Breaking the digital ice: the growth of tech start-ups in the Baltic states

Recent years have seen rapid growth in the tech start-up communities of the Baltic countries, thanks to encouragement from government. If that growth continues, it could just be the tip of the iceberg. “Being here is like being in New York before it was built,” says Avery Schrader, an energetic Canadian start-up founder based in Tallinn, Estonia. Home to almost a third of Estonia’s 1.3m residents, you can sense the different stages of the city’s history through its architecture: from the Gothic spires and picturesque orange roofs of the Old Town – a UNESCO World Heritage Site – to turn of the 20th century wooden cabins dotted next to Soviet-era apartment blocks and ultra-modern shopping centres, Tallinn wears its centuries of history proudly. But its latest chapter – the dream of becoming a world leader in tech – is among its most ambitious. And it seems to be working. Last year, Estonia’s rival to Uber, Taxify, raised $175m (£134m) from a group of investors led by German carmaker Daimler. That deal pushed the total raised by Estonian start-ups to €327m (£285) across 28 deals in 2018 – up from just €7.3m across 10 deals in 2008. It also made Taxify Estonia’s fourth tech unicorn – a company valued at more than $1bn. As the country’s official start-up organisation Startup Estonia puts it on its website: “There’s no other place as small where you can find four unicorns running free.” Explosion of activity Schrader moved to Tallinn a year and a half ago, aged 19, and spent four or five months at university before dropping out to launch a start-up. His company, Modash, helps marketers find the right social media ‘influencers’ to push a brand to target audiences. Schrader cannot see himself leaving any time soon. “It’s really crazy what’s happening here. There’s a ridiculous amount of companies. They’re preposterously successful for the number of them,” he says. It might be a bit unfair to think of Tallinn as an unbuilt New York. After all, I spoke to Schrader on Skype, which was invented more than 15 years ago in Estonia and still crops up in conversations whenever someone asks what the small forest-covered country has done for the world. But there has been an unprecedented explosion of activity in the past two years, much of it led directly by the Estonian government. This also mirrors what its Baltic neighbours, Latvia and Lithuania, are doing to make the region a hub of tech activity with a disproportionately strong appeal to start-up firms. Estonia, Latvia and Lithuania all launched a Startup Visa programme in 2017. Though the specifics vary among the three countries, they all offer the same basic service: streamlining the process for foreign innovators to launch their start-ups in the Baltics. In Lithuania, for example, the visa gives those behind start-ups temporary rights to live and work in the country for up to one year, which can be extended for another year before regular immigration rules kick in. In Latvia, the visa is issued for up to three years, and in Estonia for 18 months. Incentives for tech Applicants for Startup Visas have to pitch their ideas and prove that they are legitimate entrepreneurs. In Estonia, start-ups have to convince a panel of seven organisations within the start-up community. Schrader says the process is “super easy”, adding: “It’s the same pitch you would give to a VC or angel investor: this is what we do, this is how many customers we have, this is how big our market is. “You have to have something that other people are willing to believe in.” So far, Estonia has had the most active reception to its Startup Visas, attracting 1,108 applications from companies worldwide since its launch two years ago. Some 931 people have either moved or been given the right to move to Estonia so far – of those, 657 moved in 2018, suggesting that the programme is growing rapidly. By comparison, Lithuania received 178 applications from foreign companies in 2018, which was a 41% rise on the year before. Latvia had not, at the time of writing, published its numbers for 2018. All three governments are approving incentives left, right and centre to bring more people into their tech ecosystems. Latvia’s parliament passed a “start-up law” in 2016, establishing a flat tax regime where start-ups pay €252 a month per employee, regardless of what they earn. The state will also cover all social and personal taxes for highly qualified start-up employees – those with a doctorate, a master’s degree or more than five years of experience. Meanwhile, the Estonian government proudly touts its business-friendliness: 0% income tax on retained or reinvested profits and a 15-minute application to set up a business online. Crucially, start-ups – along with those hiring IT professionals and large-scale investors – are exempt from immigration quotas, which means they can hire the talent they need from outside Estonia. That can help to resolve problems finding talent in a country with the population of four London boroughs. The founders of OriginalMy, a blockchain business that verifies digital content, recently moved the company from Brazil to Estonia. A spokesman for the company says: “We moved from Brazil to Estonia because of four major things: being close to our