"DotEEBubble is one of the most controversial startup blogs in the world and you've probably never heard of it." -TechCrunch

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.



Friday, December 20, 2013

Christmas Wishes : .ee Bubble Style

A Very Bubbly Christmas

 

Even Santa knows about the bubble
Yes, it's that time of year for reflecting back on 2013. What better way to do that than with our favorite Christmas poem? In our constant pursuit of perfection, we modified it a bit, and included links to some of our favorite posts from this year.

You can also find the original, and if you're too lazy to read the original, then listen to Emma Thompson and other famous people read it to you.

A Visit from Saint EAS



‘Twas the night before Christmas, when all through Tehnopol’s house
Not a startup was stirring, nor a computer’s mouse;
The stockings were hung by the chimney with care;
In hopes that Enterprise Estonia soon would be there;
The startups were nestled all snug in their incubator beds;
While visions of free taxpayer money danced in their heads;
And mamma in her ‘kerchief, and I in my cap,
Had settled down like United Dogs and Cats for a long winter's nap,
When out on Vabaduse Väljak there arose such a clatter,
I sprang from my bed to see what was the matter.
Away to the window I flew like a flash,
Tore open the shutters and threw up the sash.
The moon on the breast of the new-fallen snow,
Gave a lustre like a Robbie Williams concert to objects below,
When what to my wondering eyes did appear,
But a miniature sleigh and eight incubator rein-deer,
With a little old driver so lively and quick,
I knew it must be EAS, also known as St. Nick.
More rapid than the Complus bankruptcy they came,
And he whistled, and shouted, and called them by name:
"Now, Startup WiseGuys! now, GameFounders! now ViljandiIncubator and Vixen!
On, Eagle Nest! on, Räpina Incubator! on, Mektory and Blixen!
To the top of the Nevsky Cathedral! to the top of the wall!
Now dash away with BIF’s 200 million euros! dash away all!"
As leaves that before the wild hurricane of euros fly,
When they meet with an auditor’s obstacle, mount to the sky;
So up to the top of Arengufond’s building they flew
With the sleigh full of EU money, and St. Nicholas too—
And then, in a twinkling, I heard on the roof
The prancing and pawing of Baltcap’s little hoof.
With talk of Publification’s failure getting around,
Down the chimney St. Nicholas came with a bound.
He was dressed all in fur, from his head to his foot,
And his clothes smelled like the inside of Subway and soot;
A bundle of ill-guided grants he had flung on his back,
And he looked like Fits.Me just opening his money receiving sack.
His eyes—how they twinkled like Liviko full of EU money, how merry!
His cheeks were plump like Yoga’s tax debt, his nose like a cherry!
His droll little mouth was drawn up like a bow,
His beard, like the face of an STD test taker at Quattromed, was white as the snow;
The stump of a pipe he held tight in his teeth,
And the smoke, like Fits.Me revenues, encircled his head like a wreath;
He had a broad face and a little round belly
That shook when he laughed, like a bowl full of jelly.
He was chubby and plump, a right jolly old elf,
And I laughed when thinking of foreign companies that claim to be Estonian, in spite of myself;
A wink of his eye and a twist of his head
Reminded me that InkSpin1’s non-existent product was no competition to dread;
He spoke not a word, but went straight to his work,
And filled all of Rate.ee’s stockings; then turned with a jerk,
And laying his finger aside of his nose,
And like the revenues of Creative Mobile, up the chimney he rose;
He sprang to his sleigh, to his team gave a whistle,
Like nearly 12 million euros we wrote about this year, they all flew away like the down of a thistle.
But I heard him exclaim, ere he drove out of sight—
“Happy Christmas to all of our thousands of readers, and to all a good night!”

Make It A Real Christmas

25% of the Estonian population lives in poverty, according to official statistics. Consider making a donation to charities like the Estonian Food Bank, so the less fortunate can enjoy a nice holiday. As we've written about all year, the government is wasting a lot of money on some projects, while ignoring more basic needs of society. At the very least, we as individuals can make a difference in the lives of some.

We'll be back in 2014...

Wednesday, November 27, 2013

Yoga Intelligence : Bad Karma for the Taxpayer

Yoga Intelligence : A Downward Dog Pose for the Taxpayer


Yoga Corporation, also known as Yoga Intelligence Corporation, Yoga Intelligence Limited, Yoga Limited, Estomatic Solutions Limited, and Mokomat Limited (more on the name fun later), is a company providing "intelligent control for all buildings."

"Oh Yoga, you complete me!"


