the rise of estonia’s startup ecosystem

Estonia has built a reputation as Europe’s startup powerhouse, thanks to its entrepreneurial culture, propensity for innovation, and sheer number of startups and unicorns

Often dubbed the ‘Nordic Silicon Valley’, Estonia boasts the most unicorns per capita in the world, and is ranked number six in Europe and 14th globally for its startup ecosystem. At the same time, its dynamic startup ecosystem is mature and uniquely positioned to nurture talent and startups, and galvanise the necessary capital for growth.

Below is a deeper look at what a startup ecosystem is, and what makes Estonia’s startup ecosystem so unique and attractive for startups. 

What is a startup ecosystem?

Each country and city has their own unique startup ecosystem. When you compare these, it's possible to see trends and to measure how effective each startup ecosystem is at nurturing and supporting startups. But what exactly is a "startup ecosystem"?

There are a range of factors that can affect how startup ecosystems function, and how many successful startups are able to be built in each country or city. This includes the markets they have access to, the tax regime and how competitive it is, the availability of funding and capital, the availability of support networks like accelerators and impact hubs, and whether governments provide support for startups through policy and enabling frameworks. 

Estonia’s startup ecosystem is both dynamic and unique. Estonia has been ranked the number 1 startup friendly country in the world in 2018, according to Index Venture, and more recently ranked 14th globally in terms of startup ecosystems in the 2023 Startup Blink Report.

Below is an in-depth look at some of the factors responsible for Estonia being such a powerhouse for startups and at what makes its startup ecosystem so uniquely successful and impactful.

Estonia: Europe’s startup powerhouse

Estonia has established itself as a startup powerhouse in both Europe and globally. According to the State of European Tech 2022 report, Estonia had the highest number of startups in Europe in 2022. 

Estonia is well known for actively supporting and nurturing startups, and the country’s entrepreneurial mindset and culture are evident from the sheer number of startups.

Home to over 1452 startups – and ranked one of the top startup ecosystems in Europe – Estonia also has the largest number of startups per capita in the world, according to the State of European Tech 2022 report.

It’s not only the entrepreneurial spirit that characterises Estonia – it’s the nature of the entire startup ecosystem. Estonia boasts over 110 partnership organisations, over 140 business angels and mentors, an entire ecosystem of incubators and accelerators, and has a significant amount of venture capital being invested into its startups.

We spoke to Arnaud Castaignet, Vice President of Government Affairs and Public Relations at Skeleton Technologies – a large and proudly Estonian cleantech company that’s involved in manufacturing innovative high-power energy storage solutions based on their patented Curved Graphene material. While it’s no longer a startup company, Skeleton Technologies is on track to become one of Estonia’s largest businesses, with hopes of following in the footsteps of Estonian unicorns like Skype: thus showcasing the potential growth trajectory of successful startups.

The impact of Skype’s success has had a massive ripple effect on many startups, founders, and other unicorns in Estonia and Europe. The State of European Tech report echoes this sentiment, explaining how Skype’s success has been a “launchpad for diverse entrepreneurial ventures”. Skeleton Technologies is well-positioned and poised to follow in Skype’s footsteps to become one of the biggest and most successful companies in the clean tech space in both Estonia and Europe. 

The following image (courtesy of the State of European Tech report and Atomico) shows the massive impact of Skype across Europe's startup network.

Estonia is also well known for its comparatively vast number of unicorns, which is why Estonia is often called the Silicon Valley of Europe. With more unicorns per capita than any other country in the world, these large companies give Estonia a magical status among countries competing to be the number one destination for startups in the world.

Estonia’s 10 unicorns, which are valued at over $1 billion, are Skype, Playtech, Wise, Bolt, Pipedrive, Zego, ID.me, Gelato.com, Veriff, and Glia. 

Reasons why Estonia is a global magnet for startups

Given the rapid rise and success of Estonia’s startup ecosystem, it’s tempting to analyse some of the reasons behind Estonia being hailed as a global magnet for startups. 

It is uniquely positioned as a thriving destination for anyone wanting to start a company, particularly if operating in the deep tech, health tech, or green tech fields.

In discussion with Castaignet, it was clear that one of the reasons for Estonia being such a great place to found a startup and run a company, is the entrepreneurial mindset. In addition, it’s the wealth of talent and skills which is nurtured through a good education system that prioritises STEM education, and the fact that Estonia has a small population which makes it easy to network and get to know a lot of people within its startup ecosystem. 

