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E-stonia: How the Baltic minnow became a tech powerhouse

Automatically generated government services? 0% tax on reinvested profits? The most unicorns per capita in Europe? Estonia's a technology powerhouse in the Baltics. Lara Olszowska went to find out how it did it...

When I stepped onto the streets of Tallinn, Estonia for the first time, I wondered if it had inspired the creators of the fictional town, Duloc in Shrek. Swinging wooden signs, tall turrets, and stone ramparts all conjure the atmosphere of a fairytale land. The capital city’s medieval vibe is, however, misleading. Unicorns do exist here, but they are digital ones.

Skype, Wise (formerly TransferWise), and Bolt, are a few of the best-known Estonian startups, but there are plenty more brewing here and the country (population, just 1.3 million) ranked as the third fastest-growing technology centre in the Global Startup Ecosystem Report this year.

It’s not just world-class startups that are based in Tallinn, but some cutting-edge digital government services too, which put other established European countries to shame. Through the state-run e-Estonia initiative, for example, new digital services have been introduced yearly since 2000.

In the last three years alone, e-Estonia has facilitated an automated childcare benefits service (one of numerous government services automatically triggered as soon as someone is born), multiple remote notary services in collaboration with Tallinn based startup Veriff, and launched the world’s first autonomous hydrogen vehicle, developed by Auve Tech, a startup also headquartered in the capital.

Even its cybersecurity capabilities are also impressive, with Estonia taking third place in a NATO cyber "live fire" exercise in 2022.

So how has such a small country attracted so much innovation and enterprise, and implemented digital transformations in society so far ahead of its European neighbours? The Stack travelled to the sixth annual Tallinn Digital Summit and the ‘Stop and Smell The Future’ conference to speak with ministers and industry leaders to find out how the small Baltic state became an all-singing tech hub.

‘Learning is in our DNA’

Estonian President Kersti Kaljulaid (2016-2021) led a panel discussion titled "Fuckups and lessons learned in building a digital country" this September in Tallinn. 

The country’s digital story started over thirty years ago when leaders and policymakers decided to make Estonia a digital-first country after it gained independence from the Soviet regime in 1991. Prime Minister Kaja Kallas and former President Kersti Kaljulaid remain invested in their predecessors’ tech mission, as is evident from their speeches at the summit and conference respectively.

Leading the panel ‘Fuckups and lessons learned in building a digital country,’ former president Kaljulaid said, “Estonian Silicon Valley is definitely not a myth. Access to public services in this country is radically better than in any other.” What about the mistakes made by the government over its 32-year digital project? The Estonian ID card crisis in 2017, for example, meant that the smart chips in the ID cards were vulnerable to cyberattacks.

Also, mistakes jeopardised the online democratic voting process in recent years. Estonian tech journalist Ronald Liive, on the panel with Kaljulaid, said “for the past two elections there were some human error mistakes that could have been avoided; really simple mistakes.” This Spring when voters were told they had 30 minutes to verify their votes on their phones, in fact they were only given 15 minutes, meaning many missed the window to verify.

For Prime Minister Kallas, it is essential for a country to learn from such challenges in order to move forward – and Estonia has not been without challenges. After independence, “digitalisation became a powerful tool to rebuild our economy and society,” Kallas said. “We did not have the resources to invent new technologies, but we were bold enough to adopt emerging technologies, to learn, to fail and to try again,” she added.

Tiit Riisalo, Minister of Economic Affairs and Information Technology told The Stack: “You have to have the people who want to learn, and this is in the DNA of Estonians because we don’t have too many natural resources, oil or metals. Basically, in very harsh conditions you have to survive using your brain.”

The quality of education in IT and engineering is also at a top standard across the country. Degree alternative kood/Jõhvi is an 18-month coding course that requires no prior coding experience, only that applicants are educated to secondary school level. The course equips students with practical skills so they are ready to work as stack developers from the day they finish studying.

So, aside from the clear appetite for tech and a digitally-minded workforce, why is this country the perfect place for businesses to start up?

Size matters

A "Clevon" self-driving delivery vehicle in Tallinn this month. 

Being a small country has huge upsides for founders looking to start a company, to test out their product or service, and get it approved in a more streamlined process than in other countries.

It’s quick and easy to set up a company in Estonia. Through its e-Residency scheme this can typically be achieved in a few hours, but the current record is just 15 minutes. There is 0% tax on reinvested profits which allows for real growth, and e-residents don’t even have to live in or have physical offices in Estonia to enjoy the government’s digital services.

In terms of testing, Margot Arula, Head of Legal and Intellectual Property at self-driving car manufacturer, Clevon, told  The Stack: “Estonia is the perfect base for this kind of technology because it’s relatively small so it’s like a sandbox. You can test out new things without too much of a complex environment.”

With regards to regulatory progress, Priit Liivak, Chief Architect at digital transformation firm, Nortal, told  The Stack: “It’s easier to move a smaller ship. Estonia due to its size has had a great position to implement new developments.”

As Arula further explained, “what you see in Germany is some regulations take five years, ten years. Here we can have them in one or two.” Clevon has had its self-driving cars on Tallinn’s roads for over a year with zero accidents so far. The city also has self-driving buses and robots that deliver goods to your front door. Other European countries could have the same if it weren’t for slower regulatory processes in their governments.

Collaboration is key

These startups do not only enjoy the digital and financial incentives, test-lab conditions, and speedier regulations provided by Estonia, but also state support and access that would be hard to get in other countries.

“Estonia is a very close-knit society,” Minister Riisalo told  The Stack, “so we talk with people who are running the companies, doing the startups, so we know the needs and try to reflect them.”

This is certainly the case for Nortal, which has consulted on 40% of e-Estonia’s government services. “The support from the government side makes us truly a startup nation,” Liivak said. The business has graduated from Estonian-founded startup to fully-fledged global company with over 2000 employees.

The same is true at Clevon. “You have quite good access to government officials,” Arula said. “Everyone knows everyone in a way. You know who to talk to and you know how to make it happen.”

The Estonian transport authority has been involved in developing Clevon from early on. “Before they let us on the road, they ran some tests to see if there was a baseline level of safety that is guaranteed,” Arula added.

It is these relationships between startup founders and state bodies to which Arula attributes much of the company’s success, and in turn, the capital’s own digitalisation.

Adapting to beat adversaries

Prime Minister Kallas hopes Estonia’s startup success will inspire better governance and security in the country, especially after it was hit with devastating cyberattacks in 2007.

“Governments need to adopt the tools of tech startups and tech companies: constant iteration and obsession with user experience, decision based on data, learning from and reusing what others have already built,” she said.

The NATO Cooperative Cyber Defence Centre of Excellence was founded in Tallinn the year of the attacks, and last year, Estonia nearly doubled its annual cyber security budget. The Prime Minister’s latest pledge is to spend 3% of its GDP on defence overall.

As Liivak noted, “the threat is always out there in terms of data breaches and cyberattacks. We just need to be prepared.”

What next?

Estonia is leading the charge for digitalisation, and startups continue to enjoy the advantages of basing themselves there: the ease of founding a company in Estonia, the country’s small size making it a fertile ground for testing, the collaborative government and access to ministers, the quicker regulation processes, and a tech-ready workforce thanks to the country’s high-quality education in IT and engineering.

While an efficient digital government that is creating more jobs and helping startups to flourish may sound like an ideal more than a reality for many countries, Estonia is proof that the tech is not only there, but working and useful for citizens. Time for the rest of us to catch up?

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