Viljandi Incubator Responds

Editor's Note

Our post about the Viljandi Creative Incubator drew much interest, including a response from the people behind the incubator. They asked us for the opportunity to present their side of the story, which we are happy to provide. Below is their response, in its entirety and without any modifications.

Guest Post : Viljandi Incubator

First of all, what makes our incubator rather unique and also expensive is that as one of the only kind that is fully furnished with high level professional equipment for crafts people working with textiles and/or metal who could not afford such versatile and professional machinery themselves. While we were furnishing the metal and textile workshops we bared in mind the need to optimize manucafturing of craft products (volume, capacity, preserving the quality) as well  that it would be possible to produce small series products.

From EU funding less than 20% has gone for equipment for textile and more than 80% for metal workshops.

TEXTILE

• Traditional handlooms, computer looms
• Sewing machines with all necessary equipment
• Knitting machines + programs
• Half-industrial stitching machine
• Leather sewing machine
• Felting Machine
• Yarn handling tools
• Tufting machine
• Dyeing chamber, laundry room

METAL WORKS

• Goldsmithery
• Blacksmithery
• Cast moulding (noble metals, bronze, aluminum up to 5 kg)
• Sheet metal experimental works
• Chemical processes: cleaning, patination, anodization, galvanization, galvanoplastic
• Cutting services (lathe and milling machine)
• CNC machine

Thus, we offer incubation services without dotation (funding has gone for equipment) which means that we are also engaged in economic activities such as offering training courses, workshops, being engaged in cooperation projects, dealing with administration etc..

As we are still in the phase of setting up the incubation environment (metal workshop will have official opening in April, small scale work is already going on) there has not been a capacity so far to be more engaged in bigger scale projects.  However, we are actively engaged now in tuning up the machinery and system, client contacts etc.

Second goal for near future is to become a development centre in material studies, product development and design in the area of crafts (textile and metal). For this Viljandi has nearly ideal place as here is the competence and know-how of traditional crafts at University of Tartu Viljandi Culture Academy Department of Estonian Native Crafts (unique curricula in Estonia) which holds high level professional knowledge and skills in the area of crafts and design and has a wide contact base all over Estonia as well abroad. In cooperation with the academy incubator has been in involved in two big (covering all Estonia) development project where craft is used to integrate people back to employment market and educate craft’s people with needed knowledge and skills for entrepreneurship.

Through the two-year residency or virtual program we help crafts people to plan and implement their idea. Services include:

• Workspaces (textile and metal)
• Access to general office supplies and equipment
• Collaborative meeting rooms
• Education and workshops
• Mentorship and startup consulting
• Operational guidance and resources
• Connections with like-minded creative professionals

At the moment we have three craft entrepreneurs (all together there is space for seven) in textile incubator, two virtual incubated companies in crafts and more than 30 project incubated people/companies: those who have used/rented our professional equipment to produce material for their products or sub-contracted from resided incubated companies. As said before, metal incubator is now in the last phase of installation.

In the area of creative industries it is more and more important that people could do well and live off from their (life style) enterprises that act on local level. Thus, keeping life and active entrepreneurship also in regions that are outside of the capital area. We believe in acting local, yet thinking global. However, when it comes to export and bigger volumes of production, we believe that this is more suitable for the future incubate companies and entrepreneurs who will act in metal work area. For textile entrepreneurs we see the possibility in quality textile design products as well selling the craft’s know –how. Inherited techniques and knowledge in combination of innovative technologies is rather unique and very valued know-how in nowadays design area. Crafts is a niche production and our aim is never to compete with big producers. Energy and environmental crises (also caused by massive textile and cotton production) in contemporary world shows rather strongly that future needs another model and one of the possibilities is living on the basis of local communities being self-sufficient. This is also a direction that we support and believe in.

To sum up, we would like to repeat our invitation to come and see what we really do here! The best near future option is on May 16 where there is a big Ethno Fashion Show called “Own Fashion” which is the opening of a 3-day international conference “Traditional Knitted Sweaters around the Baltic Sea” May 16th -18th, 2013 organized in cooperation with UT Viljandi Culture academy and Tartu Art School. So, welcome to Viljandi!

