IT TAKES just five minutes to register a firm in Estonia, says Mihkel Tikk, the head of the country’s online portal, a one-stop-shop for e-government services. Entrepreneurs wishing to start a firm log in with their national electronic identity-card and a few clicks later the confirmation arrives by e-mail. That service and many other equally convenient electronic offerings are a big reason why Tallinn, Estonia’s capital, is now mentioned in the same breath as Berlin, London and even Silicon Valley. According to one estimate, Estonia holds the world record in start-ups per person—a sizeable feat considering that the country has only 1.3m people. International venture capitalists have taken notice (one, Dave McClure, created a hashtag on Twitter to describe the phenomenon: #EstonianMafia). And they are also investing. In May Transferwise, which offers a cheap way to send money across borders, announced that it raked in $6m in funding, with Peter Thiel, the co-founder of PayPal, being the lead investor. In April Fits.me, a virtual fitting room, raised £5m ($7.6m). Nearly a tenth of the firms in the portfolio of Seedcamp, a noted group of European angel investors, hails from Estonia, including Erply, a fast-growing maker of web-based retail software, which raised $2.15m in May.

Some Estonian firms have already graduated from the class of start-ups. The best known is Skype. The technology behind the popular internet phone service, which Microsoft acquired in 2011, was developed in Tallinn (the commercial founders came from Denmark and Stockholm). Playtech, one of the big names in online gambling software, is listed on the London Stock Exchange for nearly £2 billion.

Why so much tech success? The roots of Estonia’s start-up culture were planted during the Soviet occupation. Ahti Heinla, one of the creators of Skype, for instance, learned programming from his mother and father. Both worked at the Institute of Cybernetics, which was founded in 1960 and is located next to Skype’s offices. (His mother developed a system to manage Estonia’s lighthouses, which is still in use today.) Links to former communist countries remain. The technology of Modesat, which sells telecoms gear and was recently bought by Xilinx, a chipmaker, originally came from what is now Belarus.

But the failings of the Soviet command economy helped to produce an entrepreneurial mindset. “Estonians had to be good at many things,” says Mihkel Jaatma, the boss of Realeyes, which uses webcams to read peoples faces and tell advertisers how people react to commercials.

After independence in 1991, Estonia had to build a new administration—on the cheap. “We said, we might as well use information technology,” explains Siim Sikkut, the national ICT policy adviser. Today the country boasts what is arguably the world’s most digitised bureaucracy; even the government cabinet has said goodbye to paper. All this not only created an online-savvy population, but a pool of experienced software developers.

The big success story, which any start-up cluster needs in order to take off, came in 2005 when Skype was sold to eBay. Taavet Hinrikus, Skype’s first employee and co-founder of TransferWise, recalls that this showed other potential entrepreneurs what was possible and gave many employees the necessary experience to strike out on their own.

There are a few downsides to the country’s start-ups. Sales and marketing are not especially strong. Estonia is out of the way; only a few flights directly serve other tech clusters, such as London. And attracting foreign talent is hard, not just because of the brutal winter weather, but also because of complex immigration rules. A fundamental issue is how big an entrepreneurial ecosystem can a country like Estonia support? In the start-up world, being small has both advantages and drawbacks. From day one firms have to think globally: they need to go abroad for customers, talent and money. Of the €21.6m ($28.6m) of venture capital that was invested in Estonia last year, for instance, nearly €18m was foreign money.

Against that, unlike their competitors from bigger countries, many Estonian start-ups cannot really test their offerings at home. The pool of good developers is limited. And to be closer to their customers, successful Estonian start-ups tend to move management abroad. GrabCAD, an online collaboration platform for mechanical engineers, for instance, relocated its headquarters to Cambridge, Massachusetts. Transferwise and Realeyes are now based in London. Estonia’s size is not the only reason why sceptics wonder how long the country’s start-up wonder will last.

Indeed, some argue that the boom is largely fuelled by government subsidies. But Estonia has managed to punch above its weight entrepreneurially because it has also been creative institutionally. Other countries have also set up state-funded venture capital firms, but Estonia’s SmartCap has been much more than a source of money; it educates investors and has given legal advice to start-ups. SmartCap may play less of a role in future. It will no longer invest directly in firms, but only in other VC funds, says Andrus Oks, one of its managers. But other institutions have sprung up. Garage48 organises “hackathons” (“turn your idea into a working service in 48h”) to give entrepreneurs initial training. Startup Wise Guys, an “accelerator” (a start-up school), helps young firms get off the ground.

And the government isn’t sitting on its hands. Programming is now part of the curriculum even in some primary schools. The country is relaxing its immigration rules, making it easier for start-ups to attract foreign talent. There is also an idea in the air of letting foreigners use Estonia’s digital identity system (something that proposed European Union regulation would allow). They could then found a new company in the country from afar.

Estonia may be too small to become anything like Europe’s Silicon Valley, but it certainly has a shot at being the EU’s Delaware, the state where most of America’s technology firms are incorporated.



