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Thursday, March 14, 2013

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:

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


  1. Hopefully something good will come out of it :) Besides just investing in I/T type start ups which usually end up migrating bank accounts and talent offshore.. There should be a focus to serve the greater good of the skills all around Estonia like manufacturing, wood export, and taking advantage of small towns. Ensuring there will be work for the majority of the Estonian population in the near future should be the #1 focus. They need to analyze the total skill sets Estonia has to offer the world and neighboring markets, and put money into that.

  2. Thou should not use numbers unless you know what they mean - http://www.startupticker.ch/CFCD/CFCDStartUpTicker/25/25c2e7a1-8355-4abf-a1de-9b818a1e09fe.pdf makes pretty good comparison on venture capital per capita comparison in Europe. Take a look - perhaps you will find a way how to start up new .ch or .nl Bubble blog as they spend even more that Scandinavian countries

    1. Interesting link (though it is looking at total VC, while we looked at just one fund, albeit a big one).

      This still assumes that there are plenty of great ideas in Estonia where the only weakness is lack of funding. We don't think that's the case. When we look at what IS getting funded, we don't like a lot of what we see. We can only assume investors would have funded better ideas, if they were available.

    2. Judging purely by by the ranking on that linked chart, Switzerland should be the epicenter of tech funding and start-ups in all of Europe. Is it?

      Or are there other factors that go into creating successful startups in a given region?

      Like numerous large tech companies with a highly skilled workforce that can spin out technical founders?

      World-class universities?

      Numerous founders who have started companies, taken them public, and can now provide angel funding, contacts, and mentorship at the drop of a hat?

      Venture capitalists who have the contacts and influence to make things happen? Not all VCs are created equal.

  3. It's not bad that the investments flow into the areas that are behind the rest of Europe. The only question is how will these funds be spend and who decides on what they are going to be spent on.

    This is the important part - who will validate the ideas and make sure they have a high chance of success.

  4. Unfortunately, while you claim to be "data driven" your analysis, such as it is, lacks something that is generally considered important when trying to understand just about anything. That being "context".

    The BIF is in fact €100M as funded by the EU (40M) and each of the Baltic States (20M per). The 200M figure that you disingenuously refer to is the result of matching funds that are required to be brought in by any VC or fund seeking to access the BIF (http://www.eif.org/what_we_do/resources/BIF/index.htm).

    Additionally, the fund is scheduled to run over a four year period. 200 million, split between three countries (200/3 = 66.6M)and then divided by 4 years of operations (66M / 4 = ~16M) per Baltic State per year, half of which comes from private funds, means that all in all the EU and the Baltic countries are spending -Eight Million Euros- a year on innovation.

    The Baltic states have a GDP of approximately €95 Billion. Obviously you have a very healthy opinion of your ability to analyze economic and business decisions. Because of this, I would ask for your thoughts on how investing .016% of Baltic GDP into growth stage firms per year is a misallocation of resources.

    I eagerly await your response.

    1. The 200 million number is fair since that's the total amount of money flowing into the region, in search of companies to invest in. We did state that it's that number due to matching funds.

      We still maintain this is too much money, and our per-capita analysis comparing to Germany bears this out.

      The EIF has already pumped 100 million EUR into the region in the past: http://www.ebrd.com/downloads/news/Baltic_Innovation_Fund_-_Opportunity_for_pension_funds.pdf (bottom of page 3)

      Are there a bunch of startups in Estonia, where they are poised to succeed but they just lack funding? We don't think so. The money has always been there, and it's the other factors that are obstacles to success.

    2. Can you define these "other factors" that you feel are the obstacles to success in the Baltics?

      Additionally, entrepreneurial communities are created over significant periods of time, and without financial support, which doesn't exist to a meaningful degree in the business community in the Baltics (at least not in comparison to hubs such as the Valley, NYC, and London), how precisely do you believe that such a community should be fostered here? Or do you not believe in entrepreneurs and startups in general?

      You have noted many instances of "waste" in the Baltics, but have been conspicuously lacking in anything that would even approach a positive and proactive vision for how to support entrepreneurs in the Baltics. That's understandable, it's significantly more challenging to come up with a comprehensive vision for such things than it is to merely tear down those who actually go out and try. As such, listening to your ideas feels quite a bit like merely supporting trolls on the internet as opposed to sharing competing visions of how to foster entrepreneurs in the Baltic region.

      Producing ideas of your own might make even those who disagree with you actually respect you.