Best regards
Kristi Kivestu
kristi@loomeinkubaator.ee

Baltcap and Enterprise Estonia : The Rich Get Richer

Baltcap and Enterprise Estonia : Your Taxpayer Money at Work

According to their website: "BaltCap is the leading dedicated private equity and venture capital investor in the Baltic States (Estonia, Latvia and Lithuania). We have worked in the Region since 1995."

The information on the European Venture Capital Association website shows that BaltCap manages over 100 million euros of investments (search for "BaltCap AS").

Indeed they have an impressive track history, with a number of investments in the Baltics, and 29 exits since they started (though only 4 since 2010, but an impressive feat nonetheless). The EU liked them so much that they've given them 44 million euros over the past few years to invest in the Baltics (see page 3).

So what do we have? Here's a venture capital company with plenty of funding, over 100 million euros under management, and a track record for success. What more could they want?

If you're a frequent reader of this blog, then you can guess the answer. They got money from Enterprise Estonia:

Over 136,000 euros for "export development." Does a venture capital fund with over 100 million euros under management really need government assistance? We don't think so.

Rate.ee : The Facebook That Could Have Been

Rate.ee : A Tale of Failure

We frequently hear that Estonian technology (mobile parking, e-voting) is ready to take the world by storm. The technology is so great, and so ahead of the technology in other countries, that it's destined to be a success.

However, it takes more than just good technology to succeed. Sometimes, even great technology and a market-leading position will still lead to failure.

This is one of those stories.

Background

Rate.ee is a social networking website started in 2002. Shortly after its launch, it gained enormous popularity in Estonia, and ranked firmly in the top 5 of all websites in Estonia. Anyone who was anyone had an account on the site.

You can guess how this story ended, since no one reading this post probably has a Rate account, while most people have an account on Facebook, LinkedIn, or other social networking sites. Though their websites are still active, and they are still in business, their traffic numbers are small and they have little usage outside Estonia (click on each country for statistics). Their founder (Andrei Korobeinik) is now a member of Estonian parliament, and has started new ventures, so we are quite sure he's not really focused on Rate any more.

Normally, we'd analyze the detailed numbers of this case. However, this is more a story of failed execution, and not a doomed business model, so we'll only go over the numbers briefly. In addition, the ownership structure of Rate is complicated (entities involved include: Rate Solutions, Andrei Invest, Serenda Estonia, EMT) and evolved over the years, and our heads start to spin when trying to piece it all together. The main point to understand here is that EMT's acquisition in 2006 (detailed below) was just for the Estonian site (Rate.ee), and Rate Solutions was a separate entity focused on bringing Rate to the worldwide market.

A Brief History

• 2002: Rate.ee launches and gains rapid popularity in Estonia. Mark Zuckerberg starts his freshman year at Harvard
• 2004: Facebook launches, but is restricted to only students at select universities. Facebook raises $500,000 in funding from Peter Thiel.
• 2005: Rate.ee reports over 360,000 registered users, annual revenues of  over 400,000 EUR, and profit of over 300,000 EUR.
• April 2006: EMT (Estonia's largest mobile operator) buys a 51% stake in rate.ee for over 2.5 million EUR. Founder Andrei Korobeinik becomes one of the youngest (euro) millionaires in Estonia, at age 25.
• September 2006: Facebook opens to all users, not just those in universities and schools.
• December 2006: Martinson Trigon Venture Partners (MTVP) invests $1.32 million in Rate Solutions.
• 2008: Rate.ee Revenues:1.14mln EUR. Profits: 518k EUR.
• 2009: Rate Solutions receives 87,895 euros in taxpayer money from EAS.
• 2010: Rate.ee Revenues: 0.53mln EUR. Profits: 81k EUR.
• April 2012: Korobeinik and MTVP buy back EMT's stake in Rate.ee for a price much lower than EMT paid in 2006.
• May 2012: MTVP sells off their share in Rate Solutions back to Korobeinik and another individual investor.

