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Estonian startups set an example for Silicon Valley companies with their turnover

According to Yrjö Ojasaar, a partner in the investment company Change Ventures, one advantage of Estonian startups compared to those in Silicon Valley is that they immediately generate turnover. This is why companies in Estonia have higher valuation than average and why relatively few of them fail.

Technology news portal Digipro wanted to find out more about how Estonian start-ups are setting an example for those in Silicon Valley.

“Lots of Estonian companies start generating turnover straight away,” said Ojasaar on the radio show ‘Restart’. “And you can go really far with real money.” According to Ojasaar, money gives a company more freedom and, if needed, the time to reposition itself.

The same ideas are reflected in the recent Baltic Startup Funding Report, which provides an analysis of start-ups in the Baltic States. Ojasaar discovered two surprising or rather unexpected results in the study. First, it revealed that companies must, for the most part, generate turnover. “In our region, it’s virtually impossible to raise money on slides alone,” he said. “Even pre-seed companies earn €7,250 a month on average.”

Changes brought along by COVID-19

Another surprise was related to the seed stage, in which companies posted a turnover of €52,000 a month in the first half of 2020. Coronavirus is partly responsible for this. “On the one hand, investors have been more careful, putting their money into companies that are generating turnover,” Ojasaar explained. “On the other hand, those who should’ve raised the A round raised the seed round instead.”

Ojasaar says that an average or above-average company in the Baltic States is the equal to any in Israel, London or Silicon Valley. To illustrate his point, he explained that the valuation of the seed companies among the top 25% of the most successful companies in Estonia is 10 million, which is a higher median than in the United States.

This has mostly been dictated by smart foreign investors who do not overpay for companies. “Which leads us back to turnover,“ he explained. “The turnover of the top 25% of the most successful companies in Estonia is around €100,000 per month. In Silicon Valley, they would already be A-round companies and their valuation wouldn’t be 10 million euros, but 20-40 million.”

Estonia leads the way

The report also revealed that Estonians are well ahead of their southern neighbours. “Even though I said for years that the Latvians and Lithuanians would catch up with us before long, the truth is they haven’t,” Ojasaar admitted.

The differences between the three Baltic States are most apparent in the seed stage. Before it, there are almost as many companies in all three countries raising comparable amounts of money. However, drastic changes occur in the seed stage once companies have moved on from the initial idea to actual clients and testing.

“There aren’t as many companies or as much money in Latvia and Lithuania altogether as there is in Estonia,” said Ojasaar. Compared to seed-stage companies that raise around a million and have 15 employees on average, companies in the pre-seed stage raise just €150,000 with five employees.

Number of reasons for Estonia’s success

There are a number of reasons for Estonia’s continued success. “I think it’s mostly down to the different ecosystems,” Ojasaar speculates. “We have more investors, more accelerators and more incubators. But the biggest difference is psychological, in my view.”

He compares entrepreneurship to the world of running, where people believed for years that it was impossible to run a mile in under four minutes. When that was finally proved wrong, another 20 people crossed the magic line in the year that followed.

For Estonians, a variety of myths were similarly debunked by the success of Skype. Hardi Meybaum’s GrabCad and other success stories which came later seemed to prove to Estonians that success was not the exception, but the rule. Every entrepreneur in Estonia believes they can grow big and that they will make it happen. “That belief doesn’t come out of nowhere,” said Ojasaar, adding that Latvia and Lithuania still have yet to see such success stories, and exits in particular.

Read the original article in the Digipro portal here (in Estonian).

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