new leads in Southern Europe, regulation, costs and taxes. It was a very good decision on our internationalisation strategy.” Those benefits work on a backdrop of strong technical infrastructure and low costs of living. All three Baltic countries have among the 20 fastest internet connections in the world (Lithuania at 17, Estonia at 15 and Latvia at 13 – by comparison, the UK is ranked at 35), according to broadband comparison site cable.co.uk. Attractive environment Justina Jursyte, co-founder of Proptech Baltic, says: “The Baltic countries stand out with advancement in technology, IT talents and a favourable business environment. This is how we see ourselves in the world: dynamic, flexible and keen on advancement. “I believe it is safe to say that all Baltic countries understand that IT becomes the value driver in all industries – and all that, combined with talents, makes a great value proposition.” Cost of living is similarly inviting, averaging about €1,093 per month for a typical start-up employee in the Baltics. Calculations from cost of living database Numbeo suggest that would last about 11 days in London, 17 days in Stockholm or 19 days in Berlin. Digitising residency In one way, Estonia has gone a step beyond Latvia and Lithuania, offering online residency, or e-residency, to entrepreneurs around the world. Through the programme, the Estonian government can issue a digital ID to anyone in the world, which then allows that person to start and manage a business within Estonia – and, by extension, the European Union – and do it all online. Since British journalist Edward Lucas became Estonia’s first e-resident in 2014, the programme has issued some 50,000 permits to people from 157 countries who have gone on to launch around 6,000 companies in Estonia without having to live in the country itself. According to Kaspar Korjus, head of Estonia’s e-residency programme, half of all that activity happened in 2018, and those companies have paid around €10m in taxes to Estonia. Deloitte, meanwhile, estimated that e-residency in Estonia would bring about €194m in net indirect socio-economic benefits to the country by 2021. Ever since the UK’s EU referendum in 2016, Estonia’s e-residency scheme has emerged as a potential solution for businesses that want to continue accessing the European market. Already, 2,447 UK citizens have applied to become Estonian e-residents, with 267 of them going on to launch businesses in the country. In Lithuania, Ihor Pakhomov, Ukrainian co-founder of cybersecurity start-up EsteQ, says he set up his company there for several reasons. It provides access to the European market in a place where Russian is widely spoken. But the really key benefits come from the support of a wider network. “The Startup Visa is really nice because in the Baltics the situation with immigration is pretty bad,” Pakhomov says. He adds that while there is some hostility towards immigration in the country as a whole – “because of conservative groups in government” – the start-up community has been open-minded and is readily available to help with both professional and personal concerns. The community, though still small, is “swimming together”, he says. A tight-knit community Schrader echoes that opinion in Estonia: “Foreigners have an advantage because, on average, we’re higher on obnoxiousness – or outgoingness. If you leverage a little bit of confidence in speaking to people, it’s super-easy to access the top founders here. If I wanted to, it’s super-easy to call Markus Villig, who founded Taxify.” He says that while there is “definitely an older generation” that is wary of immigrants, the start-up community – about a quarter of which is foreign in Estonia – welcomes them. It’s created a tight-knit community where even companies that outgrow Estonia, such as Taxify, which now operates throughout Europe and Africa, stay headquartered in Tallinn. Others, like robotics start-up Starship, have moved their base to San Francisco while maintaining back-office functions in Estonia. But there is more the community could do to build itself, Schrader argues. All three Baltic countries have a government-led initiative to attract the industry – Startup Estonia, Startup Lithuania and Labs of Latvia – but there are concerns that the community might become too reliant on the government. “Talent is a really big issue here because there’s only so many human beings in this tiny country. We have this single structure of ‘OK, we’re allowed to break the rules around how many foreigners we can bring in’, so the question is how can we have a concerted effort to do that?” Schrader says. “That means building the brand of ‘Come here to work’ – and that takes more than relying on the government to make Estonians breed or something.” Regardless, Baltic start-up communities have hit a growth spurt in the past couple of years, and it looks like the beginning of something much bigger. As Schrader, ever enthusiastic, tells me at the end of our call: “Hopefully, we will grow super-fast. We need an office in Portugal in order to find the best talent in Southern Europe, but for an extended period of time it would be cool to stay here.”     To send feedback, e-mail karl.tomusk@egi.co.uk or tweet @karltomusk or @estatesgazette Photo: GTW/imageBROKER/REX/Shutterstock