The Murky World of Defining an Estonian Company

Taking Credit Where It's Not Always Due : What is an Estonian Company?

Does Vladimir Putin celebrate the success of Google?

Is Paypal a South African success story?

Is Youtube the pride of Taiwan?

Is Instagram a triumph of the Brazilian "startup mafia"?


If you follow the logic of  the cheerleaders of Estonian startups, the answer is Yes.

Google founder Sergey Brin was born in Moscow; Paypal founder Elon Musk hails from South Africa; Youtube founder Steve Chen is from Taiwan; and Instagram founder Mike Krieger is Brazilian.

Most people would call the companies listed above American, and so would we.

So what gets us confused is when companies with even the most tenuous of ties to Estonia are still classified as Estonian startups. Let's take the example of Transferwise, since they were in the news lately:

 

If you just read the information above, you'd assume this is an Estonian company, right? Actually, they're a UK company. A recent interview with the founders, who are Estonians, confirms that they are based in the Shoreditch area of London. Further confirming this, they were listed as one of the top 20 tech startups in East London, and were listed on the top 100 list of UK startups.

Some in the Estonian startup community seem really desperate to claim this company as their own. Last week, Transferwise was even given the award for Estonia's Best E-service!

(Astute readers will note the EU logo in the background. Yes, taxpayer money was used to run an awards program.)

Our critics will point out that Transferwise does have a subsidiary in Estonia. That is correct, however according to public records, that was founded almost a year after the UK company was founded.

So given all this confusion, we thought we'd do our own research and come up with our own decisions about which "Estonian" companies are really Estonian. We picked a few companies that have been prominently featured lately.

In some ways, it's difficult to classify a company as Estonian or not, especially when they have offices in both Estonia and abroad. We looked at several factors when making our determination, including company addresses, employee locations, and how the company represents itself.

Realeyes

 

In an article about the investment mentioned above, it states: "Realeyes, a Boston, Massachusetts-based technology company" and later the same article states that, as part of the new investment: "The cash will go towards the company’s relocation from Boston to New York City, and to quadruple its sales force."

Here's what else we found:

• Official corporate filing documents show the company is registered in Massachusetts.
• The company's own website only lists addresses in the US and the UK.
• The company's website states they are London-based.
• EAS records show the company has an Estonian division that received over half a million euros in taxpayer funding, some as recently as a few months ago.
• Of the company's open positions, 7 are in Hungary, 1 in London, 0 in Estonia or the US.
• Of their entire management team (click on each country), 2 out of 7 appear to be Estonian, and both have UK phone numbers listed.
• 5 of the 7 members of the management team are listed as part of the London tem.

There's some conflicting information here, but most of it seems to point to the company being UK-based, especially when added weight is given to statements on the company's own website.

Our Verdict: RealEyes is a UK company.

Click and Grow

Here's what we found:

• The Kickstarter page created by the company lists them as being a Palo Alto, California-based company.
• The company's Twitter profile lists their location as Estonia.
• Their company webpage lists both US and Estonia addresses, however, the US address is the same address as a law firm and Silicon Vikings. We think this is not an office for the company, but rather just an address for legal purposes.

Again we see conflicting information, but we think the Kickstarter page lists them as a US company because Kickstarter is only open to US and UK companies, so they listed it that way in order to be eligible to raise money.

Our Verdict: Click and Grow is an Estonian company.

Zerply

 

Our findings:

• Company's Crunchbase profile lists them as a US company.
• Company's Twitter profile lists them as a US company.
• Recent article on the company, based on an interview with the Swedish CEO, states that "operations are based in San Francisco, its core team and engineers are in Tallinn"
• The company's two open positions are based in Tallinn.
• According to the profile pages of the 6 core team members, 3 are based in San Francisco, 2 in Tallinn, and 1 in Sweden.

Based on how the company represents itself, as well as statements about their operations, it looks like San Francisco is their main base of operations.

Our Verdict: Zerply is an American company.

Fits.Me

 

Here's what we found:

• Recent TechCrunch article refers to the company as "Estonian startup, which is based in London"
• Company's Twitter profile lists them as being based in London, New York, Tallinn
• Company's contact page lists addresses in the UK, France, and Germany only.
• Of the 5 members of the executive team, 3 appear to be based in the UK, and 2 in Estonia.

