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Saturday, November 7, 2015

The Failure of Estonian Air : Flying Away with Taxpayer Money

Why Small Governments Should Not Run Airlines


Estonian Air's Tupolev Tu-134a. Photo taken back when they last made a profit. [Photo Credit]

Estonian Air is dead, long live the Taxpayer!

Based on the recent ruling by the European Commission, the near-constant handouts to the company by the Estonian government are illegal, and must be paid back. Estonian Air simply doesn't have the cash to pay it back.

How much money is involved? By some accounts, over 130 million euros of taxpayer money was supplied to Estonian Air in the form of equity and debt (loans that will never be paid back). That would be like if every man, woman, child, and rullnok in Estonia took a 100-euro banknote and burned it.

Trondheim, population 180,000. Estonian Air flies here. Popular with lutefisk-seeking tourists. All five of them.

What Went Wrong

Is there one particular bad decision that caused all these problems? Is Estonian Air the next Emirates or Singapore Air, and just needs one or two small changes to become profitable?

Blame the Planes!

It must have been the planes! Too big? Too small? Too many? Well it turns out, they tried them all.

They tried standardizing on an all Boeing 737 fleet, and realized it's hard to sell all the seats in such a big plane.

Then they got rid of those and moved to all Embraer jets, which are smaller and easier to sell all the seats.

Well it turned out those planes used too much fuel, so then they moved to all Bombardier jets.

They basically tried numerous types of planes, and nothing seemed to work. Must not be the planes that are the problem then.

It's the Management, Stupid!

Bad management?  It must have been the CEO's fault! Who was that incompetent person who doesn't know an an aileron from a wing flap?!

Well, it turns out they went through 3 different CEOs the last few years (Aljas, Taskila, Palmer), and that didn't help either. Must not be management then.

Joensuu, population 59,000. Estonian Air flew here. A popular destination for tourists who like to ride bikes on snowy sidewalks.

They Fly to the Wrong Places!

Big cities? They tried that then cancelled all flights to places like Frankfurt, London, and Dublin.

Small cities? They launched flights to places like Joensuu, Kajaani, and Tbilisi  (no, we're not making this up, they really flew there). That didn't work either -- the Kajaani flights consisted of one or two sex tourists, and the Georgians didn't like the 4am flight and a layover in Tallinn when connecting to their onwards destination.

Vacation cities? Also tried -- Dubrovnik, Simferopol, and Athens were all cancelled shortly after they started, since most Estonians book package tours on charter flights.

Transit hub for passengers coming from Asia? Agreements were signed with some Asian countries, and nothing ever happened, perhaps because Finnair already does exactly this in Helsinki.

London, population 8.5 million. Estonian Air cancelled flights due to lack of interest. Everyone wanted to go to Kajaani to meet the sex tourists instead.


Let's Be the Nation's Bicycle!

(You know the girl who is referred to as the village bicycle? That's because everyone has had a ride!)

"Coffee, Tea, or... wet lease?"

Estonian Air's most recent strategy is to whore out their planes and crew to the highest bidder, known as wet leasing in the airline industry. They basically operate flights on routes contracted by governments in other countries. These are typically flights to small cities, and they get paid directly by the government to operate the flights, on routes like Copenhagen-Orebro in Denmark, Arvidsjaur-Gallivare in Sweden, and Amsterdam-Vaxjo.

Not only is the airplane prostitution strategy not doing any good, but what is the use of an Estonian national airline if they are just flying domestic routes in other countries?

Destination : Failure

Estonian Air has not turned an annual profit in over a decade.  During this time, they've tried everything -- changing planes, changing CEOs, changing route structures, and even selling their hot plane ass on the airport tarmacs of Arvidsjaur.

Nothing worked. They've tried everything, and it failed. We think there is a structural problem -- the Estonian market is simply too small for a national airline.


Moving Forward

It's time to stop the madness. This government-owned airline hobby has cost the Estonian taxpayer 130 million euros. Meanwhile, the Estonian government, foreseeing the fate of Estonian Air, has already set up a new taxpayer-funded airline known as Nordic Aviation Group, and set aside 41 million euros of taxpayer money to fund them.

Supporters of this move will say it's necessary to ensure Estonia has good air connections to other cities. We agree that air connections are vital, but Estonian Air has already proven they can't provide air connections to major European cities like Frankfurt and London. Instead, foreign airlines have stepped in to fill the gap, and they've done a good job. Overall passenger traffic at Tallinn Airport has grown by over 100% in the last decade, meanwhile Estonian Air's share of passenger traffic at the airport went down from 55% to 27% during that same period. At the same time, Latvian carrier Air Baltic has announced plans to operate direct flights from Tallinn to 11 other European cities -- many of the same cities Estonian Air offers direct flights to.

Yes, we're sad to see Estonian Air go. We've been flying them for years, even during their days of the rickety Saab planes operated by the Estonian Air Regional spin-off, and have taken the legendary twice-daily London flights that made it possible to fly to London in the morning for meetings, and fly back the same evening (and head directly to Decolte from the airport). Nonetheless, just like Decolte, it's time to shut it down and move on. There are better uses for 41 million euros. How about ensuring all children have access to nursery school?

Best Estonian Air ad ever. 

Wednesday, April 1, 2015

.ee Bubble Receives Funding from Enterprise Estonia

.ee Bubble and EAS Announce Project to Create an Incubator for Incubators


Tallinn, Estonia, 1 April 2015. The .ee Bubble and Enterprise Estonia (EAS) are pleased to announce a new collaboration project. EAS will provide 2 million euros in funding to the Bubble, to start an Incubator for Incubators. The new incubator for incubators will focus on providing services and training to help new incubators in Estonia get started.