One of the most fascinating insights from talking with Castaignet, is the unique opportunity that Estonian companies have to collaborate with the government and take part in influencing sectoral policies that affect them. Furthermore, Castaignet shared his excitement for the fact that the cleantech sector in Europe has been attracting growing investments, with the biggest investment rounds in Europe in 2023 being for cleantech companies. 

Below are some of the key factors that are contributing to the growth of the startup ecosystem in Estonia.

1. Estonia’s thriving entrepreneurial culture

Estonia is a country that actively encourages and supports innovation and entrepreneurship, which is evident in its school system, government policies that support startups, and the maturity of its startup ecosystem. Castaignet also echoed this observation, saying how the Estonian entrepreneurial mindset is unique and sets the country apart from many others. 

The culture of entrepreneurship may be one of the reasons why the country has so many home-grown startups, and why so much public and private infrastructure exists to support the startup ecosystem in the country. 

The rise and success of startups in Estonia is testament to how nurturing, supportive and mature the startup ecosystem in Estonia is. 

Not only does Estonia have a vibrant entrepreneurial culture, but many startups have been globally successful with vast amounts of capital having been invested into Estonian startups. 

2. Government support for startups

Estonia’s government has been actively supporting the growth of businesses and startups in a number of ways. 

It has many policies that enable and support the establishment of startups in Estonia, like the Estonian e-Residency program, Startup Estonia, and Accelerate Estonia, which assist tech companies to navigate legal and regulatory barriers.

Through the e-⁠Residency program, foreign founders are able to quickly, easily, and affordably register a company in Estonia and manage it remotely from anywhere in the world. This allows those companies to take advantage of Estonia’s competitive tax system, and access the EU market. 

E-residents can also easily access e-services that make it simple to manage their companies from anywhere, while being able to access investment and seed capital. It’s estimated that between 2020 and 2022, around $849M in early-stage funding was deployed within the Estonian startup ecosystem. 

These enabling conditions have made it easier for entrepreneurs to start and grow their businesses in Estonia. 

3. Estonia’s advanced digital infrastructure

Estonia’s advanced digital infrastructure has also paved the way for a flourishing startup ecosystem. That includes the ability to start a company 100% online, and advanced digital ID and e-services that make it possible and easy to manage companies online and remotely (including filing all taxes online, and digital banking services). 

This digital infrastructure means that it’s easy for startups, particularly tech startups, to be founded and managed very easily. It’s no wonder then that Estonia is often cited as the most digital country in the world. 

4. Access to startup funding 

Startups that are founded in Estonia have been able to attract significant support from venture capitalists and angel investors. 

This ready access to an established network of potential funders makes Estonia an attractive place for startups looking to secure funding to grow and scale. In 2022 Estonia was able to raise more venture capital per capita compared with all other European countries. 

According to Castaignet, Estonia has a nascent cleantech ecosystem, and investments in cleantech business have been on the rise in Estonia. However, he feels that certain barriers to growth need to be addressed to help encourage even more growth in the cleantech sector. This includes the increase of clean electricity generation in Estonia and an adaptation of the university curricula to boost the number of skilled hardware engineers. 

5. Access to EU single market

Another reason why many startups choose to be registered in Estonia is that it gives them access to the EU market. For founders who are not from an EU country, this can be a significant advantage.

For companies like Skeleton Technologies, access to the world’s largest single market area, where there is high demand for cleantech products as well as commitment to reach net zero emissions by 2025, is a significant advantage.

6. It’s easy to start a company in Estonia

Starting a company in Estonia is simple, quick, and affordable. For foreigners, there’s no requirement to have a visa or local agent, which makes it less of an administrative burden compared with other countries. 

In addition, Estonia’s e-⁠Residency Marketplace provides startups with a vast number of service providers, making it easy to hire the necessary skills and services needed. 

Furthermore, the costs associated with running a business is far less than many other countries, starting from around €200 a year.

7. Estonia has the most competitive tax system in the world

Any startup or founder looking to incorporate a company, will be mindful of choosing a location that is competitive from a tax perspective. 

Estonia has maintained its position as the global leader in this regard, by topping the Tax Competitiveness Index for several years in a row. 

One of the main tax advantages of starting a company in Estonia is that startups do not pay tax on profits which they reinvest. This enables founders to invest their profits into building their products, finding clients, and growing capital during the startup years. Only when they are in the safe zone of revenue growth and ready to distribute dividends do they need to think about paying taxes. 

Another advantage is its competitive corporate tax rate of 20% for distributed profits. In addition, it has established double taxation agreements with over 60 other countries, and doesn’t charge capital gains tax, making it an even more attractive destination for startups.

This article was written by guest contributor and seasoned digital nomad Andy Stofferis (www.andysto.com).