This was a tough one, but the company clearly is representing itself as being in the UK more than Tallinn, to the point of not even listing an Estonian address on their contact page.

Our Verdict: Fits.Me is a UK company.

GrabCAD

 

(Side note to our friends at EAS: It's Grab not Crab. Remember that next time you send out a press release in response to our blog, where you justify wasting taxpayer money.)

This one was easy:

• Interview with their CEO explaining why he moved the company from Estonia to Boston.
• Company's website states their headquarters is in Boston.

Our Verdict: GrabCad is an American company. Crabs are tasty.

Erply

 

What we found:

• A recent TechCrunch article, where the CEO was interviewed, states: "New York City-based Erply"
• The company's Twitter profile lists them as being based in "New York - Tallinn"
• The company's website states: "Headquarters in New York, London and Tallinn". Isn't the point of a headquarters that you have only one?
• The company is hiring for 3 positions: 1 in New York, 2 in Tallinn
• The company's addresses are listed as New York, London, Tallinn, Sydney, in that order.
• The company's LinkedIn page lists headquarters as New York.

The predominance of information, particularly the most recent TechCrunch article, indicate New York.

Our Verdict: Erply is an American company.

ZeroTurnaround

 

Our findings:

• From the company's website: "The company’s commercial heart beats in Boston, Massachusetts, while our development feet are firmly planted (and rapidly growing) in Estonia"
• Around half of the entire company's workforce is based in Boston, based on this article stating there were around 40 employees in Boston, and a company press release stating the company has just over 80 employees.
• The company's contact page lists the Boston address as their North American Headquarters, and the Tartu address as their European Headquarters.
• The company's Twitter profile states they are based in USA, Estonia, Czech Republic.

We'll admit it. This was the toughest decision of all the companies. It looks like the Boston office has a slightly higher number of workers than any other locations, and it's indeed a key location for company operations, based on this video from ERR where they visited the Boston office. We're going to decide in favor of Boston on this one, as the company's website states it's their commercial center.

Our Verdict: ZeroTurnaround is an American company.

Does it Matter?

Some may say that the misrepresentation of companies as Estonian when they're not is OK. After all, what harm does it cause?

We think there are three problems with this.

First, we often see the Estonian startup cheerleaders pointing out the many great benefits to the startup nation that is Estonia. That's misleading, if many of these companies are moving abroad to be successful. We don't blame these companies for setting up outside Estonia or moving their operations from Estonia to other countries. They are doing what they feel is best for their companies, and it appears that often their best path to success is outside Estonia.

However, what that shows is these companies are taking advantage of what makes these other countries great for startups, whether it be the talent pool, availability of financing, proximity to customers, or any other factor. As we said, we don't blame the companies for doing this, but it just makes the claim that Estonia is a great place for startups quite weak.

Second, a number of the companies listed above received some support in the form of taxpayer money, from EAS and/or the Estonian Development Fund. Taxpayer funding, unlike typical private equity funding, is usually made with some specific societal goals. These funds are intended to promote and improve the economy within Estonia, as well as create jobs in Estonia. A number of the companies that received funding later moved outside of Estonia. So not only is taxpayer money being potentially wasted on companies that may not need the funding, but it's not even helping the economy and people of Estonia.

Finally, these companies outside Estonia provide most of their economic benefits outside of Estonia as well. They create jobs there, have investors there, and pay various taxes there. These companies should not be celebrated as Estonian companies when their operations are predominantly outside Estonia, and their benefits are being provided predominantly outside Estonia.


It's looking to us like the trend is that startups with only minor links to Estonia are being lauded as great Estonian success stories when these companies aren't really Estonian to begin with. A company based outside Estonia, with a founder or two who are Estonian, does not qualify to us as an Estonian company.

Russians don't celebrate the success of Google as a Russian company, but instead focus on companies that are real Russian success stories, like Kaspersky Labs. It's unfortunate that Estonians can't focus on their own home-grown successes in the same manner.

Publification : A Solution in Search of a Problem

Publification : A Failure in Two Countries

Publification is a startup created with great fanfare as a spin-off from Indilo Wireless, with a goal to provide a browser-based e-publishing solution. In other words, if you wanted to read a book but didn't want to install an app, you can read it directly from your browser. Its apparent appeal to authors is that authors receive a higher percentage of royalties (revenues) compared to major publishing platforms like Amazon Kindle or Apple Books.