It should be noted that EMT claims their investment was primarily to market mobile services in Estonia to the user base of Rate.ee, and after the acquisition, they launched a mobile product (SIM card) tied to the site, which they claim had over 50,000 users at its peak. As far as we can tell from the information available, the investment from EMT's perspective did achieve their goals (gaining mobile customers) both from a market and financial perspective.

Our Analysis

Rate's technology, especially in the early years, was great. Not only did it have many features to keep users on the site and connect with their friends, but it scaled well. It was a high-traffic site, and it managed to handle all that usage with few problems. Often we see Estonian sites that can't scale well (technically) to larger markets, but this technology appears to have been built well and on a solid foundation.

In short, when Facebook opened to all users in 2006, Rate was years ahead of it in terms of features and technology. Rate also had enviable profit margins, and investors with capital.

It was Rate's contest to lose, and sadly, they lost it.

We think this was a failure in execution and strategy, and management is likely to blame. They did not bring on the right people with experience in expanding rapidly to larger markets.

Estonian companies often underestimate how important it is to have excellent management that can formulate a strategy and then execute on it. When competing on the world market, that also means you're competing with the world's best managers. For a variety of reasons, there are few of those to be found in Estonia. It's one thing to have a good idea, but it's another thing to actually make it successful.

Viljandi Incubator : How to waste 684,000 Euros

Viljandi Creative Incubator : Wasting 684,000 Euros

One sign of a bubble is when there is too much money chasing an insufficient number of good ideas. The Viljandi Creative Incubator (Viljandimaa Loomeinkubaatorid) was set up to fail from the start.

According to EAS records, they have received 684,715 EUR in funding over the past few years:

Who in their right mind would spend that sum on an incubator located in a tiny city of 20,000, to help companies produce clothing and handicrafts?

Let's look at some numbers.

Incubated Firms

According to their current webpage, there are 3 companies in incubation. Looking at an archived version of their site, another company (Tuuli Jõesaar) used to be on their list. To be fair, let's look at the results of all 4 companies:

1. Kristiina Libe - Clothing design and production. Her website (a blog) is by invitation only, so we're going to assume this was not a success.
2. Margit Varik - Clothing accessories design and production. Only post on her website is from November 2011, and there's no pricing listed, so we're going to assume this was not a success. (Though we will say her designs are nice.)
3. Karolina Lehtma ja Liisi-Ly Viikin - Clothing design and production. Their site is just a Pinterest page with no contact information, nor pricing. We're going to assume this was not a success.
4. Tuuli Jõesaar - Leather accessories design and production. Her website (a blog) was last updated in August 2012, and all the posts seem to be detailing the process to develop a product but still nothing for sale. We're going to assume this was not a success.

So of all 4 companies in the incubator, all of them have failed to succeed. This is the type of result that 684,715 EUR can buy?

Our Take

This project was set up to fail from the start, and we think the people who make the decisions were smart enough to know this. It appears the funding came via ERDF (a regional development fund) so it had to be spent outside major cities like Tallinn. Thus, they wasted this money in Estonia's 6th largest city -- a city with so few people that there are more people living on one street in Tallinn's Lasnamäe district than in all of Viljandi. Our theory is that they figured they had to spend the money or they would lose it, so might as well create a few jobs in Viljandi, for a project that was doomed to fail.

Why was it doomed to fail? As we can see from the 4 incubated companies, the focus was on the clothing and textile industry. This industry is extremely competitive, with enormous downward cost pressure and where marketing and building a brand is extremely costly. As far as we can tell, none of the people behind the incubated companies, nor behind the incubator itself, have experience in this area. It's one thing to be able to sew pretty dresses, but it's another thing to mass produce clothing, market a brand, and obtain wide distribution.

There is also little ability to protect the designs, so what's to prevent a major manufacturer like Zara from coming out with a similar product? We do know that Zara has the scale and efficiency to undercut (on costs) and out-produce any Estonian producer.

