Shedding Soviet history, Estonia aims to be world’s most pro-tech nation

Karoli Hindriks is old enough to remember when the last Soviet tanks and soldiers filed out of Estonia in 1991, not long after the country declared its independence from the USSR.

The joyful celebration that followed decades of occupation was quickly replaced by reality. Tucked into the northeastern corner of Europe, with a population of 1.3 million, no natural resources, and no major economic engine, residents looked around and wondered: Now what?

Hindriks, 33 represents a big part of the answer. In 2014, she founded Jobbatical, a website that helps people who are traveling the world find jobs that let them earn money to extend their journeys. Based in the nation’s capital of Tallinn, Jobbatical raised $2 million in venture capital last year in a round led by New York-based Union Ventures.

The company’s headquarters has the playful atmosphere found in any Silicon Valley startup, with the particularly local touch of a giant wooden swing in the lobby — a nod to Estonia’s national sport of swinging (kiiking). Several employees are from outside Estonia, having found positions there using Jobbatical. In joining Hindriks and her company, they are now part of one of the more remarkable and unlikely startup economies.

The Estonian ecosystem has been carefully cultivated by a government that has itself radically embraced the future to reinvent its relationship with its citizens. Put those elements together and you have what is arguably the world’s most enthusiastically pro-tech nation, one that has overcome its remote location by seizing the possibilities this age of networked computing offers anyone who wishes to be part of a global economy.

In throwing open its borders, Estonia also increasingly stands out in an age when many other countries are withdrawing into themselves.

“It was one thing to look at people around me and how we perceived geographies when we were growing up,” Hindriks said. “We used to have friendships and they were very local. Suddenly, we’re living in a world where I’m connected to people all around the world. We start to perceive geography much differently than we did before.”

Getting away from it all

It takes more than looking at a map to convey just how remote Estonia feels. Tallinn, the capital city, is a two-hour ferry ride from Helsinki, Finland and a three-hour train ride to St. Petersburg, Russia. The native language is spoken by just over a million people. At various periods in its history, it’s been invaded by Sweden, Denmark, Poland, Germany, and Russia.

Its geography creates a sense of both isolation and vulnerability.

Walking into the historic city center of Tallinn, which is home to about one-third of Estonia’s population, gives one a sense of the richness and turbulence of this nation’s history. The architecture is a mix of period styles, from classic European Medieval to Russian Orthodox churches, all incredibly well-preserved. On an early December day, with a slight snow falling and the sun having set just after 3 p.m., a tour of this old city feels almost like one imagines Santa’s North Pole to be.

But pass through the touristic beauty of this zone and you come out the north side to an industrial area that is being transformed by aggressive bets on the future. The Telliskivi Creative City (Telliskivi Loomelinnak) is a former railway and factory center that features the Lift99 coworking space for startups and the headquarters for crowdfunding financing platform Funderbeam.

They are surrounded by trendy restaurants selling craft beers, artists’ cooperatives, and a range of other small businesses both digital and analogue. Many of the 10 formerly industrial buildings are now adorned with fantastic graffiti designs from local artists.

 

It’s as if someone carved out a few blocks of San Francisco’s South of Market district, transported it the Baltics, and dropped it here.

Funderbeam has become one of the more notable names in the Estonian startup scene, having raised $2.6 million last year. Lift99 was cofounded by Ragnar Sass, a serial entrepreneur who cofounded CRM platform Pipedrive, which has raised $31.2 million. Testlio, a QA testing platform, has raised over $7 million and has joint headquarters in San Francisco.

These startups are part of a growing community of 400 startups — either located in Estonia or with Estonian founders abroad — that have been getting increasing attention from international VCs. In 2016, Estonian startups raised a total of $108.9 million, up from $102.55 million in 2015, according to Startup Estonia, the government-sponsored initiative to catalyze the nation’s startup economy.

The largest round last year went to foreign exchange service TransferWise, which raised $24.97 million. Founded by Taavet Hinrikus and Kristo Käärmann, the company is officially based in London but maintains development offices in Tallinn. The pair started the company after being frustrated by the cost of transferring money between London and Estonia.

These companies are attracting international VCs because — knowing that their home market is a tiny one — startups here have to focus on building a global service if they want to have any chance of success. And while the fundraising sums may not sound extraordinary by Silicon Valley standards, those dollars go much further in Tallinn, where salaries and the cost of living are a mere fraction of what they would be.

“We raised an angel round of $260,000,” said Hindriks. “If we had been in San Francisco, it probably would have been the burn for one month. Here, that gave us a year to figure out what we were doing.”

