In the early 2000s, Estonian software engineers Ahti Heinla, Jaan Tallinn, Priit Kasesalu, and Toivo Annus teamed up with Swedish entrepreneur Niklas Zennström and Danish entrepreneur Janus Friis and built VoIP telecommunications service Skype. After quickly gaining international success, the company was sold to eBay in 2005 for $2.6 billion, giving the Estonian tech scene its first unicorn.
Even with the ongoing coronavirus crisis, Estonian tech startups managed to raise over $1bn of funding in the first 10 months of 2021: double that of the previous record for the whole of 2020.
Mobility company Bolt has been by far the biggest recipient of funding. The company started eight years ago as a small ride-sharing app and now offers vehicles for hire, micromobility and food delivery in Europe, Latin America, Asia, and Africa. It received €20million from World Bank's IFC in March, and €600 million from investors in August to launch its new, 15-minute grocery delivery service in 10 European markets.
Although Bolt's contribution counts for the lion's share of investment, Estonia continues to produce promising startups at a high rate. In a country of 1.3 million people, more than 30 startups have closed investment rounds of over a million euros in the first 10 months of this year, with AI-based customer service platform Glia (€64m), identity verification platform Veriff (€58m), and ultra-capacitor manufacturer Skeleton Technologies (€29m) taking the second, third and fourth spots.
So, what's the secret behind Estonia's startup success?
"Most of the year the weather is so bad and it's dark outside, so what else would you do besides writing code in a cave?" jokes Madis Lehtmets, CEO and co-founder of construction software startup Remato, which raised €1.4m in August.
Jokes aside, Lehtmets says Estonians are a hardworking and resilient people, and largely quiet introverts. "We don't make friends or form communities that easily, but when we do, the connection is much deeper and stronger. You can see that from our startup ecosystem…I think technology has given our people a medium to shine."
The Skype effect
When looking at the development of the local tech scene, it is difficult to overestimate the impact Skype has had.
In addition to the money that its sale in 2005 injected into the country's tech ecosystem, Estonia remained the main development center of the platform for several years, giving thousands of Estonians the experience of building world-class technology for a big multinational corporation.
Many Skype alumni subsequently went on to found their own companies that drew further investment to Estonia's tech industry. Taavet Hinrikus – Skype's very first employee – co-founded TransferWise (now Wise), a multi-billion euro company now listed on the London Stock Exchange. CRM platform Pipedrive, which was valued at about $1.5bn in 2020 after receiving a majority investment from Vista Equity Partners, was co-founded by former Skype employee Martin Tajur.
Martin Villig is another former Skype employee. He went on to co-found Bolt, which was valued at approximately $4.75bn in its latest investment round in August 2021.
These, and other companies founded by ex-Skype staffers, have employed thousands of people in Estonia and have provided valuable experience for the next wave of startup entrepreneurs. In the process, a lot of money has been reinvested into Estonia's tech ecosystem.
"There is the virtuous cycle following the Skype effect, with more capital on the market from the founders who have had a successful exit and giving a boost to new companies coming up," says Taavi Madiberk, CEO and co-founder of Skeleton Technologies, which is one of the most promising startups in Estonia and Europe's biggest ultra-capacitor manufacturer.
"There is a lot of solidarity and proximity in Estonia's tech ecosystem, with a lot of founders willing to give back and make the ecosystem grow."
The situation in Estonia was completely different when Madiberk was first trying to raise funds for Skeleton Technologies in 2013. For one thing, he says financing for tech companies has gotten significantly better and more accessible on a global scale.
Lehtmets, who cooperated with a number of local startups before co-founding Remato in 2018 agrees, adding that success stories have helped put Estonia on the map in the global VC and startup scene, while removing much of the reliance on overseas investors: "Our local investor community has grown very fast, and for an early-stage startup, you don't have to raise capital from abroad – there's enough money at home."
That's not to say fundraising has become any less stressful: Lehtmets recalls his own experience of raising runs for Remato in the first half of 2021, reaching out to some 100-plus investors in all: "I sent out emails, reached out to old contacts, used all available intros, and booked the first three to four weeks tightly with around 60 investor calls. I think my record was nine calls on one day, though I do not recommend that – I started to lose track of what I've already spoken about during the last calls that day."
Success breeds success
Estonia's success stories have not only attracted traditional investors to its startup scene, but also created an important pool of capital to be invested.
According to statistics from Estonian startup hackathon organization Garage48, in the first 10 months of 2021, local investors injected more than €42million into local startups. In comparison, the figure for the entirely of 2021 was €31million.
Mari Hanikat, Garage48's CEO, points out the historical context behind the country's tight-knit tech community. "The Soviet background has pushed many of the entrepreneurs born in the '80s to do their own thingto reach success instead of pursuing a more traditional career path and join a steady job in a more corporate environment," Hanikat tells ZDNet.
Given the rate at which new, high-potential startups are emerging in Estonia, both Madiberk and Lehtmets are confident that this year's investment record will be beaten.
However, while finding money doesn't present the same challenge as it once did, finding talent does. "It is always difficult to find top talent locally and there is tough competition among tech companies," says Madiberk.
"We have been working on in-house initiatives, such as the Skeleton Academy, to help our employees gain new skills, because upskilling is key nowadays."
Garage48's Hanikat believes that there is huge untapped potential in Estonia's tech workforce, particularly as it is still male-dominated. According to the data gathered by Statistics Estonia and Estonian Startup Database, only one-fifth of the country's startups are founded by women, and only one-third of startup employees are female.
"We need more inclusion. It is very exciting to see more female founders, but the ratio is still very small," says Hanikat.
"The startup community has come very far over the past 10 years, but there is still a very long way to go in empowering more female founders."