The company has ambitious plans. In a presentation given by their managing director (Priit Vimberg) in 2010, he spoke of their plans to have an IPO by 2015, while raising 4 separate rounds of venture capital funding prior to that (see slide 19).

Mr. Vimberg is indeed a dreamer. In 2008, he told the Äripäev newspaper that his company had a valuation of 1 billion Estonian Kroons (64 million euros), and needed to raise 150 million kroons (9.5 million euros) from investors. They had it all planned out too: of the 150 million, 100 million would be spent to enter new markets, 40 million on product development, and the remaining 10 million on "other expenses" (Hookers and blow? Fast cars? We can only speculate.).

"We're worth one BILLION kroons!"
Now, before we tear them apart like a vengeful Hindu god (hey, they named it Yoga, not us!), let's have a look at the idea.

Building Intelligence for All

 

Bear with us here, as their product is a bit difficult to understand, which is why they have numerous pages on their website dedicated to explaining what it is.

So the general idea with an "intelligent building" (also known as building automation) is that the building has feelings. It can tell you when it's too cold or hot, turn on the lights for you, and try not to use too many resources (power). It's like a good wife, but without the nagging and with much worse cooking skills. Some of the more intelligent buildings can even ask you if they look fat in this dress.

"Care to join me, or would you rather just discuss building automation?"

The building develops feelings reminiscent of a middle-aged women's book club after 2 bottles of wine, through the use of sensors. Just like your thermostat at home or in your car, various sensors report about room temperature, who is in it (through motion sensors), and so on.

The idea is this: why bother to heat, cool or light a room if no one is in it? That's a waste!

You must be thinking that Yoga then makes the sensors and hooks it all together, for a happy building that needs no antidepressants. Nope, they don't make sensors. They don't make lights. They don't make thermostats. They only make the software that controls all of it.

That's not so bad in itself (though we wonder why they needed a further 40 million kroons for product development). Let's have a look at their two markets, consumer (residential) and commercial buildings.

Let's start off with the easy one - residential.

First, there's price. According to this article, the price for an average apartment would be 1,500 - 4,000 euros to make the apartment into a "smart home". We're not sure if that's just for the software, or also all the sensors and installation, but let's assume it's fully inclusive. Remember, savings are marginal, so if your energy bill is 100 euros a month and they save you 10%, you're saving 10 euros a month or 120 euros per year. Even the yearly number is hard to predict, since heating and cooling needs vary drastically depending on the time of year. Who is going to spend 4,000 euros for such modest savings? Not many.. and here's another reason why:

Think of the last time you were out with friends, and talked about your house. Was it about energy savings? Probably not. It's just not an interesting topic. Do your friends (or you) care that you saved 10 euros a month? What's the motivation to go through all the hassle and effort to get this product, have it installed, and set it up?

Then, there are the alternatives for people who want to save money. Programmable thermostats have been around for years, and cost 20-100 euros. With those, you just program what day and time you want it to be a certain temperature, and it takes care of the rest. So it can basically turn off while you're at work, then have things all ready and cozy when you return in the evening. Simple solution, good savings, and low cost. Some vendors even make wifi-enabled thermostats so you can adjust it on the go. Who needs Yoga?

Now let's move on to business. Envision a large building, with the accompanying large costs to keep it heated, cooled and lit.  Yoga would be great for this, right? Well... maybe not. Large buildings are usually staffed by a maintenance person (building engineer) at least while it's occupied. This is often for insurance reasons -- someone needs to be on hand to fix anything that breaks, and in a large building, maintenance needs arise pretty much every day.

But surely the Yoga system can solve problems, right? It can adjust the temperatures automatically. Sure, it can, but so can the building engineer. What makes it even easier is that buildings lead a fairly boring life. They open at a certain time every day, and close at the same time. Usage is very predictable, so it's easy to plan ahead and warm the building up for Monday morning, turn off the system on Friday evenings, and so on. Easy tasks for a building engineer.

Of course, we could be wrong. Maybe every building and home needs this great technology, and we're just idiots. Ultimately, the measure of that would be the results, right? Now let's have a look at those.

 Taxpayer : Take Your Downward Dog Position!

Poor taxpayer. They thought it was just a yoga position.



Time for our history lesson of the day. Yoga Intelligence Corporation (business registration 10681001) started out back on July 2000. Yes, more than 13 years ago.

They got millions of kroons in investment from private investors, including a prominent investor from the UK. They also took on numerous company names during this time, including Yoga Intelligence Limited, Estomatic Solutions Limited, and Mokomat Limited, before finally settling on Yoga Intelligence Corporation.