The People’s Republic of Skype

Like Hindriks, Ahti Heinla can remember growing up in Tallinn when it was part of the Soviet Union. When Estonia gained its independence, he felt personally liberated.

His parents were both Soviet computer programmers who taught him how to write software. He was playing with punch cards when he was five years old. He always wanted to do this own thing, and when the Soviets left he found himself a citizen of a country that had no long traditions of how things should be done. It was a chance to write his own rules.

In the ’90s, he teamed up with two compatriots, Jaan Tallinn and Priit Kasesalu, to start a video game company. As that was failing, they were recruited by Sweden’s Niklas Zennström and Denmark’s Janus Friis to build a portal company. That, in turn, led the Estonians to develop a peer-to-peer service called Kazaa, which quickly gained international notoriety for enabling huge amounts of music file swapping.

The group then found another use for their P2P technology: Skype. While Skype is alternately seen as a Swedish, Danish, or sometimes even British company, a large number of its employees have always been in Estonia, even to this day. It is almost impossible to overstate the impact the success of Skype has had on Estonian entrepreneurs, and the sense of pride people feel when they talk about the company.

“Skype had quite a transformational effect on the startup scene,” Heinla said. “Before Skype, it wasn’t really demonstrated in Estonia that you could do a startup and do well internationally. But once someone has shown it’s possible…”

Startup Estonia has tracked 40 companies that were started in Estonia by former Skype employees.

“Skype had what it took to build a global company,” said Mari Vavulski, head of Startup Estonia. “Skype has proven that a small country can do something big.”

Heinla is himself among the Skype veterans who’ve founded a new company. He’s CEO of Starship Technologies, which is building autonomous robotic vehicles to deliver goods to homes and businesses. Last month, Starship announced it had raised $17 million in seed funding. The company splits its headquarters between Tallinn, London, and Silicon Valley, but the bulk of its development team is in Estonia.

“Estonia is a great place to do development,” Heinla said. “There are a lot of great engineers and it’s a lot easier to hire them. I know everybody there and it just wouldn’t be the same anywhere else.”

It’s for just that reason that another member of the Skype diaspora, Steven Tamkivi, moved back to Tallinn 18 months ago to launch his new company, Teleport.

Tamkivi had spent eight years working at Skype. After leaving in 2013, he became an entrepreneur-in-residence at Andreessen Horowitz. It was during this stretch that he began fleshing out the idea for Teleport: software that helps people decide the best places for them to live and work.

When it came to hiring, however, his network was in Tallinn, and so he left Palo Alto to focus on building his team. While Europe’s startup scene has been surging in recent years, Estonia has been accelerating despite being far from the continent’s most glamorous and powerful capital cities.

“European startups are becoming more global,” Tamkivi said. “But Estonia’s isolation forces you to think internationally from the beginning. Estonia right now is like Europe on steroids.”

Country as a Platform

On a frozen evening in Helsinki, Finland, Estonian president Kersti Kaljulaid arrived to represent her country’s most ambitious startup: its government.

Under its sweeping e-Estonia initiative, the government has become an incubator for programs pioneering advances in digital citizenship, security, virtual business, and education. And, like any good startup, it knows how to market itself. On this evening, e-Estonia sponsored the opening night party for the mega tech conference Slush.

The party featured musical celebrities from Finland and Estonia, as well as culinary treats from both countries. During a pause in the festivities, Kaljulaid took to the stage to discuss the progress the country has made with its e-Estonia initiatives, particularly its e-Residency program.

The residency program allows anyone to become an official resident of Estonia without having to move there. E-Residents are given an identification card with a chip that uses 2048-bit public key encryption. With that digital ID, they can access government services to set up a company or open a bank account in Estonia without ever needing to actually visit.

Kaljulaid told the audience that since e-Residency was launched in 2014, more than 15,000 people from 135 countries have applied. She said that those e-Residents have launched 1,000 new companies based in Estonia. These companies, in turn, pay taxes and fees for other services that contribute to the country’s economy. And, unlike some European countries, Estonia is not using any tax shelter schemes to lure prospective residents or companies.

“Even ten times larger states cannot beat us,” Kaljulaid said that night. “If you wait until your home country implements similar solutions, it could take a long time and your competitors would get ahead by a few years.”

Elected in October, Kaljulaid — who is seen as tech-savvy and is popular with the country’s entrepreneurs — is the face of the country’s digital future. Many are quick to point to the fact that her son, Siim Talvik, was chief technology officer at Estonian startup Sorry As A Service.

