Deep tech is a fast-changing business, where insider knowledge is crucial. Taavi Rõivas, former prime minister of Estonia and current chair of Auve Techin, discusses Estonia's technological journey in an interview with Baltic Business Quarterly, delving into the historical roots and future directions of deep tech in Estonia and the Baltic States.
How and when did the deep tech movement gain traction in Estonia, and can you comment on the Baltic States?
I think that was linked to Skype, a very early unicorn, and I would say most of the Estonian next-generation start-ups, including deep tech companies, have some roots at Skype.
Secondly, there has been a shift from SaaS and marketplace start-ups that used to boom at some stage towards more complicated, more capital-intensive, and I would also say more exciting start-ups. So, recent years have shown the growth of deep tech.
Last but not least, there are two different approaches to these deep techs in this context. A comprehensive definition includes any software solution that uses AI. I would go further and focus on the technologies that utilise the best of science and R&D.
You mentioned Skype, but what is the leading company for deep tech right now in Estonia or the Baltic States?
I wouldn't mention one single company because that would not be fair. I see various sectors emerging. If we want to paint a comprehensive picture, I would say the booming or fast-growing sector is anything green, anything related to climate change.
But if we go into more detail, I would point out at least two. The first is saving energy and optimizing the grid.
Secondly, smart cities or, more like in Estonia, smart transportation. There are many autonomous driving companies for delivering both people and goods. Where we see most unicorns or successful companies coming are the sectors where they address the mega-trends, so energy transition and reducing CO2 in transport are sectors that address the mega-trends of our time.
What differentiates the deep tech ecosystem in Estonia from the other two Baltic States?
I recently visited the Lithuanian ecosystem. We were guests of Lithuanian VCs and they believed that Lithuania is a couple of years behind Estonia, which, in my opinion as an investor, is excellent because it shows that big things are still happening in Lithuania.
I do believe that too, by the way. I saw that there is a vibrant and hungry ecosystem, which is always a good thing. Of course, the present time is not the easiest, but on the other hand, strong companies will survive.
I know very little about the Latvian ecosystem. Latvia has a couple of bright stars, but the ecosystem isn't as complete as in Estonia or Lithuania. I see many similarities between Estonia and Lithuania, but Latvia is a different ball game.
I hope that the Latvian ecosystem will be more comprehensive at some point and that the success stories from the neighbors have a positive spillover effect on Latvia too.
How does the Baltic deep tech industry compare to neighboring markets?
I like to describe the Baltics as the New Nordics. We are part of the Nordic value system and the broader start-up ecosystem. Of course, the Nordics are not homogenos either. Sweden stands there as the number of start-ups in the sector and the valuations are highest. Finland and Denmark are somewhat behind, and Norway is even further behind. The Baltic ecosystem fits very well to complement the general Nordic picture.
A couple of years ago, I attended the Baltic VCA Summit in Pärnu. I remember one Finnish venture capitalist saying that yes, we would like to invest in Estonia, but you know Estonia is so close to Russia, and we see a lot of danger.
And I asked, excuse me, perhaps I am wrong, but where exactly is Finland, or who are Finland's neighbors? This stupid or naive paradox has existed until recently, and I think they don't make sense in the current situation.
Is the Estonian government cooperative?
Well, I think the most essential help was at the early stage. Around ten years ago, we had the co-investment program, investing with VCs and adding public money to that. That was the most critical thing. All the Baltic governments have been relatively successful in introducing as favorable a tech system as possible. We may have to develop a little more in attracting talent.
We have all been somewhat cautious about migration, and it has been challenging to attract international talent. But this is where government can help. For the rest, I would say it's better to have a government that doesn't intervene too much in the business process because usually they can make things worse. And I say this after having worked for the government for two decades.
In deep tech, do you see potential for collaborative projects among the Baltic States?
Yes, I do, and I think this is driven to a great extent. I see that investors have plenty of interest in using the potential, especially in Estonia and Lithuania and less so in Latvia. So, I hope that we see Latvia coming into the picture a bit more.
Both in Estonia and Lithuania, I have seen that success creates success. If you have unicorns and real success stories, this creates additional success. Five or six years ago, Lithuania and especially Vilnius took the approach of wanting to be the fintech capital of Europe and that paid off. It was a clear message, and start-ups and investors hear these kinds of messages. I do hope that Latvia finds something similar to this.
I have already said that in Estonia, the most important single thing to happen to the ecosystem was Skype. Even though Skype has nothing to do with fintech, it was the most significant source of the biggest fintech in Estonia.
The founder was the first guy working for Skype, so the connections are very, very deep. Everything is systematic and logical if you look at it from that perspective.
Where do you envision the Baltic deep tech sector, including green tech, to be in the next five years?
Well, I see two mega-trends. I see that anything green will continue to be the buzzword or the main thing. Of course, anything to do with the military is going to grow for the foreseeable future. But leaving that aside, it will be anything green. The second thing is that the overall ecosystem is getting more diverse and more complex. I think that's a good thing because it's no longer enough to have a good idea and then design an app around it. But you must demonstrate exceptional technology to get serious financing to be a big star.
Basic AI is no longer an exceptional technology. Everyone can access basic AI. This is becoming very normal in our lives. So it needs to be more complex. And if we focus on these sectors then we have a real chance.
This interview first appeared in the latest issue of Baltic Business Quarterly, Winter 2023/2024.
Editor: Kristina Kersa
Source: BBQ, interviewed by Ruslanas Irzikevicus