Is Dot-ee the Next Bubble? Blog Says Yes, Entrepreneurship Agencies Say No ({{commentsTotal}})

Source: Photo: Postimees/Scanpix

A new blog that takes to task the hype over Estonia's startup scene has been drawing attention in cyberspace.

A debut writeup was published on the anonymous, English-language blog on March 4, predicting a disastrous economic bubble, inflated by inefficient but cash-splashed startups predominantly in the tech sector.

The blog says its authors are entrepreneurs familiar with business in Estonia and that they insist on writing anonymously because "people" in Estonia take criticism poorly, referencing the Estonian president's censure of economist Paul Krugman.

The blog's main argument is that there is too much money going around for startups in the Baltic countries and not enough results. It is a situation reminiscent of the late 1990s dot-com bubble, they say.

Last year, news of a 100-million-euro Baltic Innovation Fund was met as a sign of promise in the Baltic market, but the authors of the blog are skeptical. They point to another major fund, Ambient Sound Investments, which they say could not find enough Estonian companies to invest in and turned to other markets.

"We're going to assume these venture funds will take a nice management fee off the top, so they will benefit handsomely from this [...] But with this new funding, it's basically just an investment in a company, with few (if any) strings attached [...] People will come up with crazy ideas and start a company, get funding, and then take a nice salary and live off that until the funding runs dry, with no results," the blog says.

The authors say there has been an abundance of praise for startups in Estonia and a free-for-all of taxpayer money, but many companies are doomed at outset.

"What we've found disappointing is that there is little real analysis of the Estonian startup scene. You can read plenty of press releases, both directly from the companies and from lazy journalists who seem to just regurgitate the press releases they are given," the blog says.

Below average

KredEx, the state financing institution that placed 20 million euros of public capital in the Baltic Innovation Fund, could not provide comments in response to a query from ERR News on Friday. The agency's spokesman, Tarmo Seliste, did provide a study from last year that found that in Estonia venture capital financing as a percentage of GDP was lower than the Eastern European average, as well as that of Latvia and Lithuania.

"Although Estonia's venture capital market is relatively underdeveloped compared with other European countries, including Lithuania and Latvia, the situation will probably significantly improve in the near future in connection with the establishment of the Baltic Innovation Fund," KredEx CEO Andrus Treier said in a statement last December.

Inherent risk

In response to a query from ERR News, Enterprise Estonia's director of entrepreneurship and innovation, Dmitri Burnašev, said Estonia's startup environment has been thriving in recent years, as indicated by the growing number of companies, incubators and startup events. He said there is nothing unusual about the rate of failure of startups in Estonia, compared with those of other markets.

"It is normal practice for startups that a large portion of them are unsuccessful. That is already programmed into the definition of a startup. Estonian startups have done quite well," Burnašev said. "If investors are ready to contribute to new ideas, they are generally aware of the risks," he added.

Burnašev said he found it hard to overemphasize the role of startups in Estonia's economic prospects.

"It depends on the kind of Estonia we want to live in 10 to 20 years from now. If the tip of our ambitions is doing subcontract work for other countries, then we really should not invest in startups. But if want to have a world-class business environment, globally recognized goods and services, and we want to earn money more with our knowledge than with physical work, then we don't have very many alternatives," Burnašev said.

Viljandi incubator

One of the examples from the blog's "list of numerous failed startups, many funded with taxpayer money" is a creative incubator in Viljandi County. The blog argues that a 684,715-euro budget was overly generous for support for a small number of minor clothing and handicraft companies, operating in a competitive industry with limited experience. Another criticism was the location of the incubator in a relatively small town, Viljandi.

Burnašev admitted that, while not a globally ambitious project, the Viljandi incubator served a purpose in regional development. The emphasis of the project, he said, was infrastructure, and the success of the companies was secondary.

"The lion's share of the money allocated for the Viljandi County creative incubator was invested into necessary infrastructure. The infrastructure's payback period is long, due to which it is not appropriate to compare long-term investments in a building with the short-term results of companies based there. The supported operational costs make up about 5 percent of total investments there and are reasonable when compared with support granted to similar organizations," Burnašev said.

Aspiring for global success

According to Enterprise Estonia, Estonian startups raised 17 million euros in private investments in 2012, with 2 million euros coming from Estonian investors. The pace of investments is growing rapidly, according to the agency, with another 8 million euros raised in the first two months of this year.

"The amount of capital that has been raised is impressive, considering the small size of Estonia, and there are many shining examples of startups in Estonia that have reached the international market with capital raised abroad as well," an Enterprise Estonia executive, Krõõt Kilvet, was quoted as saying in a March 22 press release.

She named GrabCAD and Fortumo as examples of successful startups. Other 2012 successes included the establishment of Europe's first computer games accelerator, Gamefounders, and the establishment of the Estonian Angel Investors Association.

"Estonia is becoming a startup center and companies are coming from all over the world," Kilvet said.

Kilvet also mentioned, as a sign of progress, another accelerator, Startup Wise Guys, who are a subject of criticism on the bubble blog. The authors predict the accelerator will be shut down by the end of the year.



Opinion
Kallas, Kasemets, Maasikas: EU is strong, no upside to losing the euro

Speaking on Vikerraadio's "Reporteritund" ahead of the 60th anniversary of the Treaty of Rome, Siim Kallas, Keit Kasemets and Matti Maasikas agreed that despite its prblems, the EU remained strong as a union.

Opinion digest: How can Estonia shed its reputation as a frontline state?

In a recent opinion piece in Postimees, Propastop, a blog maintained by Estonian Defence Forces volunteers, listed suggestions on how Estonia could shed its international reputation as a frontline state.