"We were doing an analysis of incubators in Estonia, and found that there is a 1-to-1 ratio of taxpayer-funded incubators to startup companies." said the .ee Bubble. "We thought this was way too high, and reported our findings to EAS. You know what they told us? They said it was too low and they wanted more incubators!"

"In Estonia, we need more incubators." said Andrus Mullisepp, chairman of the board of EAS. "Other than the Räpina Incubation Center, Viljandi Creative Incubator, Startup WiseGuys, GameFounders, Tallinn Tehnopol, Tallinn Creative Incubator, EBS Business Incubator, Roosna-Alliku Incubator, Mäo Incubator, Narva Eagle Nest Incubator, Läänemaa Incubator, Sillamäe Free Zone Incubator, Startup Estonia, Founder Institute, Võrumaa Technology Incubator, Tallinn Incubator, Ülemiste Incubator, Kopli Incubator, BuildIT, Mektory, Prototron, European Innovation Academy, Start Smart, SummerCamp4Startups, Startup Garage, Ideelabor, Protolab, Biomed Incubator, Seiku Social Entrepreneurship Incubator, Ajujaht, Tartu Creative Incubator, Tartu Science Park, and the Pärnu Incubator, we really don't have that many incubators in Estonia. For example, let's say you live in Abja-Paluoja and have started a new online dating service -- Tinder for Inbreeds, if you will. You'd have to drive all the way to Pärnu to find the nearest incubator. That's a 20-minute drive if it's a busy day!"

On the reason for the funding, the .ee Bubble said, "Look, we really don't know why they gave us money. We thought they hated us! We heard there were only two proposals they received, one was from us and the other was written by a bunch of monkeys randomly typing on their computers. They were going to give the contract to the monkeys, but there's some EU regulation against awarding contracts to circus animals."

When it was pointed out to EAS that places like Silicon Valley have a much lower startup-to-incubator ratio, and none of those incubators receive taxpayer funding, Mullisepp from EAS said: "I'm tired of everyone comparing great Estonia that that economic wasteland that is Silicon Valley. Other than Facebook, Google, Apple, Oracle, Intel, Cisco, Twitter, Uber, eBay, Paypal, and Adobe, what has Silicon Valley provided to the world? In Estonia, we have amazing innovative companies like Fits.Me, United Dogs and Cats, and Jobbatical!"

When asked why EAS is giving 2 million euros to the .ee Bubble for this project, Mullisepp said: "Actually, 2 million euros isn't that much if you think.... ahh.. it appears I've just been asked to resign because my wife's brother's company got funding from EAS last year. You'll have to ask my successor about that."

Jaanus Mullitaja, the new chairman of EAS, continued: "Two million euros isn't that much, if you consider how much we've been giving to the incubators themselves. We gave 2.7 million euros to just the incubators in smaller cities in Estonia, and you can see how well that's working out. The Roosna-Alliku incubator doesn't even have a webpage! I'd also like to add that... ahh... it seems I'm being asked to resign because my consulting company received funding from EAS last week."

Tarmo Mullipää, the third new chairman of EAS in the last hour, added: "We think incubators are the key to success for startups in Estonia. Our goal is that every startup will go through at least three incubators, and we'll have incubators in every city and village in Estonia. Ideally, startups will just permanently remain in incubators and never actually start doing business."

When asked about when the startups will start making money, Mullipää said: "Look, do you really think we care about profit? Hell, we gave a few hundred thousand euros to some rich British pop singer so he could make a DVD of his concert and keep all the revenues. The way we consider our efforts a success is if we've given away all the taxpayer money that was given to us."

Mullipää was also questioned about his qualifications to be chairman of EAS and he responded: "It's quite simple actually. Nearly everyone in Estonia has either received money from EAS, or has a friend or relative who received money, so that disqualifies them from being on the EAS board. I, on the other hand, am an orphan, virgin, childless, and I have no friends and no relatives. I'm perfectly qualified for the job because I have no conflicts of interest. Now if you'll excuse me, I need to go take my hourly dosage of antidepressants."

Estonia's president, Toomas Hendrik Ilves also had good words to say about the new project, in this exclusive interview:

Interviewer: Mr. Ilves, what do you think of today's announcement?

President Ilves: Today is a great day for glorious Estonia! [Ilves pauses to tweet] I've always said that we need more [another tweet] incubators, and today we have [1 tweet, 2 retweets] the solution. An incubator for incubators [tweet, tweet, tweet].

Interviewer: How do you think this will help startup companies?

President Ilves: The reason it's good is that [tweet] [tweet] [retweet].. hey, I have some important work to do right now. I'm in a Twitter flame-war with two 12 year old boys in Chelyabinsk who are not convinced that Estonia is the greatest nation on earth. It's my job as president to convince them otherwise. My wife, First Lady Evelin Ilves is right here [tweet] [tweet]. You can talk to her.

Interviewer: Good day, Mrs. Ilves. It was quite an announcement today. Can you tell us what you think of Yoga...

First Lady Ilves: What!?!! I was told there would be no questions about my personal life! I go to yoga twice a day as a hobby! I don't meet any swarthy men there, and I'm definitely not kissing them! How dare you ask such a question! [storms off]

Interviewer: Ahh... I was just just asking your opinion on Yoga Intelligence, the startup that closed up then reopened under a similar name to avoid their tax debt.

An incubator for incubators has not been tried before, and the .ee Bubble provided more information on this novel concept: "This will be like a teach the teachers program. We'll teach our courses to incubators, and they can teach this to the startups in their incubator."