The many faces of Yoga.


If the story were to stop here, we'd have nothing to complain about. Private investors invested into a startup company, and they changed names a lot (is this what they call a "pivot"?). Typical stuff.

Now let's move forward 8 years from their founding in 2000. Yoga Intelligence Corporation declares bankruptcy in 2008. They weren't meeting sales targets, ran out of money, and the current investors decided it wasn't worth putting any more money into this company.

Still OK in our book. The professional investors analyzed the company and the market, and decided it was not worth further investment. Totally normal.

Then things start to get messed up.

First, the bankrupt company shuts down with a tax debt of 99,809 euros. (The bankruptcy is so old this information is not readily available -- we verified it directly with someone at the tax authority.)

Then, the original founders of Yoga create a new company (Yoga Limited, registration number 11486721), transfer over all the intellectual property from the bankrupt company (without compensating the original investors, is our understanding), and.. get money from Enterprise Estonia (EAS)! How much money? Yoga received 442,624 euros of taxpayer money from EAS:



So let's review: a company is doing so poorly that professional investors decide it's not worth it to dump more money into. Instead, the founders run off with a tax debt and the intellectual property, create a new company, and get money from EAS. So, EAS is dumping money into a company that professional investors deemed to be a dud. Brilliant!

Was it just a matter of timing? Perhaps Yoga was just a technology too advanced for its time back in 2008 when they went bankrupt, and now they're flourishing. We don't think so. A review of their recent (2012) financial report shows a company that has racked up losses for each of the last 3 years (as far back as we have data), is heavily in debt to its investors, and has few sales to show for it.

This company is a dud, and EAS should never have dumped money into it.

Total loss to taxpayer: 544,433 euros.

Lessons Learned

There are lessons to be learned here. First, if a company has gone bankrupt, they shouldn't be allowed to just create a new one to run away from tax debt. On top of that, they certainly shouldn't be allowed to receive EAS money if they're not paying their tax bills.

Is Google blocked in EAS offices? A quick search would have revealed numerous articles about the first company's bankruptcy (they even had a similar name - Yoga!). A quick search of the commercial register would also reveal the questionable situation.

Our suggestion for EAS: before handing out money, type the company name and its founders' names into Google first.

Tuesday, November 12, 2013

Complus Consulting : One Big Minus for the Taxpayer

Complus Consulting : One Big Minus for the Taxpayer


Remember the old saying,  "If it's too good to be true, it probably is."?

With all the talk lately of a grand project to build a 600 million euro datacenter in Estonia (more on
that later), we thought it would be a good time to visit one of the grand projects proposed in the past.

Skeptical about large projects in Estonia. And the moon landing.


700 Jobs and Prosperity for All


Complus Consulting is an Estonian IT firm that handles data processing and back-office IT support.  Think of them like server monkeys, doing basic tasks like swapping out broken hard drives in computer servers, checking that a nightly report ran OK, and so on.

They write novels (and this blog) in their spare time.



Complus attracted great attention back in 2010 when they announced plans to create 700 jobs.  700 jobs! That’s huge for Estonia! To put this in perspective, Swedbank, one of Estonia’s largest companies, has 2,454 employees, and they have offices all over the country and an enormous operation.

Who would work in these jobs? This is where it gets interesting, especially to politicians. Complus’s plan was to take low-skilled workers (without IT skills) and train them to change hard drives and so on.

Now if you’re a politician, this is great news. A lot of the unemployment in Estonia, especially back in 2010, was comprised of low-skilled workers. The 17 year olds who dropped out of high school in 2006 to go work in lucrative construction jobs found themselves unemployed when the building boom went bust. Lacking a proper education or any skills other than swinging a hammer, their prospects were bleak.

(For those who were not aware of the situation in the Estonian economy back then, the market for construction workers was so red hot that it was not uncommon for a construction worker to earn a salary 2-3 times higher than a lawyer. We saw many of these construction workers wasting most of their hard-earned salaries at clubs like BonBon and Parlament when the weekend arrived, but we think that’s because the course on money management was given in 12th grade and they had already dropped out by then.)

We heard their BMW has new tires.

So as can be expected, the politicians rapidly appeared touting the great plans by Complus to help make a dent in unemployment.  It also appeared they were ready to help with funding:

"Timo Vaartman, adviser to the minister of social affairs, said that the company was keen to use the subsidies offered by the government to the companies that create jobs for the unemployed. "The state would subsidize the creation of these jobs," said Vaartman."

