Estonia is much like The Lord of the Rings

Estonia is much like The Lord of the Rings

It’s not uncommon in history that a single set of policies (often pushed by a few) turn around the future of an entire country, changing its downward trajectory propelling it into the Big Leagues.

It happened in Asia, where countries like Japan, China, South Korea and Taiwan used land redistribution, export and manufacturing and restricted markets to destroy South-East Asia.

The man who defined Korea’s modernisation was General Park Chung Hee, who served as the President of South Korea from 1963 until his assassination in 1979. Starting with building a textile cartel aided by cheap loans, tax exemptions and tariff exemptions of raw materials, Park Chung Hee transformed Korea into an export powerhouse.

In 1962, Korea’s exports were worth $56 million. In 1970, they topped $836 million, and nurtured global powerhouses like Hyundai, Samsung and Daewoo.

His methods (jailing businessmen to comply) might’ve been, ahem, questionable but South Korea’s GDP per capita is now at an all time high of $26,761, up from a record low of $944.30 in 1960.

But we don’t need to look at a president-slash-dictator in Asia sixty years ago. We can get the same lesson by taking a look at our (frozen) backyard.

Building from the ground-up

Estonia is a small Baltic country of 1.3 million people and four million hectares, half of which is forest.

Aerial view of Tallinn

After setting itself free during the collapse of the Soviet Union in 1991, the country was faced with a challenge: building itself from the ground up.

The country embarked on a series of fast-track reforms to modernize the economy. From the start, it took a digital approach with a program and a series of policies called e-Estonia.

“Estonia was a relatively poor country. Our public sector, our government and our civil servants wanted to offer our people good quality services. We did it straight away digitally because it was simply cheaper, easy.” – Kersti Kaljulaid, President of Estonia

The first big step in digitisation was taken in 1995, when all Estonian schools were wired up to the internet. Then came e-Governance in 1997, the Digital ID in 2002, i-Voting in 2005, e-Health in 2008 and e-Residency in 2014. Now you can do everything, short of getting married, divorced or buying a castle, online.

And it worked out pretty well. GDP per capita grew from $3,044 in 1995 to $22,927 in 2018. Not bad, if you ask me.

I’m not trying to bore you out of existence, I’m trying to make a point. And the point is that Estonia is fucking awesome.

Which brings me to today’s blog post...

I believe Estonia is one of the best countries in Europe, nay, the World to build a technology company.

Here’s why.

Estonia by the numbers

For a country of 1.3 million people, Estonia has a disproportionately strong tech industry.

The average number of startup per capita in Europe is whooping 5 per 100,000 people. Estonia ranks 9x higher than the European average, at 48 startups per 100,000 people. And according to Startup Estonia, every 93rd working person in Estonia has been somehow involved with startups.

Those numbers translate into companies. Tallinn, the capital, is the birthplace of Skype, Transferwise, Bolt (previously Taxify), Pipedrive, Playtech, Veriff and many more.

That’s 4 (yes, four) unicorns. No wonder Kersti Kaljulaid, President of Estonia, went on a humble-bragging spree last year.

The real question is why this small country that was occupied by the Soviet Union until 1991 is, against all forecasts, punching above its weight.

That’s 28 years ago. Argentina declared its independence in 1810 and it’s still a populist clusterfuck.

I have a theory.

Necessity is the mother of invention

As an outsider, it looks like Estonia has a desire to innovate. Part of that is their digital identity and the fact that technology runs at its core, but we shouldn’t forget necessity.

Not only Estonia doesn’t have a bunch of oil, or a thriving manufacturing industry pushing thousands of Hyundai cars 24/7, its (already small) population is shrinking.

“If we look at the population first of Estonia, we’re only 1.3 million people. With the domestic market, we can’t really develop or scale. We’re also demographically losing people. People are moving away. Some people are moving back. But in general, the outlook in 50 years, 100 years is not that positive. We have to be clever in these ways that we can actually innovate. We’re not a rich country in terms of national resources, or we don’t have huge resources of oil. But what we do have is the basis of a digital country. We could really capitalize on that.” – Ott Vatter, Managing director, e-Residency.

e-Residency is a perfect example of being clever. Soon after becoming the C.I.O. of Estonia in 2013, Taavi Kotka was charged with an unlikely project: expanding Estonia’s population.

