Estonia's startup boom drawing to a close, companies dialing back

Startup (illustrative).
Startup (illustrative). Source: 1Day Review/Flickr (CC BY 2.0)

The boom years seem to be over on the Estonian startup scene, with investments increasingly difficult to raise, Estonian startup Single.Earth said when explaining why they're contracting their activities. Others confirm that investors have become very cautious and there may soon be other struggling startups.

Green tech startup Single.Earth raised €7.9 million in 2021 and announced a new round of funding from Japanese venture capital fund Mistletoe as recently as this winter. By now, the company has dialed back its activities and let go a part of its staff.

Single.Earth engineer and cofounder Andrus Aaslaid told ERR that the steps follow a general lethargy among investors in the world.

"We raised money quickly when the times were good, hence the hard fall, but we have spent almost all of this year and the end of last one drawing up crisis plans, trying to figure out how to survive," he said.

Aaslaid said that this process has now been concluded and the company rendered stable. The cofounder said that there is no danger of bankruptcy, Single.Earth has a capable team and is concentrating on its product. He admitted there were difficult months when a lot of people needed to be let go and work reorganized, while the last month has been stable for the firm.

The engineer added that if a startup comes up with something meant to hit the market years in the future, it must wait until the market is ready and learn from its customers what needs to be done in the new situation.

"You're doing your thing and searching for it at the same time. That is the difference between startups and the old economy. The latter must have a functional model from the first, while startups use investors' money to find the right product market fit. It is a natural process, while money running out before you get your product to market is something that can happen in any sector."

The choice then is to shut it all down or dial back to weather the crisis and wait until the market is ready for your product.

"We have clearly picked the latter path," Aaslaid said. "There is no bankruptcy looming today. We are in the same business, while we have a much smaller team and a slower pace than what we would otherwise have seen."

He described the situation as poor not just in Estonia but everywhere – companies are dialing back to keep growing when the times improve.

Boom years see investors break the bank

Single.Earth raised the most capital in 2021, which experts regard as the heyday of the startup scene.

"Investors were excited and money was being thrown around. The scene has changed by now for a normalizing development as the situation was anything but normal in 2021. Investors got carried away and the whole thing started resembling a bubble. That is when they raised their money, another startup entrepreneur said, referring to Single.Earth.

They said that the environment is very different today, investors are cautious and an unfinished product won't attract funding.

"They started building a grand thing, while it is difficult to raise money if you cannot quite finish the product in the current situation. Investors initially came up with plenty of cash and they grew their staff to 70 before they finished their first product, which is too much for a small firm."

Green investments platform Grünfin seems to be doing a lot better after raising €2 million in January and expanding its product portfolio this spring. One of the company's founders Triin Hertmann said that the boom showed signs of cooling a year and half ago.

"Things were still pretty easy before the Ukraine war, while raising money really has become difficult now," she admitted, adding rapid inflation, the economic crisis and soaring interest rates to the list of what's making investors conservative.

"Investors with money to spend, if we're not talking about venture capitalists, are rather looking at more stable asset classes. Interest rates are quite high, which makes it tempting to just keep the money sitting in the account to avoid risks," Hertmann suggested.

She nevertheless remains optimistic in terms of Estonia's prospects. There is a lot of local capital, numerous funds and angel investors. The Grünfin founder also said that companies just starting out with a solid team and product will not find it too difficult to raise initial capital, which cannot be said for those who are in their third or fourth round but whose results and turnover are not enough to make them attractive.

"Startups also need to take a look in the mirror and consider where to get more money when it runs out. Customers are your best bet, so if the startup is ready to become profitable, that is the best way," Hertmann suggested.

More news of difficulties likely in store

Entrepreneurs' opinions differ in terms of what will happen next. One startup entrepreneur interviewed by ERR said that investors were sometimes trying to outdo one another in 2021, which caused the situation to barrel out of control. This has left investors rather startled, and poor investment decisions are only now starting to become clear.

"Last year was difficult and this one is worse, investments are clearly slowing," they admitted. "The market is more difficult, there are transactions, while they are very selective. Just like everyone who can hold a hammer is employed during a real estate boom, while only the best are hired in a crisis. That's largely the logic today."

Should investors remain cautious like this, a considerable number of companies will not be able to raise the necessary funds. There is tension in the system and Single.Earth will not be the end of bad news.

"It is part of the startup landscape. Not everyone can survive, which is kind of built into the model. When times are good, more firms can keep their noses above water and you get the mistaken feeling that no one makes mistakes. Most startups should not survive, while those who do will reach great heights," the entrepreneur explained.

Hertmann is less pessimistic and believes the situation could improve come fall, considering that many startups have dialed back spending and boosted income to land on a more secure footing.

"Investors have funds that need to be invested inside a certain time frame and the bolder among them will start making deals again soon," she predicted. "Venture capital investments were down 70 percent in Europe in the first quarter year over year, which is a massive drop. But I believe things will start to improve in the third and fourth quarters. Those who manage to weather the crisis will be stronger for it."

The Grünfin founder also does not believe Estonia will see a wave of bankruptcies, while we will likely see interesting buyouts, mergers and strategic investors.

Andrus Aaslaid said that while investors are holding back during the crisis, this does not mean people have lost faith in the business.

"It is one big spreadsheet at the end of the day, and the question is where you are in that spreadsheet. There are companies that investors are keeping from going under as they are close to market or already have turnover. There are those which have gotten farther still with their product, which is again prioritized," he said.

Startup investments plummet

Data from sector organization Startup Estonia suggests that Estonian startups raised €62 million over 14 transactions averaging €5 million in the first quarter of 2023.

This marks a stark decline since last year as €906.6 million was raised in Q1 of 2022. While Bolt's colossal €628 million investment affected the statistics last year, investments have still plummeted if we do not consider its effect.

Eve Peeterson, head of Startup Estonia, said that economic instability, changes in the security situation and general uncertainty in Europe and the world are affecting all fields, including the Estonian tech and startup sectors.

"There has been a clear decline in figures, and investors and startup founders are clearly concentrating on boosting efficiency rather than aggressive growth through additional capital," she said.

But Peeterson added that transactions are still happening and investors have praised Estonian startups' efficiency and experience of developing companies in the conditions of crises.

Even though it is difficult to predict the future, Peeterson believes the Estonian tech sector remains strong. On the one hand, effective and solid companies are still of interest to investors even during hard times, while startup entrepreneurs must keep in mind that investments take longer and money moves in a smarter way.

The head of Startup Estonia said that founders of startups should pay even more attention to efficiency and optimizing activities and costs to survive the difficult period.

"That said, the situation today could constitute fertile soil for effects investments because there is still a lot of capital looking for smart and groundbreaking application out there," she added.

The biggest investments in Q1 of 2023 have favored RangeForce (€17 million), Planet42 (€14.1 million), EFENCO (€12.3 million), (€6.45 million) and Salv (€4 million).


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Editor: Marcus Turovski

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