Following Kaljulaid’s presentation, a large cake was served for the crowd that had gathered. Kaljulaid was joined in cutting the cake by one of Estonia’s more notable names, Steve Jurvetson, a partner at noted Silicon Valley VC firm Draper Fisher Jurvetson. His father was an Estonian refugee when the Soviets moved back into the country after the Germans left near the end of World War II. Though Steve Jurvetson was born years later in the U.S., he’s a frequent speaker at Estonian conferences and even became an e-Resident.

None of this country’s burgeoning reputation as a tech haven has happened by chance. It has been the fruit of an economic strategy adopted in the mid-1990s, called “Tiger’s Leap” or “Tiigrihüpe.” Casting about for a post-Soviet economic plan, the country decided IT would be its future and began making large investments in computing and network infrastructure. Initially funded in 1997, the project created internet-connected computer labs in schools, as well as beefing up the nation’s overall connectivity.

In 2002, the government decided to issue all its citizens a national identification smartcard. Today, Estonian citizens use it as their national health card, to manage their bank accounts, digitally sign documents online, vote from home, and access their medical records. Ask an Estonian about it, and they’ll also brag about the ability to start a business in just a few minutes or pay their taxes in less than five minutes. It was this program that eventually evolved into the e-Residency service.

For Heinla of Skype, this radical approach to government and technology was made possible by the economic and political vacuum left behind by the Soviets. With people not trusting older generations of politicians and business leaders who had Soviet ties, voters turned to a younger generation of leaders.

“Pretty much everyone over the age of 30 had been part of the government system,” Heinla said. “During the ’90s, even older people voted young people to power. In normal countries, where everything is so entrenched in business and government, it’s not easy for young people to come in and make changes.”

Entrepreneurs welcome

Earlier this month, the Estonian government announced the creation of Startup Visa, its latest program to build a bridge to the rest of the world.

Whether it’s someone wanting to move their startup to Estonia or someone who wants to come work for an Estonian startup, the government has dramatically streamlined the application process. People from outside the European Union can apply for visas for anywhere from one to a given number of years in length. The applications are reviewed by members of the country’s startup community.

If a startup is selected for inclusion in one of the country’s two most notable accelerators, Buildit Hardware Accelerator or Startup Wise Guys Business Tech, the approval process is even faster. The founders of Buildit have noted that they count entrepreneurs from 15 different countries among their 36 portfolio companies.

This visa is also the most recent example of the government’s efforts to boost the country’s ecosystem.

With venture capital still scarce, the government created the Estonian Development Fund in April 2007 to invest in local startups. That currently has 20 companies in its portfolio but is being wound down and replaced with a new but similar fund called Arengufond.

The government also created Startup Estonia in 2011 to help local entrepreneurs develop startup skills, address regulatory issues, build international networks to attract companies, and promote the Estonian startup system globally.

Meanwhile, the Estonian Business Angels Network was launched in 2012 to connect entrepreneurs with early-stage funding. EstBAN now has 120 angel members from eight different countries. According to EstBAN managing director Heidi Kakko, the group plays matchmaker, but it’s up to the angels themselves to decide which companies to back. The network invested about $7 million into 100 Estonian companies in 2015.

Last year, as part of a larger venture funding initiative, EstBAN developed a $16 million co-investment fund that it manages and that can invest alongside its members. The goal is to continue looking for the next big Estonian startup and make sure it has the support to compete on the world stage.

“Who will have the next Skype or TransferWise?” Kakko asked. “They’re out there right now and our goal is to help them be discovered by the right people.”

The longer-term goal of all these digital programs is to build an economy that can benefit the whole country, something that will take more time. But these efforts now have an added degree of urgency, thanks to the shifting geopolitical sands. Russia’s increasingly aggressive foreign policy, including its invasion of Ukraine, has put people on edge.

Those nerves were further rattled last fall when Donald Trump adviser Newt Gingrich referred to the country as “the suburbs of St. Petersburg.” People here are eager to tell you that Estonia is one of the few NATO countries that pays its official share of costs, countering a specific complaint levied by the new Trump administration against its European allies.

And they are happy that late last year France and the United States deployed additional troops here under the NATO banner.

They hope that things like the e-Residency program and the country’s startup ecosystem will make more people around the world feel like they have some emotional stake in this little country that few will ever visit. And that, in turn, helps this nation fell a bit less alone.

“I don’t think tanks would be rolling in tomorrow,” said Teleport’s Tamkivi. “But our friendship circles now are global, and we’re very reliant on being part of a global community.”

He added: “Of course, if something does happen, we could go somewhere else and hold parliamentary elections. We have our entire state backed up in the cloud. Estonia wouldn’t just disappear again.”