We do like Viljandi as a city, and we do like some of the designs of these incubated companies (with the exception of the dead rabbit photos from Jõesaar's site). However, the idea of an incubator in Viljandi to promote Estonian clothing producers is just a stupid waste of money.

The Week in Review

Welcome

First, hello to all the government officials both in Estonia and abroad who are reading our blog. We've heard that our blog is being followed with interest by a number of them. Thanks for being open to our point of view.

Also hello to all the university students now following us. We've heard that our blog has become required reading in a number of entrepreneurship classes at universities in Estonia. We do plan to publish a few posts which focus on more than just tech startups, since some of us have expertise in other industries as well. Look for a post in the next few weeks with our analysis of whether Subway (yes, the sandwich shop) will survive in the Estonian market.

What's Coming

This past week, we've received a number of tips from readers, and we've also done more research on our own. Sadly, the situation is worse than expected. We've found a list of numerous failed startups, many funded with taxpayer money. The list is so long that we could write a few posts a week and have enough material to take us into 2014. At the same time, we found some startups we really like, and we'll profile those also, and provide our analysis of why we think they will do well.

We also noticed another worrying trend. With a number of startups, the person in the Founder/CEO role is also the Founder/CEO at a few other startups at the same time. We know that if we invested in a startup, we'd want the founders to focus 100% of their time on the company we invested in.

There's a lot more to report about, so stay tuned. On Monday, we'll write about an incubator that wasted over 600,000 euros with no results. Can anyone guess which one it is?

A Bigger Bubble Than We Thought

Our apologies. In a previous post, we wrote that the Baltic Innovation Fund (BIF) would pour 100 million euros into the Baltic startup economy. We felt that this was too much, and this would contribute to a bubble.

It turns out we were wrong in our numbers.

After further research, we found that number is different than we first reported. Because the BIF will require the investments to be matched by other investors, the total amount of money pouring into startups will not be 100 million, but rather 200 million euros.

You read that right. 200 MILLION EUROS!

This bubble is bigger than we thought.

The Winners

Not surprisingly, the Estonian Venture Capital Association is really happy about this. The reason is that this money will be provided to local venture funds that then make investments in startups. We're going to assume these venture funds will take a nice management fee off the top, so they will benefit handsomely from this.

Then there are the startups. As we have already reported, and will continue to report, many startups have been financed with taxpayer money, via Enterprise Estonia (EAS) or the Estonian Development Fund. With EAS money in particular there are often some constraints on how the money can be spent, and EAS often demands some documentation (invoices, receipts, etc.) because they get audited and don't always come out clean.

But with this new funding, it's basically just an investment in a company, with few (if any) strings attached. You can probably guess what will happen next. People will come up with crazy ideas and start a company, get funding, and then take a nice salary and live off that until the funding runs dry, with no results.

Looking at the Numbers

Perhaps 200 million euros is not such a bad amount? We're numbers-driven, so let's look at some numbers. It just so happens that earlier this week, it was proposed in Germany to set up a fund to support startups.Their fund is 150 million euros for Germany, compared to 200 million euros for the Baltics.

Let's compare that:

Germany

• Funding: 150 million euros
• Population: 81.3 million
• GDP PPP: $39,100
• Funding per person: 1.85 euros

Baltics

• Funding: 200 million euros
• Population: 7.1 million
• GDP PPP: $19,800 (average across all 3 countries, not scaled to population which is in Baltics' favor since Estonia has highest GDP PPP but lowest population)
• Funding per person: 28.17 euros

Yes, you read that right. On a per-capita basis, the Baltics are getting funded at a rate 15 TIMES higher than the Germans!

If we adjust for GDP PPP, which takes into account that 1 euro can buy more in the Baltics than in Germany, then that rate doubles, to 30 times higher.

If we fund Germany at the per-person rate used in the Baltics, the fund would need to be upsized to nearly 2.3 billion euros.

If we fund the Baltics at the per-person rate used in Germany, their fund would be about 13 million euros.