An initial course listing has also been provided:
  • Government Funding in a Matter of Minutes. How to use your Estonian ID card to create a company in 20 minutes, then apply for EAS funding on the 21st minute.
  • Techniques for Auditor Seduction. Your biggest enemy is the EAS auditor who wants to see how you're spending their money. This course will provide seduction techniques so the auditor's attention will be focused on something other than numbers. Special sessions in how to give compliments how to buy flowers will be provided.
  • How to Get Government Money from Two Governments at Once: A case study of Publification.
  • Time Management : How to Attend as Many Startup Networking Events as Possible and Still Have Time to Sleep. A good Estonian startup founder should be spending 80% of their waking hours at startup networking events, so they can meet the same people over and over and talk about "working together". This course will provide effective methods for time management and how to avoid double-booking.
  • How to Siphon Money through an Estonian Company, Never Pay Taxes and Have the Government Still Love You. A case study of ComPlus Consulting.
  • Techniques for Being a Small Five-Person Company and Still Getting Millions in Taxpayer Money. A case study of Meratel
  • Choosing Your Next Incubator. Techniques for choosing which incubator to move to next. This course will show how to evaluate if the weekend social events are good, how much free food and drink is provided, and also provide tips for determining if the people who run the incubator are single and promiscuous.

Commenting on the budget, the .ee Bubble said: "It may seem like 2 million euros is a lot of money, but really it's not. We plan to run things like our idol, the taxpayer-funded Estonian Development Fund (Eesti Arengufond), so we'll need to get the most expensive office space in Tallinn. We'll also spend lavishly on alcohol. In addition, we've set aside 10% of our budget for hookers and blow.

Summarizing the project, Mullipää of EAS said: "We hope this will be the beginning of a great cooperation project with the .ee Bubble. If things go well, then our next project with them will be Mullimaa. It's an amusement park for startups, kind of like taxpayer-funded Lottemaa, but each of the "rides" will just be a government-funded incubator where startups can sit down and receive taxpayer money. We'll also have rides for the taxpayer. They can come and sit in a locked cage for 8 hours and watch all the fun everyone else is having with their money!"

Oh, and April Fool's!

Tuesday, February 24, 2015

Meratel : MagicSIM or MagicSCAM?

Our Adventures with the #EstonianMafia

Like a TV reality show in its third season, it's time for something different. This time, instead of talking about the taxpayer money last, we're going to get to that first:

Whenever it starts with "The project of", you know it's going to be good.

That's right, 2,360,500 euros of taxpayer money to a company called Meratel for a "MagicSIM" project.

Ever heard of them? We haven't either. But for a company to receive this much money, they must be a big company with lots of employees, doing life-changing work.

Who is this great Meratel, with magic powers to take millions in taxpayer money? Information on their website was scarce. We had to know more. Time for a roadtrip!

Taking the Road Less Traveled

Records show Meratel is located in the Mustamäe section of Tallinn, so it was time to pay them a visit. Our first task was to figure out how to get there from our secretive lair under a bridge in central Tallinn (that's where trolls live, right?).

We decided to take a taxi, and now we were faced with a tough decision. Which taxpayer-funded taxi company should we take?

We thought of taking TaxiPal, recipient of 48,731 euros of taxpayer money, but got concerned about if they were still in business. Their founder seems to be employed as IT manager at Eesti Loto for the last four years.

Then we thought we'd try Taxify, recipient of 8,780 euros of taxpayer money, but we were worried reports of their EstonianMafia-style tactics might have rubbed off on their drivers, and we weren't in the mood for a battle.

Finally, we settled on the latest upstart in the taxi business, Pedobeartakso:

No taxpayer funding here!

Our ride arrived promptly, and the driver was nice enough to share his vodka with us on the ride over to Meratel. He did rush off rather quickly after he dropped us off though -- something about needing to head to the playground.

Our Visit to Meratel

We were overwhelmed with excitement. Finally, we get to visit the headquarters of Meratel, the recipients of millions in taxpayer money, and learn about their cutting-edge "MagicSIM" technology! Could this be the cure for cancer?

World headquarters of Meratel located within.

We rushed into the building, and headed straight for their offices... only to find the door locked and no one there:

Yes, we actually did visit their offices. And yes, this really was the highlight of our week.

How could this be? Surely a company that has received this much funding to develop the "MagicSIM" project would be operating on full throttle. We envisioned a lab full of engineers, laboring from morning until late in the night on the "MagicSIM." Instead, we got an empty office.

We quickly pulled out a copy of their annual financial reports, graciously provided to us by one of our readers (who is also big in the Estonian startup community -- see not all of you hate us!). Finally we had our answer -- according to their annual report, the company has only 5 employees! We must have showed up when all 5 of them were out for coffee.

We had to know more. Through careful research (ok, reading the fire escape plan that also shows building layout), we worked out they have approximately 100 square meters of office space. Not much for a company working with millions of euros.

Fifty Shades of EAS Auditors

Now we were a bit depressed, and not only because of the crappy weather. Our hopes were dashed. Meratel was actually a tiny company, that appears to take a lot of coffee breaks. No one was busy using "MagicSIM" to cure cancer.

So what happened? Here's our theory: Meratel is a telecom company, and a lot of the money they received from the taxpayer was used to purchase specialized telecom equipment (according to their 2013 annual report) -- over 1 million euros worth of it.

What does telecom equipment look like? There's the rub. This is all very specialized stuff, and only a few people will know what it is by looking at it.

Now, we don't know if Enterprise Estonia did an audit, but let's say they did. Here's what may have happened.

EAS Auditor (like most auditors, she's a single female in her 20's, from a small town in Estonia): Hi, I'm from EAS and I'm here to do an audit. According to my files, you spent 1 million euros to buy 20 Ericsson DSLAM-VOIP-THINGAMAJIG-2001 devices. Can you show me where those are so I can be sure you received them and are using them?