Most people would try to convince people to move to Estonia. Kotka, however, thought that it was possible to increase the population just by changing how you thought of what a population was.

Now, e-Residency contributed more than 58,000 e-residents from more than 150 countries, who in turn have established 7,200 new tax-paying companies in Estonia. Last year, the tax revenue collected from e-residents’ businesses was €8.73 million and since it’s birth, the program has generated €25 million in direct economic gain.

Again, not bad.

Tallinn's positive talent loop

Gresham’s Law applied to Talent Markets makes it so that you are either growing (and attracting talent) or decaying (and pushing talent out).

Talent follows talent of a similar caliber, and when Good Talent is concentrated on a single geo area, money and opportunities gravitate towards that point as well.

On the contrary, if Good Talent is hoarded somewhere else, Bad Talent will be given more movement and circulation within the Talent Market. As more and more Bad Talent starts to circulate within a market, companies will start hiring that Bad Talent, mostly because this is the only currency being traded.

If Bad Talent is rewarded with a job and power, word will spread and Good Talent will move while Bad Talent will notify gravitates towards whatever they can get.

Here’s an old chart you’ve seen a million times:

Old char you've seen a million timesEstonia has been doing a fantastic job at enabling talent to gravitate to Tallinn, creating a positive Talent growth loop on the city.

It doesn’t hurt that Tallinn’s population is 425,000, making it an order of magnitude easier to achieve a critical mass of great tech people.

As a result, the sheer concentration of tech talent in Tallinn is mind-blowing. Last week I was sitting at a coffee shop in Telliskivi (hipster area) on a Saturday, and everyone around me was talking startups.

Unless you go to Station F and sit on the floor, there’s no way in hell you’ll randomly overhear a tech conversation on a random cafe in Paris.

A unique immigration policy as the lubricant

One of the biggest barriers to a positive talent loop is immigration. Just think how hard it is to immigrate to London, Japan or the United States.

Well, unsurprisingly, Estonia nailed it.

A few years ago, Startup Estonia (yes, they have a government body for startups) launched Startup Visa, a program to help non-EU founders and tech workers immigrate to Estonia.

If you are a non-EU founder trying to build a company, you can set up shop in Estonia and operate physically from there. You just need €1,800 and a real, scalable tech startup.

It also makes it stupidly easy for Estonian startups to hire non-EU talent. As a non-EU worker, you can get a job in Estonia and start working within a couple of weeks. And as a company, you can hire whoever you want, from wherever you want.

This is the single, most important reason why the Estonian talent loop I described above works. Whenever you remove restrictions and facilitate entry into a system (a country), the flux of atoms (tech people) will increase.

Trajectory trumps lack of capital

It’s not all roses though. Estonia’s main problem is capital. Access to local capital is not abundant. There are angel investors and some small-ish funds, but most founders need to jump on a plane to London, Japan or the US whenever they want to raise a real round.

This said, making decisions based on the current snapshot of reality at this exact moment is stupid. You need to think about what the future would look like. You need to consider the trajectory, and Estonia is on an upward one.

The “talent + capital loop” is real, and it’s slowly gaining momentum. In 2013, companies raised $24 million. In 2018, the ecosystem raised 10x that, for a total $249 million.

That will only accelerate as soon as big companies like Transferwise or Bolt get to a liquidity event (ahem, IPO) and the proceeds cascade down to the ecosystem. Just like the Skype acquisition by Microsoft 8 years ago was the initial flame that kindled the first batch of Estonia startups, Estonia will get there soon enough.

If you are considering a place to set up shop, build your business, extend your runway and still be a flight away from major tech hubs, Estonia should be your place.

Everyone’s talking about Estonia and how cool it is. So, to Will Hunting’s demise, this piece might be unoriginal. But I still think it needs to be written. Wondering why? Because Estonia is much like The Lord of the Rings – widely hyped, but still under-appreciated.