Guest article: Estonia – “Minimalistic Heaven” for Startups and Investors?!
We accompanied this week’s guest contributor, the author and lawyer Jan Schnedler, on his recent trip to Estonia and we would not want to pass over the opportunity of sharing his report on the experience with you. So, today, here’s something a little more exotic for you to think about. Without further ado, it’s over to you, Jan:
Estonia is not just any old country that is simply doing some things more digitally than other countries. Estonia is quite simply “the place to be right now”. Visitors to Estonia often find it hard to imagine what the country has already achieved and what is still to come in the coming months and years. Sometimes, even Estonians themselves seem to have trouble grasping exactly what is going on in their country. Marketing for Estonia is usually done by others: those who have visited the country, taken a tour of the different showrooms, labs, startups and accelerators and talked to entrepreneurs and politicians.
It is no coincidence that Estonia has one of the highest start-up rates per capita in Europe. The average number of start-ups in Europe is five per 100,000 inhabitants. The number of start-ups in Estonia is six times higher than the European average, putting Estonia in third place in Europe, currently with about 450 start-ups!
Estonia has created a climate for start-ups that is probably unique worldwide. This is something that is already bearing fruit. Estonia is now perhaps better known than hardly any other country for being the birthplace of some of the world’s Unicorn startups. In other words, startups that are not listed on the stock exchange and whose valuation exceeds one billion dollars. At the moment, there are four of Unicorns which started out life in Estonia: Skype, Playtech, TransferWise and Taxify. But more are sure to follow soon: one very promising candidate is, for example, the delivery robot startup Starship Technologies. Depending on which definition is used, Germany, with a population that exceeds Estonia by about 80 million citizens, has only about the same number Unicorns after the IPOs of Zalando and Rocket Internet.
What makes Estonia so special in the start-up sector?
The Global Startup Ecosystem Report 2017 states: “Estonia’s mix of intelligent infrastructure, cross-border visa programmes and startup solidarity guarantees the world that it will bring us more groundbreaking technologies, as Estonia has done with Skype and is now doing with Transferwise”.
Here are ten examples of why founders and investors should take a closer look at Estonia:
- Early practice. Estonians are encouraged to become techies. Children in primary school have computer lessons, programming courses and in selected grammar schools are even taught how to build blockchain apps! Students are taught in startup centers, such as the Spark Technology Park in Tartu. All Estonian schools have been connected to the Internet since 1999 and digital class books are used almost everywhere. Even the universities make sure the youngest ones are not left out. At the Tallinn University of Technology’s MEKTORY (Modern Estonian Knowledge Transfer Organization foR You) center, there is a Lego-sponsored lab where Lego Serious Play/Robotics is played. Not by managers like in Germany, but by four to seven-year-old children. The Tallinn University of Technology has also developed its own satellite with students, which will be launched into the Earth’s orbit in January 2019. This is also not the first “student satellite” from Estonia, as the “ESTCube-1” satellite, a project of the University of Tartu, was already launched into space in 2013. According to the latest PISA study by the OECD, Estonian children are ranked number 1 in Europe and number 3 in the world.
- Startup visa. The Estonian Startup Visa is aimed at founders from non-EU countries who want to work in Estonia. Under the Startup Visa programme, a startup is defined as: a company aiming to develop and launch an innovative and repeatable business model with great global growth potential, which also contributes significantly to the development of the business environment in Estonia. The issuing of a visa will be decided on a case-by-case basis by a Commission made up of other entrepreneurs. A programme for digital nomads is also currently being developed. Estonia is thus opening itself up to the world’s biggest foreign talents and creating an infrastructure with highly qualified and technically gifted staff for start-ups.