Meratel Guy (also a younger guy and somewhat handsome, as confirmed by a female we had doing surveillance near their offices, and no we're not kidding about this): Ehh yes.. of course... here they are [points to empty Aura 1-liter juice box on floor]... oh and did I mention how beautiful you are? Those thick glasses make your eyes look lovely. Where are you from?

EAS Auditor: [blushing] Oh, why thank you. No one has ever said something so nice to me like that before. I'm from Abja-Paluoja [tiny town of 2,000 people but with a local government with roughly as many staff as the entire Maltese government].

Meratel Guy: [blank stare] Yes.. Abja-Paluoja. They say the most beautiful women in Estonia come from there. Hey, let's skip this whole messy audit thing. How would you like to go have a coffee with me? We might even see the other 4 people in the company while we're there.

EAS Auditor: Sure! This audit doesn't matter anyway. At Enterprise Estonia, the goal is to give out as much money as possible, not to take it back, so the audits are mostly for show in case the European Commission catches us.

Now did it really happen this way? Probably not -- there are no beautiful women from Abja-Paluoja. What it does show is it can be difficult to audit projects where complex technology is involved, because no one really knows what an Ericsson DSLAM-VOIP-THINGAMAJIG-2001 device looks like, or even how to count them. Could it be that Meratel just bought fancy equipment, then sold it off? More on that later.

"MagicSIM" Saving the World, One Taxpayer at a Time

Who cares how they used the money though. The goal here was to develop the great "MagicSIM" and save the world, right? That project was funded back in 2011. What happened since then?

The project must have been a success, because then in 2013, Enterprise Estonia gives Meratel more money. Apparently 2.3 million euros was not enough for a 5-person company:

Throwing good money after bad?

Meratel got another 189,000 euros of taxpayer money, this time for product marketing for their "MagicSIM". We can only assume the "MagicSIM" was ready for the market, since they were ready to take taxpayer money to market it.

So let's have a look at what all this money bought, marketing-wise. Here is the only information on the great "MagicSIM":

What 189,000 euros of marketing budget gets you

Yes, that's right -- one webpage and a slogan, "Everywhere like at home" that's not even in proper English! This company is definitely going to be a winner!

Does the man in the image look familiar? He should -- it's a stock image that can be found on websites like this one, this one, this one, this one and about 100 other websites. We guess there wasn't enough money left from the 189,000 euros to pay a real photographer.

EstonianMafia at Work

In our opinion, "MagicSIM" was a big scam. Millions of euros to a tiny company, that seems to have produced little from the project.

How did they do it? It's complicated. We haven't figured it all out, but here's what we figured out so far. If you get bored easily, skip to the next section.

For the type of projects they received funding from Enterprise Estonia, there is a requirement that 50% of the funding come from other sources, and typically this funding comes from the company itself. Meratel is a small company, so it would be difficult for them to come up with funding equal to about 3 times their annual revenue at the time.

Instead, they did two things. First, they got around 970,000 euros from a Swiss company called Rudsteff. There's little information on this company, but it looks like at the time, Dimitry Ivanov was a board member at Rudsteff.

Then, they got about 5 million euros from an Estonian company Vivex. The board members are the same two board members as Meratel, plus one more: Andrey Ivanov. Notice the similarity in last names?

Vivex appears to be just a shell company, so to get the 5 million euros to give to Meratel, they got a 5 million euro, 10-year 0% loan from Optiroam, a Hong Kong company. The CEO of Optiroam is Andrey Ivanov.

That tells us how they got money into Meratel, so that Meratel could get money from Enterprise Estonia. We pieced this together by going over financial reports for the companies. How they got it out is more difficult to determine from financial reports because the level of detail isn't there. Here are the three possibilities we think are likely:
  1. Intangible assets. Meratel shows about 6 million euros on their balance sheet for "Concessions [goodwill], patents, licenses, trademarks", which is basically intellectual property. Since that is hard to value, and easy to trade, they could have purchased this from one of the other companies in their scheme as a way of getting money out of Meratel.
  2. Goods invoices for equipment. When they bought their million euros of equipment that was funded by Enterprise Estonia, they could have bought it from one of the connected companies, and either paid an inflated price (see our Publification post for how that works) or never actually received the goods in question.
  3. Giving goods away through debtor write-offs. Meratel shows about 2.8 million euros they are owed for unpaid invoices from customers. They also show 2.9 million euros in sales to China/Hong Kong, where Optiroam is located. They could provide goods to Optiroam, and never receive payment and write it off as bad debt. That amount represents 84% of Meratel's entire yearly sales.

Of course, we could be wrong about all this. Maybe Meratel is the most legitimate, honest, law-abiding company ever created. They set up this complicated structure of companies for some good reason, and "MagicSIM" is in fact a great technology used throughout the world. It's improving millions of lives and creating thousands of jobs in the Estonian economy.

It's possible, but we doubt it. It's just another "win" for the EstonianMafia of misusing taxpayer money.

Lessons Learned

Meratel, a five-person company, has received a total of 2,549,500 euros in taxpayer money. Estonia's business newspaper, Äripäev, included Meratel on a list of companies that received the most taxpayer money that year. Despite that, there was no reporting on how this was spent, nor any information on audits. Enterprise Estonia should have stringent audit requirements on all large projects, and the results of those audits should be made public.

In other news, over 20% of Estonians live in poverty. Maybe a "MagicSIM" will help?

Wednesday, November 5, 2014

Jobbatical : The Story of a Checkbox

Jobbatical : The Story of  a Checkbox

Last week it was announced that Jobbatical received funding. Before, we get into the numbers on this endeavor, let’s have a look at the idea.