Here's a video report from ERR News about these plans, complete with the CEO of ComPlus (yes, he's French), and then-Social Minister (now Justice Minister) Hanno Pevkur praising ComPlus and the good benefits this will bring to the Estonian working man.

Now you’re probably expecting us to jump on this and be critical of the use of taxpayer money. Actually, if the money is used to train people with new marketable skills, we think that’s a good use of taxpayer money. Education provides great benefits in the long term, and improves society overall.

According to information we received from the social ministry, no taxpayer money was ever paid out for this anyway, at least from their department.

What happened? Complus went bankrupt. According to official records, Bienvenue OÜ was liquidated earlier this year (they renamed it to Bienvenue from Complus):




The bailiff even had to step in and auction off some of their old computer equipment in an attempt to recover some money.
"Help! I'm trapped in the empty ComPlus offices and I'm lonely!"

One Big Tax Scam?


Why was the bailiff auctioning off their equipment? Maybe because they owe the taxpayer over 1.3 million euros in unpaid taxes! To be more precise, Complus has a tax debt of 1,379,061 euros!

Taxpayer's money, in the hands of ComPlus



One does not build that much tax debt overnight. In fact, Complus was in the top 10 of largest tax debtors in Estonia (see Bienvenue).

What raises our eyebrows is the type of tax debt they have. Let’s have a closer look:

  • Erijuhtude tulumaks 806 570,70 (Special Income Tax)
  • Intress 408,61 (Interest)
  • Kinnipeetud tulumaks 120 557,65 (Withheld Income Tax)
  • Kogumispensionimakse  3 561,57 (Pension Tax)
  • Käibemaks 194 412,85 (VAT – Value Added Tax)
  • Sotsiaalmaks 227 375,00 (Social Tax)
  • Töötuskindlustusmakse  26 175,05 (Unemployment Tax)

Let’s leave aside Social Tax, Unemployment Tax, and Pension Tax, as those are the taxes the employer pays for their employees. Same with withheld income tax – it’s the income tax employers withhold when they pay their employees. Those tax debts are nothing to be proud of, but they’re also not suspicious. We’ll also leave off the Interest item because it’s small.

Now let’s look at VAT. This occurs when you sell a product or service, and collect VAT from the customer, on behalf of the government.

And now the big one: Special Income Tax. This comprises over half the company’s tax debt. There are a few types of taxes that can end up in this category, including fringe benefit tax, tax on interest payments on overdue taxes, taxes on expenses not related to the business and… dividend tax.

Here’s our theory, and note it’s just a theory since we don’t have all the information:

Complus set up this whole charade as a way to skip out on taxes. The company had operations outside Estonia, so they move those profits to Estonia, take the dividends, and never pay taxes. Brilliant! Too bad the taxpayer got screwed in the process. This company basically stole money from the taxpayer's pocket, with virtually no consequences.

Why do we think this was suspicious from the start? Well all the announcements about 700 jobs came out in the spring of 2010, but according to the tax data, the company has had a tax debt since 2009.  (It makes you wonder if any of the politicians bothered to research the company at all; tax debt is public information.)

They also haven’t filed an annual report since 2009. If the company was really serious about creating 700 jobs, wouldn’t they pay their taxes every month, and file annual reports?

Of course, we could be wrong on this. Maybe in the last 4 years, they were so busy creating 700 jobs that they forgot to pay their taxes every month, forgot to file an annual report, and forgot to stop from going bankrupt.

It’s possible, but unlikely.

 

More Grand Projects


So this is why we get worried for the taxpayer when grand projects like this are announced.
We’re still waiting for the billion kroon (64 million euro) Risti Club luxury golf course housing development to open, with housing for 780 families. It’s located at least an hour away from any major employment center in Estonia, but apparently location isn’t important in real estate. Our concern is that EAS has given significant taxpayer funding in the past to golf courses around Estonia, some of which have already gone into bankruptcy, so we’re skeptical Estonia needs another golf course, unless ice golfing becomes an Olympic sport. (More on taxpayer funding of golf courses in a future post.)

Estonia's next Skype?


And then there’s the 600 million euro datacenter that we referenced earlier, from Data Valley.  It would use so much power that it’s equivalent to half of Estonia’s entire power consumption in the winter, and would require building 3 more power stations. All we can hope is that no taxpayer money is wasted on this adventure.

