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Opinion: a hard turn and 100X growth in 10 years. How Estonia became a startup country?

In August 2021, Estonia celebrated the 30th anniversary of regaining its independence. Investor and entrepreneur Kristjan Lepik reminds us how much has changed in this time in the Estonian economy.

I was still a kid back then, so I remember the Soviet Union times just vaguely. There was not much that you could buy from the shops, even for food items there were long queues. A dream of a Snickers bar was fulfilled maybe once a month.

Fast forward 30 years. In July this year, Wise was listed on London Stock Exchange. The valuation being over 10 billion euros meant that this was the biggest listing in the history of LSE. And this was a startup founded in a kitchen 10 years ago by two Estonian guys who saw that currency exchange needed to be disrupted.

10 years = 100 times increase in startup investment

Most people reading the news of Wise’s success cannot even fathom how absurdly poor Estonia was in 1991. And how absurdly hard it is for a country to change course so completely and so quickly.

In 1995, Estonia’s GDP per capita was below 40% of EU average. By the end of 2020 the number had reached 86% and just lately, Estonia passed Spain and Portugal.

In 2011, the Estonian startup scene was in an early phase, startups raised 8,3 million euros of funding that year. In the first 8 months of 2021 the total funding raised was 879 million euros. That is more than 100x increase in a decade.

I remember reading a two years ago that there were 12 unicorns in Eastern Europe. I was just walking near Veerenni Street in Tallinn and there were three unicorns only on that street. And Estonia has less than 1% of the total population of Eastern Europe!

Those facts are quite other-wordly, but in a way those are still just numbers. What’s the story behind the numbers?

The story of Skype and not getting caught between systems

There are a couple of crucial ingredients in that recipe.

A while ago I was speaking at a conference in Croatia, they wanted to learn about the Estonian success. Croatia is a beautiful country but the economy is not doing so well. One of the key differentiators is that Estonia did all the reforms in the 1990s very quickly and aggressively. Moving from a full communist system to a a capitalist one is a full 180 degree move and very hard on a society. For some politicians it might sound easier to do it step by step, but then the country might be stuck between the two systems.

The reforms in Estonia did in the 1990s were hard. One of the reforming prime ministers is still being blamed for “killing the agriculture”. Most of the systems had to be built from scratch and for sure that brought errors along. But that also meant that the foundation for a new system was strong and that is one of the key ingredient behind the success of Estonia. Corruption is now almost nonexistent, businesses can be started and managed fully online and that creates a very low level of friction for entrepreneurs.

The other key ingredient was Skype. When Skype was finally fully sold to Microsoft in 2011, this was a big deal for Estonia in terms of returns. But even bigger win was the real life experience for all the participants who managed to see very closely how the global tech sector works. Before that Estonia had some really good engineers but during the last decade all the different competences have been growing really fast – marketing, product, sales, management. 10 years ago there were some really good teams, now there are hundreds of amazing teams that are building world class technology products. I am living in Estonia, but I consider myself a world citizen, I am not the the most nationalistic person. But it really has been very thrilling to be part of that fast growing ecosystem.

And in a way this could be just a start. The main magic with scalable models is the ability to increase revenues without the need to increase the inputs to the same amount. So smart workforce can keep scaling almost without a ceiling.

World has changed a lot over the last 30 years, it was much harder back then to build a globally visible company within 10 years. Now it’s happening all the time. Those companies can be founded in any part of the world. And Estonia can be used as an example for other small countries – in a way it’s a startup country, trying to disrupt how countries should operate. Even if you are small in terms of population, in the modern world you can be big in terms of impact.

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