Millions Invested In Estonian Startups After Boom in Tech Industry

Peter Thiel helped raise $6m for Estonian startup Transferwise Fred Prouser/Reuters

Last month, the Estonian tech startup received $1m (945,000) in seed funding from US investors. Despite the fact that Estonia has a population of just 1.25 million, the funding was business as usual. A few weeks earlier, Testlio's fellow Estonian startup had received €4.5m in venture capital funding from US investors, while received €48m from Richard Branson, Silicon Valley king-maker and venture capital firm Andreessen Horowitz and Peter Thiel, co-founder of PayPal.

All Markus Villig, whose taxi-app startup, Taxify, boasts more than 200,000 users in eight European countries and recently raised €1.4m from US and European investors, needed to set up his company was a digitally enabled ID card, a computer, a credit card and a few minutes. Villig didn't even leave his desk.

That's because Estonia has successfully overcome disadvantages – such as an unenviable location, nestled next to Russia and a small population – to become the world's top startup nation. The country currently has 350 recent startups – one per every 3,700 citizens – and the government expects the number of new companies to reach 1,000 by 2020.

Early success stories – Skype in Estonia – attract talent and spawn more startups. "Most of my friends have their own start-ups now," says Villig. "Ten years ago people wanted to work for large companies."

Yet whereas Silicon Valley startups can hope for early funding from incubators followed by multimillion-dollar investments by venture capitalists, Estonian entrepreneurs turn to peer clubs and apply for grants from government agencies. The government-funded Startup Institute teaches them to pitch to large American and European VCs.

But according to Harriet Maltby, a researcher at the Legatum Institute, a London think-tank that publishes the annual Prosperity Index report, Estonia trails the UK on measures such as startup costs and the rule of law. "And the main obstacle for the Estonian entrepreneurial ambition is perception," she says. "Data shows that in 2014, 70% of Britons thought the UK is a good place for people to start a business, compared with 51% of Estonians. If it is to rival the UK as Europe's startup capital, it is not just global perceptions Estonia needs to focus on."

Estonia's government now acts like a new tech firm itself, attracting "e-residents" who can set up and run a cloud-based business remotely after one visit. The country hopes for 10 million virtual residents by 2025. Today all government information is digitised, with backups stored in embassies abroad. "It might be hard to imagine a world without documents, but for us it is normal," says Taavi Kotka, the Estonian government's chief technology officer. "We face a bigger danger of cyber-attacks than physical, of course, but we keep in mind that we have quite a ferocious neighbour."