Actually, that 13 million number doesn't seem too bad. It's still a big sum, but it's not overly large when spread across all 3 Baltic countries. To us, it seems like Germany's per-person funding rate is about right, and we wouldn't really complain if the Baltic funding was only 13 million euros instead of 200 million euros.

In Conclusion

We've said it before, and we're saying it again: 200 million euros for the Baltic startup community is too much money, and it's going to contribute to the bubble.

As we have been reporting, and will continue to report, many startups in Estonia have not suffered from a lack of funding, but rather poor ideas or poor execution. There are already incubators in place, and those seem to be failing, so it's not a situation of having all these great ideas that just lack funding. It's a lack of great ideas and ability to execute.

United Dogs and Cats : 650,000 euros of Failure

So Long, and Thanks for all the Euros!

It looks like United Dogs and Cats (UDC) is shutting down for good. Two weeks ago, the main person (Kristiina Kala) behind what's left of the project announced her departure on Facebook:

 

A Brief History of What Could Have Been

Back in 2008, the site, which is a social network for pet owners, was widely heralded as the next great Estonian innovation, ready to take the world by storm. According to a press release where they announced their $235,000 investment, the CEO of ASI, Tauno Tats: "UDC has a monolithic team that can guarantee fast growth and be successful in putting all pets in the world to the web."

One of the UDC founders, Ragnar Sass, was hailed by the press as part of the new generation of Estonian entrepreneurs ready to take on the world. (Never mind that his previous ventures, the web portal uno.ee and the TV station Neljas, are both no longer in operation.)

In 2009, ASI increased their investment and also convinced the state-owned Estonian Development fund to come in, with a total additional investment of 480,000 EUR. Your taxpayer money at work!

That brought the total investment to 650,000 EUR. That's a significant sum, and by our estimates, fewer than 10 Estonian startups have ever received investments at that level or above. With the great team Mr. Tats alluded to above, along with all this money, surely that's a recipe for success, right?

Wrong, of course. Within one year, the company laid off all its workers. According to the business registry, the company was finally dissolved in May 2012. (The portal was then taken over by a new corporate entity, United Pets OÜ, which seems to have no connection with the founders.)

Our Take

We really like the idea of a social network for pets. Pet owners typically consider their pet as a family member, and they're also willing to spend good sums of money on products for their pets. There are many opportunities to tie this together, like to offer products based on the type of dog the user has.

We think the failure here was a failure in execution, and not a bad idea. Unfortunately, we see this all too often with Estonian companies that have a good idea but fail to make it a success on the world market. Both Rate.ee and Now Innovations (ParkNow) come to mind as examples, and we'll provide our analysis of both those companies in the future.

Startup Wise Guys : A Failure

Our Take

Our prediction is that Startup Wise Guys (SWG), an Estonian startup accelerator, will fail. It will probably fail by the end of 2013.

Analyzing the Numbers

We're data-driven, so let's first look at this from a strictly numbers perspective. One good way to measure is to benchmark against others. Let's look at Techstars, which is considered one of the top accelerators, for comparison. It's a good comparison to make, because it just so happens that a founder of SWG also oversaw the merger of another accelerator he oversees, with Techstars.

Techstars conveniently posts detailed statistics on their success rate. Looking at the Boston Winter 2012 group of companies (so that's about a year ago), we see the following:

• Total Companies: 13
• Funded: 10 (77%)
• Failed: 0 (0%)

Now let's look at the same cohort from SWG. They don't post statistics in such an easy format, but we've managed to figure some of it out on our own:

• Total Companies: 8
• Funded: 1 (13%)
• Failed: 2 (25%)

The only funded company was Vitalfields (formerly WeatherMe) for 250k EUR, compared with total funding of over $12 million for the same cohort of companies at Techstars, who started at around the same time. Of the SWG companies still alive, most of them are not past the beta stage and ready to take on paying customers, including Monolith, Epiclist (formerly Faver), and Pondera (formerly Wellbeing). Of the 8 companies in their portfolio, we only think Vitalfields has a strong chance of surival. WappZapp might do OK if manufacturers don't just build the same functionality into set-top boxes. Like a Local Guide will probably survive, but it's also not a million-dollar business.