- The liberal tax system. Estonia has one of the most liberal tax systems in the world and does without a corporate income tax. The International Tax Competitiveness Index described the flat tax system as the most competitive tax system in the developed world. One of the main drivers for this is the low corporate income tax rate of 20 percent without double taxation of dividend income. Estonia only taxes profits distributed to shareholders. If the profit is not distributed (e.g. to the shareholders), it can be invested tax-free. Sales made abroad are taxed abroad, not in Estonia. Estonia therefore uses a simplified tax system and is not a traditional tax haven. Depreciation becomes fully relevant in the same year and does not have to be amortized/extended over subsequent years. This tax system will massively fuel investment in your own business idea and start-ups. The tax return can currently be submitted online within minutes, although the complete automation of the tax return is already being prepared and will be introduced next year. Then, on January 1, each Este, without even having to take any active initiative, will receive an automated tax return and, within a few days, a tax refund or a request for additional payment. Naturally, there is also the additional possibility to have the automated tax declaration examined.
- #estonianmafia. In addition, the start-up ecosystem works closely with government, universities, incubators, showrooms and businesses. It is important to be aware that the Startup Ecosystem is based on the so-called “Estonian Mafia”, which mainly consists of the founders of Skype who invested their money from leaving Skype into other startups and founded many more startups themselves. The most successful startups are known to give something back to the community by mentoring and supporting smaller startups, various events and startup hubs. Startups have an incredibly good infrastructure. For example, there are two big startup conferences: Latitude59 in Tallinn focuses on investor/startup relations. The sTARTUp-Day in Tartu is aimed more at techies who can keep up with the big startup conferences. I have never seen so many Silicon Valley participants at a conference in Germany before. One of the most famous Silicon Valley investors Marc Andreessen (co-founder of Netscape) summed it up as follows: “Few factors get us as excited as Estonian founders!”
At the universities, there are rooms sponsored by companies and countries, labs, and studios, which, if they are not approved by the students, must leave university premises again. For example, China has a traditional room for tea ceremonies, Finland a sauna with swimming pool (“Suomi Sauna Thinking Space”). There is also a Botanical Garden, a Rooftop Sweet Factory and a Mektory Yard for leisure. The company rooms are equipped with the latest technologies (Samsung Digital Academy, Ericsson Connectivity Room; Logistics and Supply Chain Management Innovation Lab, “Playful learning” Lab, Bank of Ideas, “Re:creation” VR Lab, Space Centre, Cool Tool Studio, Just a Table and a Chair-room).
- Quality of life. While the quality of life in Estonia is very high, the cost of living is low. A win-win situation! Estonia ranks above average in terms of education and skills, environmental quality, social connections and work-life balance according to the OECD index. The education system is sustainable and ranked as one of the best in the world. This is where the many technical talents and employees of the start-ups are trained. Estonia has declared Internet access a human right. Tallinn is one of the most connected cities in the world and offers free public WiFi almost everywhere. The city has several beaches and life is also affordable: even in Tallinn, there are quaint affordable hotels and great restaurants, the taxis are cheap, tram rides cost one euro and are even free for residents. The airport is well organized and offers free fitness equipment and table tennis, as well as cocoon beds for resting, complete with power outlets and connections for mobile phones and laptops. For five euros, there are state-subsidized mobile phone contracts, with unlimited data of course. In just 20 minutes, you can find yourself immersed in nature from any point in Estonia: 51% of the country is covered with forest and the air ranks among some of the cleanest in the world.
- European’s Innovation Playground. Estonia is the perfect testing ground for startup ideas, because a no-bullshit and no-limits mentality prevails. The Estonian people also think entrepreneurially, are innovative and extremely open to progress and have confidence in the state with regard when it comes to personal data. The Estonian state has built up this trust over the years. What other population still trusts the state today? For many Estonians, digitization has become a trademark of which they are proud. 150,000 Estonians have provided their DNA. DNA analysis is free of charge and every citizen has the right to free advice on the results of DNA analysis. The state is very transparent and every citizen can see at any time who has accessed his or her personal data and when. This has been made possible by laws that punish unauthorized data access by the state or companies. Often no personal data at all is disclosed in the case of enquiries, but the database only responds with “yes” or “no”, for example.
It may sound a little strange to us, but the Estonians say they have confidence in the state because everything is so digital, transparent and controllable.
This confidence probably also stems from the fact that NATO’s Cyber Security Centre is based in Estonia and that cyber security is treated as one of the most important issues in Estonia.