 

Lessons Learned


Complus was too good to be true. Numerous news sites and ministries reported their great plans to create 700 jobs, but apparently no one bothered to look into the company even the slightest bit. Just a basic search of the commercial registry would have revealed their months of unpaid taxes dating back to 2009.

The situation has only slightly improved when it comes to Data Valley and their datacenter plans. ArcticStartup did some digging into the details behind this, but there are still a lot of questions.

Maybe it’s time for the Estonian media to look into these grand projects further, instead of just rewriting press releases?

Monday, October 7, 2013

The Curious Case of Fits.Me Revenues

Fits.Me Reports 2012 Revenues : Turnaround Story of the Century?

 

Tasty Meat and Rice Pirukat (Photo Credit)

With the internet all atwitter with talk of Twitter’s IPO, and every journalist tearing apart Twitter’s financial books like a Balti Jaam bus station resident to a discarded pirukat, we figured maybe it’s worth it to take a look at the books of everyone’s favorite Estonian startup – Fits.Me.

Does the one on the right come in a C cup? We're not greedy!

It’s a favorite of people with a sexy robotic mannequin fetish because they produce robotic mannequins with at least a Miley Cyrus level of sexiness (if only mannequins could Twerk!). It’s a favorite to us because by our accounts, they’ve wasted over 3.7 million euros of taxpayers money. They’re a favorite of impoverished Estonians because that same money could have been used to help them. But enough about discarded pirukat, let’s have a look at the books, shall we?

Yikes. We'll take the robotic mannequin, please.
 
Founded in 2006, Fits.Me is now 7 years old. In marriage, that’s known as the 7-year itch, and the turning point where things really go to hell or improve remarkably (we’ve heard the latter is helped by key clubs and swinging, but that depends on the attractiveness of your neighbors).

Thanks to a copy of their 2012 annual report for their Estonian subsidiary (the one that sucks in all the taxpayer money) which we obtained, we can get a relatively clear picture of their situation.

To our non-Estonian readers, you may wonder how we obtained the annual report for a non-publicly-traded company, since typically those are not available to just anyone. We’d like to say it involved big payoffs (in discarded pirukat, of course) to a low-level bureaucrat in the Estonian Companies House. An even better story is that we seduced such a bureaucrat, a lonely unmarried mid-30’s female roaming the aisles of Selver purportedly in search of the perfect pirukat but in reality in search of true love. Or maybe we won the annual report in a high stakes poker game at Olympic Casino, James Bond style.

Sadly, none of that happened. Turns out we’re banned from all Olympic Casinos due to an unfortunate incident involving “spreading the love” and a poker table, but with no poker chips involved. The seduction of a bureaucrat story sounds good, but we think Selver smells like the inside of a Subway and we prefer Rimi.

No, what really happened is that annual reports in Estonia are publicly available to anyone for a small fee. Go e-Estonia!

Before we have a look at a few numbers, let’s get one thing straight. We didn’t actually want to write any more about Fits.Me. Our position on them is already clear, and that’s it. However, when we noticed some recent articles in ArticStartup and Äripäev where Fits.Me revenues were trumpeted, and their CEO compared their progress to internet powerhouse Amazon.com and pointed out how Amazon operated at a loss for many years, we couldn’t resist but having a closer look.

What drew our attention was their statement of how revenues skyrocketed from 22,869 euros in 2011 to over 2 million euros in 2012. That’s impressive, by any measure. Do we have the company turnaround story of the year? Were we all wrong about their path to failure?
As usual, journalists (who had access to the same annual report as we do), didn’t quite dig into the details. Let’s take a look at their revenues as reported in their 2012 annual report:

Müügitulu = Sales Revenues. Kokku = Total.

Well nothing strange there, right? The 2 million revenue number is clearly visible (Ok, it's 1,961,708 euros here for sales revenue, because there is another 116,970 euros in "revenue" from the taxpayer reported elsewhere in the report). Ahh, but hold on one second there, Buster! What are the two different rows that comprise the revenue numbers above?

First, a quick explanation. Just like rules prevent civilized (or is that uncivilized?) society from descending into anarchy, accounting rules prevent companies from descending into deceptive practices. Ok, every Enron accountant just had a good laugh at that statement, but the point is that at least in simpler cases where Jedi and Chewco-style holding companies are not involved, it’s a bit more difficult to hide the financial truth about a company.

In this case, accounting rules dictate that you separate revenues earned from your main business activities from revenues earned from other means. An example would be if you’re a book publishing company (do those still exist?) and you have some extra office space that you rent out to another company. You’d declare the tiny income earned from office rental activities separately, since it’s not your primary business activity. This helps people figure out how much money you actually earn from your company’s primary activity, and not from distractions like taking in wash or pimping.