The company is touted as a great Estonian success. They are listed as a success story on the Tallinn Technology Park website, and in October 2012 they were one of the winners at the Forbes Equity Club startup competition.

Was It a Failure?

Is this a failure? After all, their website is up and running and looks to be open for business. However, there have been few posts on their blog, their Twitter account is mostly retweets, and they have made no new product announcements lately. Most importantly, everyone listed as a member of their management team now have other jobs. More on that later.

So while the site may be up, we don't see much activity and would categorize this as a zombie startup, which in our view is a failure.

 

The Idea

At first glance, this seems like a good idea. The publishing industry (book publishers) seem to be making nice profits, and only a small percentage of the revenue from each book sale ends up with the authors. Why not come up with a solution to cut out the publisher and deliver more profits to the author? A win-win, right? The publishing industry is as old as, well, the printed Bible itself, so maybe existing publishers are too slow to adapt to the changing market.

However, it's not that simple. Publishing companies do bring a lot to the table for most authors, including an understanding of marketing, promotion and distribution.

By marketing, we mean an understanding of the market. Let's say you want to write a cookbook about healthy eating. Sounds good, right? Everyone wants to eat healthy these days. It's not that simple though. A publisher likely has a good understanding of target groups (working mothers? elderly? children?), as well as other books on the market, and what is selling well, and where there are gaps. We know one author where he was paid a six-figure advance on a book, and then the publisher decided to put the release on hold as the market timing wasn't right.

Then there is promotion. Let's say you've written world's best book. How will people find out about it? Should this be promoted to business travelers? As beach reading? Publishers know the right promotional channels that will yield the best results.

Finally, there is distribution, which can account for up to 50% of the book's retail price. Retailers, whether it be online or brick-and-mortar, need to get paid for their side of the transaction.

So even if the royalty rate is lower by going through a publisher compared to selling direct, an author is likely to make more money overall because they will sell much higher volume through the typical publishing model.

The end result is that in the publishing industry, unless you're an extremely famous author like J.K. Rowling or John Grisham, an author is a price-taker instead of a price-maker. In other words, authors accept the deals offered by publishers because it's the best overall option, and they have limited negotiating power.

Want to see this in real life? This article about Publification from October 2011 touts their planned release of Alan Moore's new book No Straight Lines. However, if you go to the author's website, you'll see he's promoting the book for purchase on Amazon, not Publification. Why would he do this? Our guess is Amazon has a much wider distribution, so even if the author earns a lower percentage, it's on much larger sales, resulting in more money in the author's pocket.

Note we're not not big fans of publishers and the publishing industry. There is a lot of room for improvement, but it is likely going to come from a company with large market clout, like Amazon's publishing arm.

 

The Technology

Even worse than Publification's idea was the technology itself. All they offered was a browser-based tool for reading e-books. There's nothing wrong with this, and it does offer more interactive features than other e-book readers, but it's still a solution in search of a problem.

E-books work well for consumers when the whole process is at least as simple as the alternative (a physical book). Amazon's Kindle service is a perfect example of this. You easily buy the desired e-book on their site, and it's automatically downloaded to all your devices. So you can read it on a Kindle reader, or the Kindle Reader app for your smartphone or tablet. In fact, just like Publification, you can read e-books using just a browser, with the Kindle Cloud Reader.

So from a customer perspective, which would you choose? The option that lets you read an e-book on any device or browser you like (Kindle), or the option that restricts you to only your browser (Publification)? We think the choice is clear.

 

Management

Normally, we don't focus too much on specific members of the teams of companies that we profile, since we're not on a personal vendetta, and often we've met the people involved (makes a lot more sense that we're anonymous now, eh?). We're making an exception in this case, since the team is an important factor in explaining this company's failure.

First, a brief history so we can get some dates in order. The company seems to have started in May 2011, when Marius Arras, Rait Ojasaar, and Janek Priimann went to the UK after the company was accepted into Springboard, which is a multi-month Cambridge-based incubation program which culminated in a final presentation to potential investors in August 2011. According to his LinkedIn profile, Janek left the company shortly after that, while Yrjo Ojasaar (Rait's brother) joined as CEO around the same time.

