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How Tallinn’s tech talent transformed its startup ecosystem

on Thursday, 18 January 2018. Posted in Communities, Analysis

Thanks to Estonia’s contributions to the creation of Skype, masses of technical talent and innovative e-residency scheme, entrepreneurs and investors the world over are flocking to get involved in its ecosystem

How Tallinn’s tech talent transformed its startup ecosystem

No matter who you talk to, the Estonian capital Tallinn has a serious rep for tech. While there are just 400 startups in the country, with a population of scarcely more than a million people it actually has the third-highest number of startups per capita in Europe, according to the Startup Investment Report Estonia by Funderbeam, the blockchain-based startup stock exchange. Clearly Tallinn has become a startup hub to reckon with. “It’s incredible: in the past few years, there has been a startup explosion,” says Norris Koppel, co-founder and CEO of Monese, the mobile current account startup. “It almost feels like startups have taken over the city. There have been multiple references now to Tallinn being the Silicon Valley of Europe.”

Despite this, Tallinn hasn’t always been synonymous with tech startups. “Twenty years back, there weren’t any startups in the way we would define them today,” says Koppel. In fact, in 1991, the country went through a very jarring rebirth: while the disintegration of the Soviet Union and Estonia’s declaration of independence meant the nation regained its sovereignty, it also meant that its infrastructure all but collapsed. “Initially it was very painful: the Soviets left and everything fell apart,” Koppel says. “There were no police, no banking system as such, so we had to quickly rebuild everything.”

But excruciating though this was, rebooting the country’s infrastructure from scratch actually proved to be a blessing in disguise, allowing it to modernise much faster than more well-established nations. “If you start to build a new house today then you use the latest materials and technology available,” says Karoli Hindriks, CEO and founder of Jobbatical, the talent-matching platform for international tech jobs. “Whereas renovating a very old castle will be much harder.”

Just as the internet age was dawning, Estonia was looking for efficient ways to implement bureaucracy and infrastructure and naturally it made best use of the tools at its disposal. And the result is that, for several decades, the country’s bureaucracy has been primarily digital: not only was internet access declared a basic human right in 2000 but citizens have long been able to do things like pay taxes, open bank accounts, secure mortgages and vote in elections online. “The user experience of the country is really easy: setting up a business takes ten minutes online from a cafe,” Hindriks says. “You waste so much less time on things, which means you can actually invest that time in building your business.”

While this supplied the fuel for Tallinn’s tech revolution, the spark that finally ignited it is likely much more familiar to less digitally native nations: Skype. Although the startup was founded by the Swede Niklas Zennström and the Dane Janus Friis, much of its tech was developed by an Estonian developer base led by Ahti Heinla, Priit Kasesalu and Jaan Tallinn. “Skype’s success showed Estonians that it can be done,” says Koppel. “It doesn’t matter that you’re a tiny country where it’s cold and dark: big companies like Skype can emerge.” And the video-chat app’s meteoric rise and its high-profile acquisitions by eBay and Microsoft have not only inspired a new generation of entrepreneurs but also helped to seed and support the growth of many new startups. “Many people exited Skype with a little bit of cash in their pocket and, eager to do something else with this new money, started their own businesses,” Koppel says.

And Skype’s success didn’t just get budding business people to start taking tech seriously: it also cemented the importance of entrepreneurialism in the eyes of the Estonian government. “It made it really clear to the government that good things will come out of the startup ecosystem if it is nurtured properly,” says Koppel. Not only has the government taken an active interest in promoting Tallinn’s startups on the international stage but it also makes itself far more available to the city’s entrepreneurs to ensure the needs of the ecosystem are heard. “Entrepreneurs can speak to decision makers as and when we want,” Koppel says. “I’ve spoken to a number of presidents and prime ministers and haven’t had to work that hard in order to get that sort of access.”