"Jobbatical"? Is this some hip word the kids are using these days? We at the Dot EE Bubble try to be up on all the latest trends, but this one must have passed us by.

Actually, it passed everyone by. It’s a word the company made up. It’s intended to be a play on the real word “sabbatical.” For those not familiar with the word sabbatical, we don’t blame you – the word is about as commonly used today as “rapscallion” because they are so uncommon. A sabbatical these days is pretty much reserved for high-ranking university professors to take 6-12 months off from teaching to focus on their research. It’s estimated only 5% of US companies offer a paid sabbatical.

It's OK. He's on sabbatical.

Jobattical? Jobbattical? Jobbatttical? How many t’s and how many b’s? That’s the problem when you name a company after a made-up word, based on a word that is not commonly used. Let’s hope Google’s auto-correct works when people try to find this company online. We mis-typed their name about 100 times just writing this post!

Back to the idea. As we understand it, the jobbatical is for working professionals who want to take a break from their job and find another short-term job with a “life-changing experience”. Likewise, it would allow companies to find short-term help for projects they have, to be filled by people on a jobbatical.

Why so skeptical?

According the company’s own data, 74% of professionals would like to take a jobbatical.

Of course they would! Who doesn’t want to quit their job for a year and take a job that is more fun? According to our data, 100% of professionals would like a pay raise, 100% of professionals want more vacation time, and 100% of professionals want to work fewer hours. We wonder what else was on their scientific survey. Did they ask these professionals if they wanted 10 million euros? Did they ask them if they wanted to take a 3-month vacation on the French Riviera?

Would like a larger office space... and a jobbatical, of course!

We know many aspiring entrepreneurs read our blog, and there’s a valuable lesson here. A lot of companies use surveys of potential customers to validate their idea, but it’s important to be careful of the methodology. We’d have worded the question this way: “Would you take a jobbatical for one year if it meant taking a 15% pay cut and possibly moving to another city?” Now we just pulled the 15% number out of the bottom of an empty sauna water bucket, but it makes people really think of the possible costs of a jobbatical, and it will result in more reliable data.

It’s not crazy to assume that any jobbatical will incur costs, whether it’s taking a pay cut, moving to a new city, or simply longer commute times. A lot of people simply can’t afford any disruption or decrease in their income. Government data shows that nearly half of all Americans live from paycheck to paycheck, with few liquid assets. These aren’t the type of people who are going to take any financial risks by jumping to a short-term job, with a potential pay cut and the chance that their previous job is not there when they come back.

But let’s give the Jobbatical team the benefit of the doubt and assume there is enormous pent-up demand for jobbaticals. While among our circle of friends (and yes.. even a few rapscallions), we have never heard anyone utter “I wish I could leave my job for a year, but I know of no possible way to find another job.”, that doesn’t mean it’s not the case. We’ve often been called idiots, so it would be no surprise if our friends are idiots also.

Is the Jobbatical website going to fill this huge apparent need for people to find short-term jobs? Well, setting aside the data showing that 80% of jobs are found through networking with peers, there are still a number of websites out there where people can look for full-time, permanent jobs.

In fact, that’s just the problem! The biggest threat to Jobbatical’s success is a simple checkbox on a web page! All these existing job websites need to do is add another search option for “jobbatical” (they’ll use a more logical term of course, like a word that can be found in the dictionary), so job seekers and companies can include that in their search.

Coming soon: an additional checkbox in the Job Type section

These existing job websites already have spent years on marketing and building their brand so they already have an existing user base looking for jobs. They also have the technical resources to add a checkbox to their search forms.

So in summary, we have a company trying to solve a problem that we’re not sure exists, and if it does, the existing established players in the market can easily solve it by adding a checkbox to their search feature.

Now you know what time it is... time for the money!

Jobbatical raised a total of 260,000 euros. 130,000 euros of taxpayer money came via SmartCap. The other 130,000 euros came from various angel (their term, not ours) investors in Estonia, Finland, Latvia, Russia, and the UK. In fact, the president of the Estonian Business Angels Network (ESTBAN) was so proud of this investment that he bragged how it was the first time such an investment has been done with investors from 5 countries.

Good work, indeed. So why did the taxpayer need to get involved? There are plenty of private investors ready to put in their money.

In fact, the founder of Jobbatical, Karoli Hindriks, might have a few good contacts to find private investors. Her husband is Allan Martinson, who founded Martinson Trigon Venture Partners (MTVP), and is even pictured on the front page of ESTBAN's website. Does the wife of a prominent venture capitalist really need money from the taxpayer to start her latest venture? Would the wife of a founder of Benchmark Capital expect the California government to fund her startup company that is developing a website to solve the pressing need of how to manage the schedules of all your household staff?

Good household staff management tools are so hard to find!

Of course, we wish them the best wasting our taxpayer money. Maybe we’ll apply for a jobbatical at Enterprise Estonia. We’re sure they’ll be glad to have us.

Tuesday, October 14, 2014

The Truth About Estonian Startups and Taxes

The Truth about Estonian Startups and Taxes


Not sure if Estonian startup cheerleaders can handle the truth.

Last week, the Estonian tax authority (EMTA) published a list of how much each Estonian company paid in payroll (employment) taxes for August and September of this year. Shortly after that, Ragnar Sass (who readers may remember from our profile of his failed United Dogs and Cats startup that cost the taxpayer over half a million euros) published his own list showing how much Estonian startups paid from that sum. In his own words: “pure data, not some hype or bullshit bingo”

Well we over at the Dot EE Bubble also like data, so when we woke from our Viru Valge-fueled drunken stupor on Monday morning (blame Sunday’s Estonia-England match), we knew it was time to act.

