This tiny country keeps on creating tech unicorns. Here's how it does it

Investments in Estonian startups are growing fast and the country of just 1.3 million people has produced already its fifth unicorn.

While many of us have been forced to work from home during the past year, few are likely to say they raised tens of millions for their startup from their bedroom, like Estonian entrepreneur Kaarel Kotkas.

Kotkas is founder and CEO of identity verification startup Veriff, which recently announced that it raised €58 million in a new Series B round led by venture capital firms IVP and Accel, on top of the €14 million it raised last year.

"Before the pandemic hit, I was in the UK and US for six months. Now for the past year, I have just been in Estonia and pretty much raised Series B from my bedroom/office in Tallinn," he says.

"The past couple of months I've lived in the rhythm of San Francisco as both of our lead investors – IVP and Accel – are San Francisco-based. My day started at 6pm and ended at 4am Tallinn time."

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Although taking care of everything remotely in a different time zone was challenging, the 26-year-old founder believes that the main principles of raising funding have remained the same.

"If you are well prepared then it is not too difficult – Veriff has a working business model, a clear long-term strategy, and a strong leadership team in place. Also, Veriff's board was really supportive, utilizing their network and making the fundraising process smoother," he says.

Identity verification has gone from a nice-to-have to a business imperative across many industries. Kotkas says dealing with the pandemic has helped sponsor new use cases; for example in the education sector, where students are taking exams while continuing with remote and hybrid learning, fast identity verification will be critical to keeping the learning process going and to ensure assessments are secure.

"We also expect to see significant growth in healthcare, where verifying your health status as vaccines are rolled out will be critical, and hospitality, which will be looking for new approaches to verify travellers safely and quickly," Kotkas says.

Veriff is just one example of Estonia's startup scene, which, despite the tough economic conditions of the past year, has continued to grow.

Last year transportation and food delivery startup Bolt accounted for more than half of the total record of €453 million in funding that Estonian startups received; Bolt raised €100 million from Naya Capital Management in May and another €150 million from D1 Capital Partners and Darsana Capital Partners in December.

Also among the biggest recipients of funding were fintech startup Monese (€55 million), ultracapacitor energy storage company Skeleton Technologies (€41 million), cybersecurity startup Rangeforce, and Veriff (both around €14 million).

According to the government's Startup Estonia initiative, altogether 76 Estonian startups managed to raise money in 2020, 30 of which raised at least €1 million. 

Indeed, the statistics for the first few months of 2021 seem to prove that 2020 was not an aberration: by mid-April, Estonian startups had already raised almost €200 million, including the funds raised for Veriff and a €64 million investment raised by digital customer-service platform Glia.

Even as the GDP of Estonia contracted by 2.9% in 2020, the total revenue of Estonian startup companies grew 43% and the number of employees 4% to 6,072 people. At the end of 2020, the startup and technology industry provided a significant 6.9% of Estonia´s GDP.

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The goal is to reach 15% by 2025, says the head of government initiative Startup Estonia, Eve Peeterson, adding that coronavirus hasn´t changed those ambitions.

2020 also marked another significant milestone for the Estonian startup ecosystem: CRM platform Pipedrive received a majority investment from Vista Equity Partners, making Pipedrive the fifth startup from Estonia – after Skype, Playtech, Bolt, and Wise (formerly known as Transferwise) – to be valued at more than a billion dollars.

In fact, depending on your definition of an Estonian startup, it could be argued that Estonia already has a sixth unicorn. In March this year, London-based insurance startup Zego announced a $150 million investment round, valuing the company at more than $1.1 billion. The company´s co-founder and CEO is Estonian Sten Saar, but the company was founded in London and doesn´t have a subsidiary or office in Estonia.

Still, the question remains: what has happened in recent years to mean that a country of 1.3 million people keeps producing a new unicorn almost every other year?

"To quote Roman philosopher Seneca, 'luck happens when preparation meets opportunity'", says Kaidi Ruusalepp CEO of global equity-funding and trading-platform startup Funderbeam.

Ruusalepp argues that, in addition to having an advanced digital society and a great pool of talent, another key factor is improved access to capital and networks.

"If the company is mature enough to look for series B or C round funding, then the Estonian super-founders who have themselves already invested into a particular company in earlier stages are very well connected to bridge the startup with venture capital giants in London or Silicon Valley," she says.

Veriff´s CEO Kotkas points out that there are already a couple of generations of startup founders in Estonia, who have successfully exited their businesses and are now looking for new startups and projects in the country that have potential.

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This resonates well with the statistics collected by Startup Estonia: in 2020, almost €31 million of the total €453 million funding provided to startups was provided by the local investors, many of whom have a background from a local unicorn.  

And their support is not only financial.

Ruusalepp argues that Estonia might be the only country where startup founders have established a strong club called Founders Society, and the code of conduct in the Estonian startup landscape is that one founder helps another.

"I can call to tens of other Estonian founders; they'll find a moment to listen and consult me. This also works vice versa," she says. 

In her opinion, having a strong sense of unity enables startup founders to share experience, but also to be the one united partner to the government and other industries in and outside Estonia.

"Founders can learn from other founders who have already tackled similar challenges, engineers learn from other top engineers, business developers learn from other top business developers, and so on."