What’s next for Estonia as a tech hub?

At Atomico, we’ve long-believed in the great potential for business success in Europe. Since we launched in 2006, Atomico has been banging the drum for the strength of the European ecosystem. Throughout, Estonia has played a key part in the Atomico story, with Niklas having established Skype there back in 2003 and continuing to the present day with our recent investment in Pipedrive.

We see the present moment as an inflection point for the tech ecosystem there: funding amounts are heading in the right direction, Tallinn has a greater density of startups per capita than many of the more traditionally revered European hubs, Estonia has a higher density of developers than any other EU country, and of course, with a small domestic market, Estonian startups are all born with an international outlook hardwired into their DNA.

But where does it go from here? No ecosystem can remain static, after all, if it hopes to succeed. Recently, we held an event in Tallinn where we hosted two panels, asking the ‘old’ and ‘new’ faces of the Estonian startup ecosystem how they thought the scene could scale.

What became abundantly clear from the discussions is that Skype still plays an important role even today, with Sten Tamviki speculating that of the 400 or so startups in Estonia right now, 70–80% of them have a connection to Skype, a concentration of network, talent and capital that typically only exists in Silicon Valley.

Jaan Tallinn, one of the co-founders, likened Skype to “A bootcamp for engineers and entrepreneurs, giving an excellent grounding in the skills and principles needed to develop and scale a world-leading company.”

There are also less tangible, but still important, consequences of Skype’s legacy, like inspiration: Skype showed Estonians that it was possible to build a global company and a sense of “If they can do it, so can I”. With its aforementioned small domestic market, Estonians need to think globally from the outset, although Martin Henk, co-founder of Pipedrive, did make the point that he felt that too many Estonians were concentrating on problems that aren’t big enough and, as Niklas pointed out from an investor point of view, bigger ideas are actually less risky; the likelihood of failure is about the same, but the potential rewards and benefits are so much greater.

Not only did Skype’s success have a direct impact on Estonians, it also played a vital role in opening up the country internationally, with talent from all over the world coming to work for Skype, providing a huge opportunity to develop the local ecosystem and benefit from the knowledge and talent that comes with a diverse influx of nationalities and skills. In fact, Estonia has the highest percentage in Europe of startup hires who get a visa; making it easier to attract a global workforce to Estonian businesses and providing them with a unique advantage over other hubs; after all, attracting talent is arguably the biggest challenge for most of the major tech hubs in Europe.

This has been the most direct contribution from a government that is extremely supportive of the tech scene, and one which sets a strong example as to how other governments in Europe could assist with supporting and fuelling their own ecosystems. Estonia’s latest innovation is the much-publicised e-residency programme which allows anyone to become an Estonian e-citizen, enabling them to register and start new businesses online.

While attracting talent has always been Estonia’s main strength, there are still some challenges that need to be resolved to ensure that this continues to be one of their key advantages. For example, while there’s clearly a deep pool of technical talent, there is still a lack of marketing and business focused skills on the ground, meaning that Estonian companies typically need to look outside for this. This often means setting up satellite offices elsewhere to compensate, something that Pipedrive has been doing recently.

There’s also the problem that all ecosystems face: talent is a finite resource, and with a relatively small population, this limit can be reached reasonably quickly, with increased amounts of local startups and foreign companies establishing development centers. Still, with the startup visa and even the e-residency programme, they are better placed than most to deal with this issue.

Although Skype’s exit bought money back into the ecosystem, with many new Estonian companies benefiting from angel investments from former Skype personnel, there is still a lack of local early-stage funding options, with Estonian companies having to typically look to the United States or elsewhere in Europe to raise a seed round. Things are improving here with Estonian companies seemingly finding it easier to raise than ever before. There was a 50% increase in the number of funding rounds in 2016 compared to just two years prior, according to Dealroom, demonstrating that things are moving in the right direction.

All of the factors discussed in our panels and outlined in this post make a strong case for Tallinn continuing to punch above its weight and produce more companies like Skype. Companies like Pipedrive, Jobbatical and Testlio are all demonstrating strong traction, and proof of a capable new generation able to follow in the footsteps of where Skype once stepped. Although some challenges remain, in general conditions are favourable for those in Estonia both looking to start new companies and those who are already on their journey. At Atomico, we firmly believe that great companies can be built from anywhere — Estonia is strongly positioned to be that ‘anywhere’.

This post first appeared on Medium

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