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.