Next time he should try Sovietsko and Vana Tallinn

We found it interesting that people are bragging that Estonian startup companies do what every company should be doing – paying their taxes. What’s next, a presidential parade when they submit their annual financial reports? (More on that later.)

Crowds celebrating a startup that filed their VAT declaration on time

Sadly, maybe there is reason to celebrate when an Estonian startup pays their taxes as required by law. We’ve profiled companies on this blog, like Complus Consulting that ran off with nearly 1.4 million euros of taxes owed, and Yoga Intelligence that pulled a similar trick by bankrupting the company with tax debts and starting a new one.

Anyway, back to the data. The companies on the list are probably familiar to anyone following the Estonian startup scene. These essentially represent all startup companies currently operational (with paid employees) in Estonia. In other words, this list gives us a fairly comprehensive overview of the Estonian startup environment. We sent our experienced research team to dig further into these startups, and analyze the results.

You'd also have the same look after sifting through numerous EAS funding databases.

First, the good news. A lot of Estonian startups are doing well in our book. They follow the path of startups in other countries, by using private funding to build their company and be successful, all while complying with the relevant laws and paying taxes. One example is Creative Mobile, a company we profiled last year. (Yes, we can be positive sometimes!)

Now the bad news, a bit more than half (23/45) of startups have received taxpayer money, and a lot of it:

Remember these names. They're living off your money!

Yes, you read that correct. More than HALF of the top Estonian startups have received taxpayer money.

How much? 13,318,415 euros. Yes more than 13 MILLION euros of taxpayer money.

Among startups that took taxpayer money, the average funding amount was 579,061 euros

The last column in the chart shows how many times each startup took taxpayer money. What do we learn from that? Taxpayer money is nearly as addictive as cocaine – of the startups that took government funding they received it an average of 3.7 times.

An easy choice for Estonian startups -- more taxpayer money please!

Depressed already? It gets worse. As of October 13, 7 of the companies on the overall list have a tax debt, in total worth 70,831 euros.

"Paying taxes is for chumps!"

And remember those annual reports we mentioned earlier? Five startups have not filed their 2013 annual report as they are legally required to, including Now! Innovations, Click & Grow [corrected October 15], Cherry Media, and Majandustarkvara (Erply). Two of the five, Click & Grow [corrected October 15] Now Innovations! and Sportlyzer, have direct investments from taxpayer-funded SmartCap. So SmartCap is on the board of these companies but can’t even get them to file their annual reports on time. No reason for a government-funded company to follow the government’s rules, right?

Some will say that these government handouts are good. The taxes paid by startups shows they are “giving it back”. But are they? For some startups that either pay a lot in taxes or took little government money, they pay back in taxes what they received in a month or two. Meanwhile, some, like Visitret Displays, would need to pay taxes at the current rate for 519 months – 43 YEARS – to pay the taxpayer back. Now Visitret is certainly the extreme, but the average across companies is 49.1 months – more than 4 years.

Number of months to pay back taxpayer funding -- see you in 4 years!

Lessons Learned

Is this really how things are supposed to work? Half of the top Estonian startups have received an average of more than half a million euros each of taxpayer money.

For a better way to handle things, simply look at just about every other country out there. We don't think there's one country where half of all the country's startups are funded by the government. In many free markets, like the US and UK, investing is left to private investors who are highly experienced and motivated to invest well. We've heard the argument that there is no private investor money in Estonia, but we simply don't buy that argument.  Just one quick look at EstBAN's presentation shows there is plenty of investor money available, and many private investors willing to help.

Why does Estonia need to have the government dump millions into startup companies, when every other country has successfully left this to the private market?

Footnote on Numbers

Some of the numbers include not only money from Enterprise Estonia (EAS) which typically is a handout, but also money from SmartCap which is usually in the form of an equity investment or convertible loan (and effectively a handout unless the company does well). SmartCap is the taxpayer-funded investment arm of the Estonian Development Fund (Arengufond). Despite being publicly-funded, they don’t make the numbers easily available on how much they invested in each company, so we had to go to some of our sources. If you have an issue with any of the numbers for a company, just complain in the comments (like we need to ask you!) and we’ll provide information on how we arrived at that number.

Friday, July 25, 2014

Lottemaa : A Horrible Ride for the Taxpayer

Lottemaa : The Amusement Park that Fails to Amuse

Not Lottemaa. They don't have any roller coasters. Or rides.

For the 10% of Estonians not currently on vacation in the month of July, the country has been abuzz with talk of the opening of Lottemaa (Lotte's Land in English).

Who is Lotte? Don't go to Google to figure this out. It turns out Lotte is a popular name for a lot of things, including a major conglomerate in Korea, that protested the name Lottemaa and caused delays until an agreement could be reached. Why would some Korean company care about Lotte's Land? Perhaps because they already operate a major theme park known as Lotte World:

Typical Estonian family in front of Lottemaa? Nope, that's the Korean version!

It turns out Lotte is also the name of a famous Dutch actress:
Lotte Verbeek: "Come into my world!"

After intense research, we also discovered Lotte is a popular name for porn stars, but we'll leave it to our readers to do their own research on that one. Besides, we want to keep this blog safe for work, so all our fans in various Estonian ministries can read it while they're busy at the office.

In fact, Lotte is a cartoon dog beloved by Estonian children:
"I may look cute, but wait until you hear what I did with your money!"
Think of Lotte like a sauna-going, black bread-eating, black socks with sandals-wearing, hot coffee with entree-eating cartoon character. In other words, the Estonian version of Mickey Mouse (or Minnie Mouse, to be more accurate). Numerous Lotte cartoons, books, and merchandise have been sold over the years to eager Estonian children. By any measure, Lotte is the most popular Estonian cartoon character (actually the only Estonian cartoon character, but who cares about the details?).

