Rate.ee : A Tale of FailureWe 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.
BackgroundRate.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.
Our AnalysisRate'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.