While it may be easy at first to dismiss this as politics as usual, with politicians paying lip-service to the concerns of the community, it has in fact yielded radical results. In 2014, the country launched its e-residency scheme, a potentially revolutionary innovation that allows entrepreneurs from around the world to become Estonian e-residents and access company formation, banking, payment processing and taxation within the country. “E-residency is doing for countries what startups are doing to corporations,” says Hindriks. By lowering the barriers to establish a company in the country and making it easier for international entrepreneurs to access its infrastructure, it could be argued the e-residency scheme is disrupting the idea of nationality itself. “The openness to taking a risk like that is a very good reflection of the mindset that you see in Estonia,” Hindriks says. “Instead of asking ‘what might go wrong?’, you can see the opportunity of it.”

But while Estonia isn’t afraid of dreaming big, this doesn’t mean that Tallinn’s tech is in any way flighty: in fact Estonia’s entrepreneurs, by their very nature, have a preference for the practical. At a time when much of Europe is struggling to secure the technical skills needed to drive its tech forward, Estonia is widely recognised as producing the highest calibre of coders. Part of the reason for this is that while western nations have started waking up to the importance of strong STEM education, many of Tallinn’s entrepreneurs were raised under an education system where these subjects predominated. “Not that I want to say anything positive about the Soviet Union but the education system had a very strict focus on science and mathematics,” Hindriks says. Inevitably, Estonia’s shift toward being a digital-first society hasn’t tempered this passion for technical skills. “Science and technology are still very important in the curriculum,” says Hindriks. “Kids are taught coding in the first grade.”

And this is reflected in Tallinn’s attitude to entrepreneurialism. “It’s a very pragmatic culture: they’re very down to earth,” says Michael Jackson, ex-COO of Skype and partner at Mangrove Capital Partners, the early-stage VC firm. “You’re more likely to get projects that solve definitive issues rather than do fancy, hipsterish sort of things.” While Silicon Valley obsesses over nailing the next social smash or unveiling the Ubers of umpteen different verticals, Tallinn’s entrepreneurs are focused on delivering much more practical, polished products. In fact, one only need compare the Valley’s beleaguered ride-sharing startup with Estonia’s Taxify to see how in Tallinn firm foundations are valued higher than flash. “The young men behind it are doing very well; they’re very down to earth,” Jackson says. “They’ve got a fraction of the staff of Uber and yet they have decent turnover, are very pragmatic and have grown without a lot of investment.”

Historically, this preference for building more organically may be part of the reality of the Estonian investment landscape, which has taken a while to mature. “In the early days, the typical Estonian investor wanted to invest ¤10,000 for half of your company,” says Koppel. “But I’m very happy that this thinking has started to change.” With high-profile successes like those of Skype bringing an influx of capital into the country, increasing numbers of homegrown angels are looking to invest in the next generation of startups. Meanwhile, the number of Estonian VC funds is currently exploding: the next year alone will see the creation of multiple seed funds offering around $30m to $50m. But perhaps most importantly, thanks to its top-notch tech skills, international funds are increasingly eyeing the Estonian ecosystem and looking to invest in its innovations. “Technical talent and founders from Tallinn are really well known now,” Koppel says. “If you go to any Silicon Valley VC, they know who Estonians are and where they are coming from.

And Estonian entrepreneurs certainly aren’t turning their noses up at this attention from overseas: while Tallinn’s ecosystem is coming along in leaps and bounds, the size of its market means that its startups need to be thinking internationally from their inception. “Estonia’s a tiny country with 1.2 million people; it’s about the size of Bristol,” says Jackson. “They know it’s a small market so if they’re going to introduce a product that’s going to be any use at all, they know they’re going to have to try to move somewhere.” Thanks to this and the role Skype has played in whetting many Estonians’ appetites for entrepreneurialism, for years many of them have looked to follow in its footsteps by expanding to Silicon Valley or, if not, London.

However, it does seem like attitudes are changing. “The more coverage the country gets in terms of thinking differently, being different and being an innovator, then I think we will see much more VC money but also founders actually coming to Estonia,” says Hindriks. Not only are initiatives like e-residency drawing in founders virtually but the buzz around the hub is motivating them to move there in their droves, with many international entrepreneurs looking to tap its talent and make use of its friction-free infrastructure. “You couldn’t even imagine that happening five years ago or ten years ago,” she concludes. “There’s much more confidence about the future so I think we will see many more people looking to build their company from this corner of the world.”

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