We Hate it When a Plan Comes Together

So why are we after cute little Lotte? It turns out some of the people behind Lotte (not her boyfriend... we mean the humans who created her) cooked up a cunning plan to set up a Lotte theme park.

On an abandoned Soviet-era missile base.

In a tiny village nearly 2 hours' drive from Tallinn.

With taxpayer money. Lots of it

Before we get into the financial part of this, let's consider: Does Estonia really need a children's theme park?

It turns out Estonia already has two popular children's theme parks (Vembu-Tembumaa and Vudila), and each is close to one of the two largest cities in Estonia. We have heard no reports about tickets being sold out or it being difficult to get in due to overcrowding. This tells us the demand is already being met.

But as we've been told many times, we're all just a bunch of idiots. What do we know about theme parks? Not much, but you know who does? The operators of the legendary Tivoli in Copenhagen. They looked at opening a theme park in Tallinn a few years ago, and decided against it.

But wait! Maybe this Lottemaa will be better than all the other theme parks in Estonia combined. Maybe it will have the tallest roller coasters, the slipperiest water slides, and the fastest bumper cars in the Baltics. Nope! No roller coasters, no bumper cars. No real rides, actually. It's just a bunch of houses in the woods with some activities inside. Here's an actual photo so you know we're not making this up:
More fun than a roller coaster! (Photo Credit)
Oh, and did we mention they plan to be open every year only from May 15 - August 31, and only for 8 hours a day (10.00-18.00)? Oh, and that ticket prices will be 15 euros per person, a high price for most Estonian families, and the subject of much criticism from many parents?

And now... the money

What does it cost to build a bunch of wooden houses in the forest? A lot. So much that the first tender failed because no company could do it within the budget set aside. So Enterprise Estonia had to toss in a bit more (1.2 million more.. but what's a few million between friends right?).

Then the project needed more money. And more money. Here's a list of all taxpayer money involved that we could find. It's mind-boggling:

  1. 73,902 euros. Tender 152020.
  2. 213,880 euros. Tender 151442.
  3. 29,850 euros. Tender 150988.
  4. 644,980 euros. Tender 144566.
  5. 153,380 euros. Tender 144564.
  6. 4,344,314 euros. Tender 144557.
  7. 13,900 euros. Tender 132901.
  8. 535,014 euros. Tender 132368.
  9. 31,955 euros. Tender 128042.
  10. 125,586 euros. Tender 119908.
  11. 280,000 euros from Pärnu city government.
  12. 4,599 euros from Halinga town, a tiny nearby village with a total of 56 children (see page 11). It would have been a lot cheaper to just buy those children season passes.
Ready with your calculators? That comes to 6,451,360 euros of taxpayer money. For a bunch of wooden houses in the forest!

(Side note to journalists at Äripäev: If you're bored and looking for something to write about, dig into the tenders above. It looks like most of them went to the same three companies, and it just doesn't smell right to us.)

Should this have been built? Did the taxpayer need to get involved? The Lotte cartoons are produced by Eesti Joonisfilm (the Disney of Estonia), and they seem to be doing quite well by Estonian standards in terms of making money. Äripäev (Estonian business daily) even wrote an entire article about them titled "The profitable Lotte fever." This hardly sounds like a charity case to us.

Adventures in Theme Parks

Lottemaa has just opened, so we can't really talk about their results yet. What we can look at is the Estonian government's previous adventures into taxpayer-funded theme parks.

Let's think for a minute: What is the stupidest possible idea for a theme park? First, it needs to be located far away from Tallinn or Tartu so that it is difficult for people to get there. It should probably be in a really small town so there won't be enough locals interested in going there either. Next, it needs to have a really stupid attraction. Can you think of a place like this? We can.

Welcome to Kiviõli Adventure Center!

"I said I wanted a mountain of CASH, not ASH!"
No, we're not making this up. They built an "adventure center" on a mountain of ash, way over in eastern Estonia in a city of less than 6,000 people. It's at least a 2 hour's drive from both Tallinn and Tartu.

Yes, their attraction is it's a mountain of ash, the byproduct of Estonia's burning of oil shale to produce power. They must be proud of it, as their website is tuhamagi.ee which means "ash mountain" in Estonian.

Brilliant marketing? Most Estonians reading this blog have probably never been there, but it's been open for a while now.

You really should visit. You paid for it. According to some reports, the project will end up costing over 6 million euros. We could confirm only 3,065,634 euros in taxpayer money so far, based on our initial search.

Market Distortion

Now imagine you're the hard-working owner of the children's theme park Vembu Tembumaa, which has been in business for years. You've built your business over time, using your own hard-earned money. How do you think you'd feel about Lottemaa sprouting up, funded with 6 million euros of taxpayer money?

Is this fair to the free market? Why should some theme parks in Estonia get millions in government money, while the rest are left to grow like normal private enterprises? The Estonian government is usually quite business-friendly, but this tactic of massive handouts to private enterprises to then compete with other private enterprises is not fair at all.

(Note we have no idea if the owners of Vembu Tembumaa are hard-working at all. We've never met them. They could just be a bunch of lazy drunks for all we know.)


Lessons Learned

The Estonian government should not be in the theme park business. There are already private companies who do this, and do it well. There are better ways to spend nearly 10 million euros of taxpayer money (much of which did not come from EU funding but directly from the Estonian budget -- check the tenders we linked to above) than by paying for theme parks in the middle of nowhere.

Tuesday, January 21, 2014

NewsPin : Pinning the Taxpayer to the Wall

NewsPin : Pinning the Taxpayer to the Wall (and without the courtesy of a reacharound)

Add another company the list of failed taxpayer-funded startups. (Actually two, depending on how you count -- more on that in a moment). Newspin recently posted this tombstone on their site:

Apparently it's not in vogue to thank the taxpayer investors for their support


What's in a Name?