The company was fairly active from Fall 2011 until the end of 2012, so we'll focus on that period.

Now let's look at what the 4 members of the team were up to during that time:

• Yrjo Ojassar, CEO & Co-Founder.
• Myoton AS - Advisory Board Member
• Tallinn Technology Park - Entrepreneur Coach
• Solon Partners - Partner
• Prototron - Investment Board Member
• Software Technology and Applications Competence Center - Advisory Board Member
• Tartu University DDVE Program - Co-Founder and Lecturer
• GameFounders - Mentor and Advisor
• Startup Wise Guys - Mentor and Advisor
• Marius Arras, CPO & Co-Founder.
• Indilo Wireless - Partner and Board Member
• nodeSWAT.com - Co-Founder and Managing Partner
• Solon Partners - Partner (according to Solon webpage)
• Rait Ojasaar, CFO / COO & Co-Founder
• IronCurtain Entertainment - Hands-on Investor
• Indilo Wireless - Member of the Board and Investor
• Solon Partners - Managing Partner
• Myoton - VP of Business Development
• OCDesk - Co-Founder
• nodeSWAT.com - Co-Founder
• Harri Siirak, CTO & Partner
• Indilo Wireless - Software Engineer
• nodeSWAT.com - Partner & Mission Architect

It's clear that most of the members of the team, with the possible exception of Harri Siirak (who was involved in the other ventures only for a short time overlapping during the time period in question), had a lot of other things going on, and one might question their priorities. Yes, we realize that some of these activities are just in a mentor or advisory role, but that all takes time. Are these people really devoted to Publification full-time? In particular, the Solon Partners affiliation raises questions for us, as 3 of the 4 Publification team members were also 3 of the 4 Solon Partners partners at the same time.

Putting their many interests aside, there is another important detail here: no one on their team has experience in the publishing industry!

Show Me the Money

So let's re-cap what we have so far. We have a company with a bad idea, bad technology, and an inexperienced management team that is involved in other projects at the same time.

Would you invest in this? We wouldn't. Thankfully for them, and unfortunately for the taxpayer, EAS comes to the rescue, with 121,151 euros in funding:

Now here's where it gets interesting. As part of the Springboard program, teams automatically receive a small investment, so they get a $20k seed investment (13,910 euros at the exchange rate then).

Then, a couple months later, in December 2011, they receive $150k (112,260 euros) from Northstar Ventures. As stated on Northstar's website: "Northstar is a venture capital company dedicated to building successful high growth businesses across the North East of England." [emphasis added]. Also stated on their website is that much of their funding is backed by European Investment Bank and European Regional Development Fund -- in other words, EU taxpayer money.

Now hold on a minute. Isn't Publification an Estonian company? That's the requirement to be eligible for funding from EAS. Or are they a British company, located in the North East of England, since that's the requirement for investment from North Star? Or maybe they moved from Estonia to England?

According to EAS records, the two projects listed above were dated June 2011 and July 2012, and the Northstar funding occurred in December 2011, right between those events.

Does something smell fishy to you? It does to us. From where we sit, it appears this company managed to set up shop in both the UK and Estonia, for purposes of receiving EU funds from both sources. That's like taking a tortilla chip, dipping it in salsa, taking a bite, and then dipping the same chip back into the salsa. That's double-dipping! You can do that at home when no one is around, but companies shouldn't be doing this.

Add it all up, and we have 247,321 euros gone to waste.

(As an aside, the Northstar investment is not listed on their site, however in an August 2012 interview, Yrjo Ojasaar confirmed the investment.)

Too Close for Comfort?

Besides this questionable funding arrangement, there's another red flag that pops up in our auditor-like minds.

The way EAS funding for companies usually works is they pay up to 50% of the costs, and the company pays the other portion. The goal here is that the companies receiving the funding also have to share in the risk.

So let's say a company has in their plan that they will spend $1,000 on marketing. Their marketing supplier will give the company an invoice for $1,000, which the company then pays in full, and submits documentation to EAS. EAS then reimburses the company $500 of the sum (50%).

From our experience working with other companies that have received EAS funding, a common "trick" is to have the supplier invoice for double the amount, and then give that difference back to the company later. So let's say the company planned to buy $500 worth of marketing services. They would put $1,000 in their plan they submit to EAS, and the supplier would provide $500 worth of services but invoice for $1,000. The company pays the $1,000 to the supplier, and submits the invoice to EAS and gets $500 back. Meanwhile, the supplier also gives back $500 (perhaps minus a small handling fee), so the company effectively didn't have to pay anything.