- Agile Government. The Estonian government thinks ahead, is agile and – not only because of the small size of the country –fast too. If something does not work, it will be changed. The local startup community has good relations with the government and its voice is heard, not least because there is a Minister for Entrepreneurship. The government does its best to respond to entrepreneurs and start-ups. “One of the best things about Estonia for an entrepreneur is the short decision chain. Two years ago I wrote a blog post about why start-ups don’t want to start businesses in Estonia, and, within twelve months, a package of legislative changes was passed in parliament that addressed exactly these issues. You won’t see such agility anywhere else in the world,” enthused one of the best known members of the local startup community, founder of Teleport and former head of Skype Estonia, Sten Tamkivi. Another example of the mobility of the state while maintaining data security is that the e-residency card must be collected in person, e.g. at an embassy. This is seen as an important confidence-building element in the virtual society. This approach is problematic, as, being a small country, Estonia does not have embassies all over the world, e.g. there is currently no embassy in South America. Currently, further collection points are being set up worldwide. In Hamburg, there is a representation of Invest-Estonia, which is led by Riina Leminsky. Riina immediately invited Hamburg startup entrepreneurs, business representatives and professors to Estonia and opened all doors so that we could participate in the startup conference “sTARTUp-Day 2019” and meet politicians, startups, institutes and accelerators. Riina and Estonia were incredibly open hosts: Friendships and very valuable contacts were made. The whole country has a “just-do-it” mentality. In the rest of Europe one often has the feeling that it is a matter of a “don´t-do-it” mentality.
Estonia is also the first country to have drafted a bill to regulate the status of Artificial Intelligence (AI) in a legal dispute. There are two alternatives which are discussed: either the artificial intelligence or a so-called robot agent should be given its own legal personality, e.g. a limited liability company or the AI is defined as an object that belongs to someone who is responsible for this object.
Since the beginning of 2017, the legal basis for self-propelled cars in road traffic has been created in Estonia.
- Standard startup contracts. Startup Estonia and the Estonian Private Equity and Venture Capital Association (EstVCA) have prepared all relevant industry standard legal documents and make them available free of charge on the website http://startupestonia.ee/resources. The contracts can be commented on online for continuous improvement.
- E-services and easy transaction processing. The country’s e-government solutions are first class! Estonia currently offers over 600 e-services for citizens and 2400 for businesses. In Estonia everything is done online and happens very fast. Limited liability companies can be set up online within 15 minutes – even for (EU) foreigners if they have initially applied for e-residency. There are already over 35,000 e-residents from 143 countries who have this “virtual” citizenship. A tax return can be submitted in less than 3 minutes. Startup LeapIN offers a turnkey solution for setting up a location-independent company with a bank account. For 59 to 99 euros a month, LeapIN also takes care of company creation, accounting, invoicing, tax returns and compliance.
Every Estonian has an ID-Card, foreigners can apply for the E-Resident-Card. With the ID-Card almost everything can be done online: Company start-ups, ticket purchases, filing tax returns, obtaining prescriptions and doctor’s reports, voting, banking, lending books, transferring ownership of vehicles and using other vehicle services. However, it also serves as an identity card, driver registration document, travel document, medical card, encryption tool and digital signature.
Estonia has started to open the interfaces of this card up to companies, so that further functionalities can be expected in the future. Loyalty points can already be collected at the supermarket. In addition, a community platform is currently being developed that has the potential to become much better and more functional than Facebook due to its database and the connected services.
- A small country needs to think big. Estonia has only about 1.3 million citizens and is therefore a very small country. The disadvantage of the small Estonian domestic market (gross domestic product of 20,659 million euros), however, is in fact more of an advantage. It means that start-ups have to open up other markets immediately and internationalize much faster. Estonians therefore think globally first. The fact that the working language is usually English also helps here.
So are there any reasons that actually count against Estonia? I have thought about it for a long time and could only come up with one: mosquitoes. Otherwise, most problems are caused by the laws of other countries.
This week’s guest contributor is Jan Schnedler, a startup lawyer and the author of the book “Startup Recht”. He shares his impressions of Estonia from a recent trip to Tallinn and Tartu by a delegation from Hamburg, in which professors, startup entrepreneurs, family entrepreneurs and the Innovation Contact Point also took part.