrepreneurship background. Estonia went on to generate  Playtech gambling and trading software, Transferwise international money transfers, and Bolt, the taxi platform.

“Combined with Estonia’s very clear strategy towards e-governance and promoting startup culture, it was a win-win that is hard to catch up with – I mean for Lithuania and Latvia,” says Bojare of Startup Wise Guys, which was itself founded in 2012 in Estonia, and has now invested in more than 185 early stage startups with founders from more than 40 countries.

Bojare points out that Estonia’s commitment to tech startups is shown by the fact that two onetime presidents are deeply involved in the ecosystem: former president Toomas Hendrik Ilves and current president Kerste Kaljulaid.

She admits that Estonia is over-hyped, but this is another factor in its success. “Estonians are also master marketers and in a way that they have created a self-fulfilling prophecy, where sometimes the reality has to catch up to the hype,” Bojare says.

Yet Lithuania is now breathing down Estonia’s neck. Lithuania has had the biggest growth jump in new startups during 2019 -2020, whereas Latvia really picked up the pace in November 2020, according to Agne Randyte from Versli Lietuva (Enterprise Lithuania), the Lithuanian business promotion agency.

According to Enterprise Lithuania, the country’s startup ecosystem now matches that of Estonia: there are 1,043 startups in Lithuania, compared to 1,121 startups in Estonia and 400 plus in Latvia. Randyte lists incubator Tesonet, digihealth startup Kilo Health, mobility services platform Trafi, 3D design company CGTrader, and microfluid tech company Droplet Genomics as names to look out for in the future.

“Estonia is famous for its digitalization, especially in the governmental sector. It is very easy to get an e-residency or open a new company,” says Sarune Smalakyte, head of the Rockit fintech and sustainable innovation centre in Vilnius. “No one doubts that Estonia is famous for its unicorns like Bolt or Pipedrive, but Lithuania has always been spotted with such startups as Vinted or [money transfer company] TransferGo,” she says.

“Lithuania is now one of the biggest fintech hubs in the world, with a ranking of four (competing with hubs like the USA, Singapore, and UK) and this is our key area,” she says. Smalakyte picks out up and coming startups Ondato, which offers know-your-customer solutions, and financial research company as top fintech hopes.

She also points out that the other Baltic states share many of the same advantages as Estonia.

“Most investors agree that the business infrastructure, tax regulations, and talent availability are quite similar across the Baltics,” she says.“An innovation-friendly environment, the strong performance of the regulatory system, the talent pool, and ease of doing business are among the strongest innovation dimensions for both Latvia and Lithuania,” says Smalakyte. “What is more, acceleration programmes, collaborations between corporations and startups, the business angels network, and VC funds also play a big role in startup boosting in the whole region.”

Ivan Ladan, Founding CEO Marine Digital, a startup that originated in Riga, says that both Lithuania and Latvia have made a lot to progress in building a better environment for young companies to start a business.

“It might be so that Estonia has started these activities a bit earlier and established cooperation within the local ecosystem between the government, corporate business, and IT/industry entrepreneurs, while in Lithuania and Latvia these processes are still on the way to a great balance,” he says.

Bojare of Startup Wise Guys says Latvia and Lithuania have their own advantages too.

“If we look at Latvia specifically, its stronghold is what I like to call ‘heavy industries’ such as drones, hardware, robotics, biotech, medtech, deeptech. Also its recently passed employee stock option regulation puts it in a favourable position for founders looking for a good base in Europe,” Bojare says.

She also points out that both Latvia and Lithuania reacted very fast in reaction to the political crisis in neighbouring Belarus by welcoming tech migrants, which is already showing up in the startup numbers.

Think global

But the Baltic states are also coming face to face with severe constraints because of the size of their economies and their limited talent pools, which have become even smaller as the local superstars such as Wise (formerly Transferwise), Bolt, Vinted, Printify and others grow.

“The local market is small and there should be no illusion about a breakeven on the local markets,” says Ladan  of Marine Digital. “Also, as not all industries are represented in the Baltics, one has to do the research in-depth before starting a project and locating it in a particular place, as an example Lithuania has the edge for fintech projects, Latvia has the edge for engineering projects, Estonia might be good for some other industries/niches.”

Finance can also be a constraint. Laurs of Nextury Ventures says a big challenge now for Lithuanian startups is the rigidness of the local traditional banks. “They have become super-cautious [in issuing loans] and taking super extreme measures, which is a kill for any startup,” Laurs says.

This is even more damaging given the weakness of the local stock markets, meaning that startups often have to rely on local angels or venture capital funds until they can reach a size that enables them to do an international IPO or attract a global private equity fund.

This points to the reality that the small size of the Baltic states means that tech startups must think globally from the outset if they are to succeed, a feature that paradoxically has helped create so many local unicorns. Mindaugas Ubartas, head of Lithuania’s association of communication industries, Infobalt, says that to develop more unicorns, Lithuanian startups need to follow in the footsteps of Estonia and think globally, not regionally.

Marine Digital’s Ladan agrees that not all of the local funds and angels have the necessary international and global mindset yet, and some of the funds, for example, are willing to invest only in local operations.“For me it's understandable, but this is definitely not related to business logic,” he says.

Funding rose year-on-year in 1H2020 in the three Baltic states.