Reading the Tea Leaves

We think Startup Wise Guys is facing a cash crunch, and the founders know it. Initial funding for SWG was 78k EUR from the Estonian Development Fund.

We were quite surprised to read about the lean startup workshop they offered in January. What surprised us is that they invited startups who weren't part of their incubator to join them, for this free event. An optimist would say that SWG was just being nice, but we're not optimists. Read their post carefully, and you'll notice this key text: "The weekend will be entirely free, including transportation to Lahemaa. All the details will be taken care of by Startup Wise Guys and EAS!" (emphasis ours).

We think that SWG got paid by Enterprise Estonia (EAS) to host the workshop. But since the money was coming from that source, it couldn't be limited to just SWG companies, so they had to open it up to a few other companies in order to make it more legitimate. So why would SWG host such an event? Our theory is they are running short of cash.

Maybe the founders know this too. One of the key members, Elise Sass, left SWG to move to Microsoft:

I just started working as CEE Startup Lead @ MIcrosoft. lnkd.in/gTMtPu #in
— Elise S (@elisesass) January 10, 2013

Now why would one of the main people behind SWG leave right as the latest batch of companies just started? What does she know that we don't?

Lacking a Long-Term Strategy

Does Startup Wise Guys have what it takes to survive? We don't think so. If you view the LinkedIn profiles of the team that runs SWG, there are few people on the team who have actually run successful startup companies. The mentor list is similar -- few people who really stand out as having experience in startup companies that were successful (compare it to the Techstars Boston mentor list). The departure of one of the founders is an ominous sign as well.

So what are we left with? An organization with few success stories, short on cash, lack of talent, and with management departing. They're going to fail.

Introduction and Welcome

A Brief Introduction

A blog about Estonia? A blog about a bubble that may not exist? Why?

Over the past two years, we noticed there was more and more information about all the "great" startups in Estonia. Unfortunately, most of the talk was about startups that won some type of competition or got an investment. There was little talk of what really matters -- getting customers and making a profit.

This reminded us of the late 1990s and early 2000s, when the same thing happened in the US during the .com bubble: too much talk and not enough results.

What really capped it was the announcement of a 100 million EUR investment fund for the Baltics, known as the Baltic Innovation Fund (BIF). 100 MILLION EUROS! That was a sign that things had really gone too far. It's simply too much money floating around, with not enough good ideas to invest in.

How do we know this? Well take a look at the portfolio of Ambient Sound Investments (ASI). They were started with the proceeds from the 4 Estonian original Skype programmers, and their goal was to invest in Estonian startup companies. As you can see from their portfolio, they had to branch out to Asia and beyond to find suitable investments. They could not find enough Estonian companies to invest in. So why will the BIF do any better? They're saddled with more money than ASI, but all the viable startups have already been invested in, as ASI (and MTVP) have picked off all the good ones.

The result? Get ready for the bubble. We've seen it in the US, and it looks like it's going to happen in Estonia.

Why You Should Read Us

What we've found disappointing is that there is little real analysis of the Estonian startup scene. You can read plenty of press releases, both directly from the companies and from lazy journalists who seem to just regurgitate the press releases they are given. This is what we're here for -- to provide unbiased, data-driven analysis of Estonian startups and the environment they operate in.

Who We Are

Blog posts come from a number of experienced entrepreneurs, who are familiar with running successful startups and also with Estonia. We are also neutral -- we hold no investments in any companies in Estonia (other than companies we run), so we have nothing to gain or lose when an Estonian startup does well or otherwise. We're writing anonymously because people in Estonia seem to take criticism, even of the constructive form, quite poorly.

How You Can Help

There's a lot of information out there. Please email us any tips: doteebubble@gmail.com You can also comment on our blog, and do it anonymously. Feel free to call us idiots, but at least explain why.