Silicon Valley - Estonia's Second Capital?

Estonia - Silicon Valley partnerships could one day lead to the development of an ultra-cool, mushroom-picking app for the iPhone. Photo: ERR
2/9/2011 9:40 AM
Category: Economy

Sure it's a provocative headline, but just wait a couple of years. As the growing tech sector becomes more central to Estonia's economy, the decisions that shape the nation's future won't just be made in Parliament in Tallinn or even in computer labs in Tartu. They'll be made in noisy cafés in Sunnyvale and boardrooms in San Jose.

This transformation has already begun. Nowadays getting a foothold in Silicon Valley is an absolute must for every Estonian tech start-up - at least, for any start-up that's thinking big, like Alar Kolk's company, NycoSat.

“Basically we want to save the world,” said Kolk, by way of a humble introduction to what his 16-month-old start-up is all about.

Over a restaurant meal in San Francisco, he explained that NycoSat is developing technology that generates super-precise locations of plants and mushrooms, anywhere in the world, by combining satellite climate data with local biodiversity databases.

The main goal is to help fight starvation by letting local populations know where to find food, but Kolk hopes to be able to pour more money into the project by developing its commercial potential as well. Hence the trip to California.

"We came here for venture capital, for money, but we also came for the customers, to develop the market, because some of our applications could be used in defense systems and by pharmaceutical companies."

"Even more important is what we call "innovation ecosystem development." We are trying to [find] partners who are actually developing applications."

While in the area, Kolk and his business partner were holding meetings to discuss potential applications for the iPhone, iPad and Facebook. They're even hoping that Microsoft will one day have plant and mushroom games for the X-Box.

The '50-Mile Rule'

Though it may be some time before any Lara Croft high-adrenaline berry picking adventure hits the shelves, the NycoSat example shows why it's so important to be in Silicon Valley: this is the crossroads of the world's tech community. If you want to be a player in this game, you have to be here.

“You definitely need a local presence,” said Andrus Viirg, director of Enterprise Estonia, Silicon Valley. As the local representative of Estonia's state foundation for business support and development, Viirg has spent the last four years helping companies make contact and set up operations in the area.

“You need a human contact, for all the networking events and meeting people,” he said. But Viirg quickly pointed out that having a locally-registered company is also crucial for raising capital. There's a so-called 50-mile rule whereby investors, particularly strategic investors, won't travel more than 50 miles to shell out their money. “US venture capitalists only give money to US companies, and we can say that Silicon Valley venture capitalists only give money to Silicon Valley companies, not even to the East Coast ones.”

Examples of Estonian companies that have recently set-up representations here are Fortumo, a mobile payment portal, Modesat, a satellite modem company, and the biotechnology firm eGene. Dozens of others have, like NycoSat, made the trip to put out feelers. Viirg says he provides support to about 30 visiting Estonian companies or groups each year.

It's not just a one-way flow. Estonia is now catching the eye of large tech companies who want to expand in Europe, thanks to the nation's credentials as a budding technology hotbed  - a reputation to which it owes Skype a great deal - and the Silicon Valley connections that Viirg is helping establish.

The anti-virus software company Symantec is one success story. They set shop in Tallinn and now employ about 150 engineers. More recently, Estonia was shortlisted for a Google data center project, but narrowly lost out to Finland.

Fail Fast, Fail Frequently

For an Estonian company in Silicon Valley, just being on the ground is, of course, no guarantee that the VCs and business angels will be interested in investing, as Kolk has been finding out.

“It was quite a surprise,” said Kolk. “You really have to demonstrate that you'll have customers and that they are going to pay a lot of money, which is quite difficult if you are just starting up a company.”

It's a phenomenon that Viirg is quite familiar with. “Twenty years ago, during the IT boom, you could get money from venture capitalists by just drawing on a napkin. But now, especially if you are coming from outside of Silicon Valley, you have to already have a proven track record, and you have to show that the investor's money is coming back,” he said.

There are plenty of other lessons to be learned as well.

Michelle Messina, CEO of Explora International, is an insider who advises newcomers, including Estonian start-ups, on how to work within what locals call the Silicon Valley “ecosystem.”

One of the hurdles that hopefuls have to overcome is the difference in communication styles.

“Americans have very short attention spans because we're always being bombarded with messages,” she said. Developing the right pitch is the key. Rather than talking about the bells and whistles of the product, she said, it's more important to talk about its emotional impact.

Anyone familiar with the classic image of the stoic Estonian can well imagine that learning to talk about the touchy-feely aspects of a product is going to be a stretch.

But Messina said that Estonians have a particular edge over most of their European rivals in that they're not afraid to take risks. One of the main rules for success here, according to Messina, is “fail fast, fail frequently.” In other words, taking risks and getting noticed will do more for your reputation within the tightly-knit Silicon Valley community than playing it safe.
Other keys to Silicon Valley success Messina mentioned are being open with your ideas, which may seem counter-intuitive to outsiders, and networking.

As Estonian tech companies start to learn and apply these new lessons abroad, they may also have an impact on business practices back home in Estonia, where the worldview is now in a state of post-crisis flux. 

A decade ago the mark of success for an Estonian businessman was owning a BMW. That's no longer the case.

According to Viirg, in the four years that he's been working in Silicon Valley, he's seen a radical shift in the Estonian business mindset. "Nowadays all the companies that come here from the home country have the idea that they could become global," he said.

This works as an analogy for Estonia as a whole - a nation that had until recently been in the thrall of quick economic success is now trying to make its presence felt on the world scene. And if indeed that impact is going to happen by way of its growing tech sector, then more so than ever, the shape of Estonia's economy will be hammered out in Silicon Valley.

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