The Baltic states: the “next startup nations”
My first decade working at a startup was during the 2000s at Israeli-founded AeroScout, which had a head office in the USA and an engineering & operations subsidiary in Israel. I got to see first-hand the ambition, hustle and relentless grit of the Israeli startup community and had the good fortune to take a C-level role in the process of building a born-global startup that was eventually acquired for $240M. The success of the Israeli startup ecosystem was such that it became one of the significant industries in the country and led Saul Singer and Dan Senor to assign Israel the nickname “startup nation” in their legendary book.
What I see in Estonia, Latvia and Lithuania today reminds me of Israel. The Change Ventures investment thesis, as the only pan-Baltic seed fund that focuses purely on backing ambitious Baltic founders, is built on the assumption that the next decade will see similar growth of the Baltic startup ecosystems. Hence our nickname for the region as the “next startup nations”. This thesis also underpins the rationale for the added capital commitments that led to our second close at €31M, thus becoming the largest seed fund in the Baltic States.
While Singer and Senor focused much of the “Start-up Nation” book’s attention on the impact of Israel’s military service and its large population of new immigrants, which are not factors present in the Baltic States, I believe that the rest of the success recipe has several similar ingredients. Most importantly, Israeli founders started with a global mindset from day one of starting a business, since Israel itself is a small market and any business of consequence needs to win in much larger markets elsewhere. The same is true of the Baltic States, whose combined population numbers just 6 million people, around the same number as Israel had during the first decade of this century. As a result, most Baltic startup founders focus from the start on large export markets for the launch of their products and services, while the Baltic states offer at most a market for pilot testing initial solutions. This has a fundamental impact on product design, ensuring that products are built from scratch to cross borders. We hear investors backing teams in other European markets say this is often missing in startups founded in countries with large local markets. A global focus is evident in all of the Change Ventures investments. For example, Planet42 serves car buying customers in South Africa, Aerones serves wind energy customers in Latin America and 99math serves teachers and kids in the USA.
Serving customers abroad from day one instills different management practices and organization structures in our startups. Distributed teams are a reality early on in most Baltic startups and English is typically established as the lingua franca from the start, ensuring team members from around the globe can get up to speed fast. And unlike the 2000s, when global communications were still much more complex and expensive (at AeroScout we spent thousands of dollars every month on international calling cards), today all distributed communications infrastructure is available at scale, on demand and for next to no cost.
The quality of STEM education across the region is a second reason for the emergence of technology leaders. Estonia’s PISA scores are in the 5th place in the world and both Latvia and Lithuania are in the top 35. The region’s best state high schools crown winners of global math, physics and other international olympiads every year, many of whom now get access to scholarships at the best universities in the world. Tartu University already broke into Times Higher Education World University Rankings top 300, while Latvia and Lithuania have multiple universities in the top 600–1000. Just as Israeli students leave university to pursue dreams of building the next Waze, Mobileye or Viber, many of our region’s university graduates now see Transferwise, Vinted, Tesonet and Bolt as inspirations for starting their own business.
Accelerating the growth of the region’s startup ecosystems is the emergence of local and regional venture investors, especially experienced angel investors, who seed the next startups emerging from the region. Estonia’s angel ecosystem already includes some “super-angels” such as Taavet Hinrikus and Jaan Tallinn, as well as a thriving business angel association. Lithuania’s community is growing rapidly and we are increasingly seeing Baltic angels investing across all three countries.
Government support and legal environment
Legal structures and government support are another key component of success in the region. The Estonian government’s e-Estonia efforts and Lithuania’s support of FinTech initiatives are both laudatory. Following Latvia’s adoption of new stock option regulation last December, Index Ventures added Latvia and Lithuania to their Rewarding Talent handbook, the leading review of stock option regulations in Europe and around the world. The three Baltic states now top the rankings, above the US, UK and Israel, in terms of attractiveness of their regulatory environment. Since options are one of the key compensation tools used by startups, this regulatory support will help startups from the region to attract and retain senior talent, including from overseas, which is especially important for scaling global businesses.
This combination of born global startups, strong education and government support means that startups from the Baltic states are ahead of the curve. As a venture fund, we are privileged to be able to support ambitious Baltic founders in their quest to build global businesses with capital, advice and our unparalleled network of potential investors, partners and customers. We look forward to an amazing decade of growth ahead of us in 2021 and beyond. If you are a founder from the Baltic states and want to connect, please reach out to email@example.com.
Andris K. Berzins