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Baltic startup scene - already self-sustainable

It was already back in 2003, when the tech giant “Skype” was born in Estonia, at the time it  was something that seemed unusual - talking through a computer from your home to another person. Everything that you needed was a laptop, microphone and an internet connection. It rapidly emerged to the point where in 18 months it had registered 23 million users and after only four more months the number already exceeded 100 million downloads. The 2005 $2.6 billion Skype acquisition by eBay and Playtech $950 million floatation on the AIM market, earning the unicorn valuation for both, was just the beginning of what would put Baltics on the startup map. Mention worthy is that the foreign direct investment in 2005, compared to the year before, more than doubled hitting almost 22% margin of the Estonian GDP, this also made an impact for Latvia and Lithuania, which also saw a raise in the attracted foreign investments in the following years.

In terms of Estonian policy towards innovation it was a turning point and made the country's government reconsider some of the targets that were set as the main objectives. The decision for the 2007-2013 strategy, also known as “Knowledge-based Estonia”, was to concentrate more towards educated people that are willing to develop their talents and later bring the ideas to reality and also improve the overall environment for doing business. Latvia also set economic development as the top priority in its 2010-2013 strategic development plan, which would be driven by improvements in the business environment and knowledge-based economy. At the time it may have sounded ambiguous but recent history has proved that technology and sustainable development can be the right thing to guide by.

What directly relates to the set strategy goals is the foundation of another technology company, namely TransferWise which is now known as Wise. The company was founded in January of 2011 by no one else than the first employee of Skype Taavet Hinrikus and his partner, both from Estonia. Wise brought revolution to currency conversions and was on the way to become the third Estonian unicorn, which was accomplished in 2015.

In terms of maintaining the ecosystem and creating favorable conditions for attracting new talents, Estonia started to show the way with the brightest example being the establishment of the first-ever e-residency in 2014. The program would allow for non-residents to access all the electronic services provided by the state, meaning that even a company could be established remotely. This was a significant win for Estonia in order to preserve the position as one of the main figures of the digital revolution, which also imposed a challenge for the rest of the Baltic states.

The rise of the startup culture meant establishing government supported startup programs, with the first being Startup Lithuania establishment in 2012. Main figures in Estonia and Latvia, namely Startup Estonia and, were established subsequently in the years of 2015 and 2016. For the process to begin in the first place, it takes a lot of enthusiasm to be able to establish a successful figure that will drive the ecosystem, as in the case of The figure was established by a group of business enthusiasts with extensive business background, which by now has proven to work successfully already for more than five years, where the process has asked no less enthusiasm, involvement and hard work than the establishment itself. These figures have also brought and initiated a variety of startup programmes and accelerator programs, including government supported ones, where Latvia adopted a “Startup law” becoming one of the first countries in the world to do so with its unique tax breaks. All three Baltic states launched Startup visa programmes in 2017, marking the beginning of a new era, an era where unicorns would be born. The Lithuanian recommerce company Vinted achieved the landmark in 2019 and it did not take too long for Latvians to join the Baltic unicorn club with the print-on-demand giant Printful in 2021. What was started by Skype, turned out to be the spark for fuelling the Baltic startup scene.

The past year, 2021 was the biggest one for the area by tripling the attracted funding totals when compared to the year before and reaching EUR 1.6 billion. Where Latvian startups attracted almost EUR 250 million in investments, an amount that was received in the previous 10 years altogether, in addition Latvian government amended the stock option laws for them to be more attractive for the owners. The year was so successful that Latvia was named the most startup-friendly country in Europe. While Lithuania in the same year had multiplied the valuation of tech companies by 17 times when compared to 2016 and also hit record-breaking numbers in terms of total attracted investments. For Estonia the years between 2020 and 2022 brought 6 more unicorns, bringing the total to 10, where 2021 was the most generous by adding 3 unicorns, bringing the total Baltics count to 4 in 2021. Considering that the Baltics population is somewhere around 6 million and the total number of unicorns has reached 13, those are really impressive numbers and they are only expected to increase.

Crowdsourced data of Estonian, Latvian, Lithuanian startup ecosystems

Currently the founders of already grown successful startups have achieved the point where they are able to make reinvestments in other scaling startups in the Baltics or choose to establish new companies by launching them with their own funding. As an example to mention, the Latvian startup, Printify in its latest round, was also funded by the founders of Wise and Vinted. The availability of own financing and the continuing generation of new ideas can be seen by the multiple startup events that are held on the Baltic level, while the investment and attention demand only keeps increasing. Techchill, Latitude59, Slash are some of the biggest Baltic startup events, where the local founders are offered the chance to meet investors and share their newest ideas. In addition to events, there is also a growing number of private ecosystem supporters, which are able to guide startups in scaling processes and also make their own early stage investments for the maximum involvement as in the case of Venture Faculty. These companies too play an important role in nourishing the ecosystem and promoting events, usually being more flexible than investment funds, but still come with an extensive experience and entrepreneurial background.

As of today there are becoming more and more locally established Venture Capital funds that are investing in Baltic startups, some are approaching or already have reached the closures and exits. Usually these funds take commitments of up to EUR 50 million with some of the most prominent examples being Change Ventures, Practica Capital and Overkill Ventures. The local funds mainly invest in early stages and sometimes up to Series A funding rounds. There are also being established more unique mechanisms that are used for increased financing availability for startups and investing possibilities for investors as, for example, Capitalia established a EUR 1 million Alternative Investment Fund by allowing to join private investors, who could contribute a fair investment, starting from EUR 25 thousand. The fund joined a larger fund, namely Change Ventures fund, creating a precedent, where such investment mechanism is put in use in the Baltics. Supplemented by angel investor groups, individual investors and reinvestors there is a clear tendency showing that even more money is coming and will continue to come directly and also indirectly from private investors who are willing to increase their investment portfolios. These conditions provide availability for startups to receive the so-important early-stage investments for continuous development of their ideas and innovations.

When it comes to larger investments that are needed for upscaling, the Baltic startups have gained the attention of the foreign investors as they have proved to be able to scale quickly and even emerge into unicorns and tech giants. When it comes to over $100 million investment rounds they are mostly led by the United States based venture capital investors, such as Sequoia, Bregal Sagemount, Accel, Alkeon and even Fidelity Investments, all of which have invested in the Baltic unicorns. European based venture capital funds also have taken part in up to $50 million investment rounds as, for example, EQT Growth (UK-Sweden based), Index Ventures (US-UK based), Creandum (Sweden based), also including individual angel investors from the Nordic countries. To complete the package, there are also funds from the Eastern Europe itself, for example, FlashPoint, which have stated that the Baltic startups are becoming even more prominent and are interest worthy, later showing that by making investments in the region with their own funds.

The Baltic startup scene is becoming more saturated every year but at the same time, taking all into account, there is also a full startup growth and investment cycle, which are good news in terms of preserving the rising success and mitigating the impact of the expected investment winter. We will see how it turns out, but there are reasonable grounds to believe that the Baltics are in a very good place as of now and that the positive tendencies will continue to be seen in the foreseeable future. Nevertheless, there are still multiple startups that should be held on the radar as they are approaching the rounds that could make them the next Baltic unicorns. Lokalise, Printify and Kevin. and also a couple of others could fulfill 2022 and make it the most successful in terms of new unicorns in the Baltic history.