Normally we don't make fun of a company's name (the business model usually provides enough comic material), but we'll make an exception in this case.

New Spin? News Pin? News P In? Newspin? NewsPin? We're confused.

We get more confused with their site name. It's not newspin.com, since that's already owned by a company called New Spin 360.

So is it.. newspin.eu? newspin.ee? Nope. Can't guess? Why, it's newspin.co of course! Yes, when you want to go to a website, you always prefer .co to .com, right? Well, the people of Colombia might go there, since .co is the top-level domain assigned to their country, but not anyone else.

Colombian woman who likes newspin.co ... and men with large monitors
Brilliant marketing idea, right? Let's pick a site name from an obscure country and hope everyone will remember!

But enough of lusty latinas. What was their business idea?

Party like a.. social media rockstar?

Here's an explanation of their product, directly from their website, before it was taken down:

Do social media rockstars get all the girls?
So as we understand it, you use their service to tweet interesting articles on your behalf. Apparently, your Twitter followers are unable to follow the same sources you are retweeting from because they're all a bunch of bumbling idiots.

Oh, and you're supposed to pay them for this also. We'll let our readers decide if this is a winning business idea or not. (Hint: They failed.)

Bad Boys, Bad Boys, Whatcha Gonna Do?

The Estonian company behind NewsPin was not called NewSpin, but instead Inner Circle. Reggae music fans will immediately recognize Inner Circle as a popular reggae band. How popular? They even performed at Cafe Amigo in Tallinn last year!

Any Inner Circle fan, which surely encompasses all our readers, also knows that their most popular song, Bad Boys, is the theme song of the long-running American TV show Cops.

"Calling all cars! There's a misuse of taxpayer money in progress! Send in the auditors!"

You're probably wondering about the money situation. Well back in September 2010, the taxpayer-funded Estonian Development Fund (Arengufond) gave them 88,006 euros (1,377,000 Estonian Kroons to be exact). In their press release about the investment, they stated:

"Inner Circle presents itself as trashfree Facebook. The ambition of the enterprise is to create and go global with an user-friendly environment for group socialising, which differs from the current Facebook by privacy principles."

Of course, Enterprise Estonia (EAS) probably felt some jealousy that Inner Circle was spending so much time with Arengufond, so EAS handed over 5,113 euros of taxpayer money to Inner Circle three weeks later, in a bid for attention. We also heard EAS dressed up in its prettiest skirt, and put on extra makeup that day. Our sources were unable to confirm whether a threesome involving Inner Circle, Arengufond, and EAS took place later that night.

NewsPin's taxpayer money, nicely pinned up of course!


The Rich Need Help Too!

Now for the interesting part. In the same Arengufond announcement about their investment in Inner Circle, they stated:

"The seed stage start-ups have difficulties in finding investments all over the world, so as the developer of local venture capital market we pay more attention to the competent teams and emerging enterprises in very earlier stage." (emphasis ours)

Did this company really have trouble finding investors? Let's see what ArcticStartup reported about the company when the investment was announced:

"Inner Circle's founders include serial entrepreneur, and co-founder of Martinson Trigon Venture Partners, Allan Martinson as Chairman, while the team is led by CEO Andrus Raudsalu, ex-CEO of major Baltic web portal Delfi." (emphasis ours)

So, the founder is Allan Martinson, a venture capitalist? Do venture capitalists have trouble raising venture capital money? Isn't that like a baker who can't make bread?

Actually, we don't think he'd have trouble raising investment money. He's a well-respected and experienced entrepreneur. He even has his own page on Wikipedia. If anyone can raise investment, it's him.

So why did the taxpayer have to fund this?

A Lesson in Double Dipping

Don't worry, it gets worse. According to the Estonian company registry, Inner Circle was founded in June 2010, and according to CrunchBase, Kalle Volkov started as CTO of the company then. Normally, that's nothing newsworthy, but it turns out Mr. Volkov has his own company, Hiirepadi, which appears to be a one-man consulting company. It also turns out that in June 2010, EAS gave Hiirepadi 4,808 euros of taxpayer money:

Was Hiirepadi invited to the orgy?

So as far as we can tell, Mr. Volkov was working for Inner Circle and taking taxpayer money, while also working for Hiirepadi and taking taxpayer money!

This is a bit similar to the double dipping we reported in our post about Publification last year. We didn't like it then, and we don't like it now either.

The Inner Circle Swingers Club?

So remember earlier in this post, we reported about two failures? Well it turns out that Inner Circle initially launched a different site, called PosterBee, which is now long gone. In fact, that was the product that Arengufond touted in their investment announcement. You can read an old TechCrunch article about PosterBee -- this post is already too long to go into it.

Sadly the Inner Circle was indeed a bit of an inner circle. As Äripäev reported back in 2010, another investor in Inner Circle turned out to also be on the board of Arengufond. So he invested in a company, and then was on the board of the state-funded organization that invested in that company. Do they not teach the meaning of "conflict of interest" in school in Estonia?


Lessons Learned

There are two lessons to be learned here. The first is that EAS should not be funding the same people to work on multiple projects at the same time (as appears to be the case with Mr. Volkov).

The second is more important. If Facebook's Mark Zuckerberg or Amazon's Jeff Bezos wanted to found a new company, do you think they would go to the American taxpayer for funding? We doubt it.

So why do successful entrepreneurs and venture capitalists like Allan Martinson need taxpayer money for their new startups?

Is there even one good reason why the taxpayer should be funding rich venture capitalists? Tell us, dear reader. Comments are welcome.