Startup Estonia and the role of government in an entrepreneurial ecosystem

Paul Chen

There is no denying that Skype has been quite a European success story. In the latest listing of valuations, it is valued at $8.5 Billion.  It has recently been acquired by Microsoft.  People choose it as their preferred international communication solution putting local telecoms out of the international dialing business.  Most people cannot imagine that such a company comes from a small Baltic country of Estonia.  Poland is on the verge of having, what they call a unicorn (company with a valuation of $1.0 Billion or more). We want to know how to deal with the period after this declaration.  I sat down with Mari Vavulski during Bitspiration to talk about this and the role of a government in helping to make this happen.

Mari Vavulski is the head of the Startup Estonia program. Startup Estonia is seeking to turbocharge Estonian-based start-ups that have the potential to succeed in the world. They cooperate with the rest of the Estonian startup ecosystem, to make it easier for start-ups to have access to experienced people and companies, investors, and money as well as developing a good breeding ground. Startup Estonia is financed by the European Regional Fund. She has a banking background and was a sectoral manager of Enterprise Estonia which is one of the largest institutions of the national support system for entrepreneurship in Estonia.

Web.Gov.pl: What was the state of the Estonian tech domain after 1989?

Mari Vavulski: Telecommunications and banking sectors are the cornerstones of Estonian information society developments. Activities of the public sector have been also crucial in providing favourable legislative environment, but also in launching infrastructural projects and in implementing 'innovative e-services.

The first banks were established in Estonia in 1988. By the end of 1995 foreign ownership amounted to 35 percent of the share capital of Estonian banks. It is somewhat extraordinary how quickly electronic banking and Internet banking has emerged in Estonia. Hansapank started its first electronic banking solution Telehansa in 1993. The first banks to introduce Internet banking services in Estonia were Eesti Forekspank and Eesti Hoiupank in 1996. It is even more outstanding that as the world's first Internet banking services started in 1995, and by the end of 1996 there were only about 20 such services, of which three were from Estonia.

The building up and development of own in-house capacity has led to the situation where the banks have been the ‘informal’ leaders in the software industry in Estonia.  The emergence of Internet banking in the company was rather a result of work of enthusiastic employees than systematic conduction of R&D or guidance given by top managers. Programmers developed the Internet bank days and nights on their own initiative. The building up and development of own in-house capacity has led to the situation where the banks have been the ‘informal’ leaders in the software industry in Estonia. The Estonian banking system has actually set standards for e-services offered by other private and public sector companies.  Banks have been also providing authentication mechanisms to access public and private sector e-services.

WEB: How did Estonia react to the success of Skype?

MV: Skype has had a profound impact on Estonian startup community and society in many ways. They have brought about a wave of entrepreneurs who understand how to build a scalable international companies. They brought in people who understood how to build a good start-up in terms of team, product and company culture. They also diversified the Estonian workforce in terms of people with many different skills and national backgrounds. This type of raised tech-awareness has made implementing tech solutions for governmental bureaucratic tasks like e-voting possible and popular among Estonian citizens.

WEB: What were some of the problems that Estonian tech faced in the past?

MV: We are facing problems similar to other ecosystems in the CEE region.  We don’t have serial entrepreneurs with a good track record of repeated successes of building globally scalable companies. As a result, we are facing some shortage of tech talent as well as personnel who can fill other start-up positions. Some regulations have impeded progress.

WEB: How did the Estonian government help solve these problems?

MV: The government in Estonia is seen as a catalyst to the ecosystem. They digitized everything, put more focus on the tech sector, and choose venture capital as an instrument. Our government is really open to different solutions and to try new things. An example of a new initiatives is the E-Residency program.

WEB: What is the idea behind the E-Residency program? What are the benefits?

MV: It is a transnational digital identity available to anyone in the world. It allows for a location-independent business online. With a population of about 1.3 Million people and a low birthrate, we needed a way to increase the ability of the country to grow. This seems to be a viable solution to grow the economy. The e-residency gives you access to Estonian e-services which you can use to operate an European business in Estonia.

WEB: How does Estonia get past the habit of looking back at history and continue looking forward?

MV: Estonia has put a lot of effort to built up a digital and tech-oriented society. We have created a favorable business environment for start-ups and investors. All of the public sector services have been streamlined and continuously going towards a paperless state. This allows entrepreneurs to direct their energy and time not to figuring out bureaucratic processes but to build their business and interacting with their stakeholders.    

WEB: Some people believe that government should have minimal involvement in the start-up community. How does Estonian startups feel about it?

MV: Brad Feld has written a brilliant book about it called “Startup Communities”. We believe that a good startup community is built by entrepreneurs. The government’s role is to interact with them and ask them what they need to succeed, get status updates on how have the needs changed and not to interfere with business building. Estonian start-ups are proud to be Estonian. We use the #EstonianMafia which was offered to us by Dave McClure of 500 Startups. These days, we are trying to answer the question ’Why do start-ups need Estonia?’ not ‘Why doe Estonia need start-ups?’.

WEB: What would you say are the essential recommendations for governments when dealing with a start-up ecosystem?

1. Government should support activities with long term influence to the ecosystem. They should provide a long term commitment and ask the start-ups what are their long term goals. We want the ecosystem to be able to develop by itself.
2. A government should involve every member of the ecosystem in the conversation. Those include: start-ups, investors, incubators, accelerators, universities, corporate R&D centers and service providers.
3. Government needs to maintain an open dialogue with the ecosystem. They should be transparent,honest and provide feedback. They should allow a solution time to develop and not to rush things. Consequently, you will get better results.
4. A government should have an exit strategy for everything they start and know how the market should develop and what will happen next.
5. The government should involve the start-up ecosystems in the legislative process if the law or regulation could affect the proper legal growth of the community.
6. Governments should see start-ups and businesses as ways to help the national economy grow, not only a source of tax revenue. A proper relationship will help maximize the government’s return on their investment.

WEB: Thank you very much Ms. Vavulski, that has been very inspiring.

MV: It was a pleasure.

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This is a repost with permission of a article that originally appeared in Polish on web.gov.pl.