Notice something with the Fits.Me numbers? They have two categories of revenue reported:
  • Virtual Fitting Room (Virtuaalse proovikabiini teenus): 58,626 euros
  • Sale of Services (Teenuse müük): 1,903,082 euros
97% of revenue is from the "services" category, from which they made 0 revenues in the previous year. Only 58,6262 euros -- 3% of sales revenues -- came from their primary business acrtivity (Virtual Fitting Room).

Sounds kind of suspicious, doesn’t it? A company boasts of their huge revenue jump, but where did the 1.9 million euros in "services" revenue come from?

Thankfully, accounting rules again are our friend. They require companies to report separately any transactions made between related companies. The Estonian branch of Fits.Me (Massi Miliano OÜ) is actually owned by a British parent company. This was done because many people in Fits.Me had ugly teeth and it was felt they’d fit in much better in England, the land of poor dental work. Ok, we’re joking. Actually the people in Fits.Me have quite nice teeth and the NHS now funds dental work, so the only bad teeth you’ll see in Merry Old England are from truly aging East Midlands cocktail waitresses who are known for saying “Freshen ya drink, guvnor?

Probably when Fits.Me got some non-taxpayer funding (Yay! Let the VCs suffer too!), which came from UK investors, they required an ownership structure set up in the UK.

So let’s see what happened with transactions between related companies:



Ahh, looks like we’ve found our 1.9 million! It appears it came from sales to the parent company! Now let’s be clear, the transfer of money between a parent company and its subsidiaries is not in itself problematic. Probably the investors put their money into the UK company, and then it was transferred to the Estonian company to fund operations there. That’s normal.

But, is this revenue? Perhaps. Maybe the Estonian branch invoiced the UK parent company for “services rendered” and it was treated as revenue. We’re not accountants, so we’ll just assume that’s acceptable under accounting rules.

But does this present a fair and balanced picture of the company’s revenue situation? Note how they were touting their big jump in revenue, but could it be that nearly all their revenue comes from inter-company transfers, and not actually from sales of their main product? We can’t be entirely sure, but to us, it appears that is the case. So our assessment based on the numbers is that Fits.Me revenues from selling their core product (Virtual Fitting Room) were only 58.626 euros last year, and this disappointing result was despite their great efforts to increase sales, as their CEO said in an article about their 2012 financials:

"For a very long time we were a technology development company, however last year was the first year when we turned Fits.me into a sales machine." (emphasis ours)

That brings us to profit, which is what really matters. They ran a loss again, though it was reduced considerably from 1,246,886 euros to 167,694 euros. Good news, great improvement, right?

Well let’s think of how a profit number is derived. In the simplest sense, it’s revenues minus expenses. But as we’ve seen above, 97% of their "revenues" appear to be just from the parent company giving them money, so they aren’t real revenues to us, and can easily be adjusted up or down by asking for more from the parent company. What does that mean for the profit number if the revenue number means nothing? You guessed it – worthless! How can you trust a profit number if you can’t trust the revenue number?

We Are Zee Robots


1977 Fitting Solution
 
There was another item in their annual report that drew our attention. They have 48 full-time employees (up from 21 in 2011)! What do they do all day? Not selling to customers, apparently!

That gives us an idea about how to turn the company around. With that many employees, they probably have enough of the different body types among them. Why not just get rid of all these mannequins and just line up all the employees and photograph each of them wearing the garment? Skip the robotic mannequins entirely. It will probably be cheaper too!

Typical Lunch for Fits.Me's chunkiest employee


Ok, Estonians aren’t as fat as your typical American, so they may not have an employee who wears size XXXL, but just pay one of the chunkier employees to eat a Supersize Me-style diet of only McDonalds for a month, and that problem is solved.

It turns out our great solution may not be needed much at all. TechCrunch reported last week that Fits.Me is finding the robot mannequin solution is too expensive for many retailers, and is pushing a more limited mannequin-less solution called FitAdvisor.
 

Lessons Learned


What can we learn from this? The Fits.Me numbers were reported by both Äripäev and Arctic Startup. It appears neither of them bothered to look into the actual numbers on the annual report. Even a brief review would show this situation. If math is hard, simply asking the CEO what drove the huge revenue growth would (ideally) lead to the same information. Is reporting about Estonian startups really that shallow? It doesn’t have to be.