What concerns us here is most of the management team from Publification was also working in Solon Partners at the same time, and had connections with other companies as well, like Indilo Wireless. It would be very easy for them to conduct a transaction like the one described above. Note we are not saying they did so. We have no evidence of this and we want to make that clear. We are merely pointing out that because of the close relationships the team had with other companies they managed, this would be very easy to pull off. We know the people at EAS are avid readers of our blog, and they do have access to this data. We'd be interested to know what they find, though sadly EAS does not have a good track record when it comes to enforcing the rules.

Where did the money go?

We're talking about fairly large sums of money here, especially for Estonia where the average salary is around 900 euros per month, and also when considering the short period of time involved. How did they burn through nearly 250,000 euros in 18 months?

Let's think about this further. In an IT business, the largest costs are usually for employee salaries and product development (both are somewhat related). However, in this case, we see that nearly all the members of the company had other jobs at the same time, so salaries weren't that important. On top of that, as far as we can tell, the product was already fairly well-developed around the time they entered Springboard.

As for overhead costs, they are touted as a success from the Tallinn Technology Park, so we assume they had access to the cheap office space and related resources there.

So how would you spend this amount of money, which is over 13,000 euros per month? Marketing and sales, perhaps? A bit more product development? That's what we'd do, but we still can't figure out how they burned through that much money in such a short period of time. We see little evidence of any major marketing initiatives, nor any major sales results, and only minor product development advances. Again, the auditor in us makes us really wonder how this money was spent and if any of it was directed to their other companies, but unfortunately we just don't have access to the data to figure that out.

Is the Government Part of the Problem?

So let's go over what we have here. Nearly 250,000 euros, almost all of it taxpayer money, have gone to waste, on a company with a bad idea, bad technology, and questionable management with no industry experience.

A quick Google search would result in the LinkedIn pages of the team members, and it would be clear they were working on other projects at the same time, and had no publishing industry experience. Why were they given any money at all?

It's not just a one-time mistake either. There were multiple funding events over 18 months, and each time there was an opportunity to do the simplest of Google searches to realize what was going on.

Maybe it's time to leave investing to experts in the free market?

Fly like Vapiano's or Fail like Friday's? Subway's Future in Estonia.

Subway Arrives in Estonia : Our Take

Yes, we know Subway is a large multinational company and isn't usually considered as a startup. Yes, we know they didn't receive EAS money. Yes, we know they don't really fit the profile of most companies and organizations we cover on our blog.

However, we think there is a lot to be learned from analyzing the potential of this venture. In Estonia, Subway is a franchisee, so the local owners are essentially starting from scratch. Countless restaurants in Estonia fail, so we thought an analysis of the numbers that drive the restaurant business would be of interest. One of us has expertise in this area, which enabled us to do a fairly thorough analysis.

A Brief History of Subway in Estonia

Subway opened their doors last week with an exclusive party on Thursday, complete with a band, DJs, ribbon-cutting ceremony, and even a speech by the US ambassador to Estonia. Anyone who has lived in the US, where Subways are more common than McDonalds, would find the fanfare quite surprising. The opening of a new Subway in the US is typically greeted with a resounding "meh" and nothing more. Estonians probably have the same reaction when a new R-Kiosk opens.

The opening of Subway seems to be the largest business event in Estonia this year, based on the widespread media coverage. There were 5 articles in Delfi about it just the last month, and another 3 in Äripäev in the same period.

Subway opened its doors to the public on Easter Sunday, and even that drew press coverage, with Delfi reporting on the status of how many people were waiting in line (not many, but we've heard the lines have been longer on some occasions since then). No one in Estonia at this point is unaware of Subway, given their heavy coverage in the media.

What was sadly lacking in all the media coverage was an analysis of their business model.  Will it work?

Now that their numbers are starting to come out we can start figuring out what it will take for Subway to succeed in Estonia. Subway has more locations worldwide than McDonalds, thanks to much lower start up costs and a franchise model that tolerates a higher level of stores per area.

How will this business model succeed in Estonia? The owners have plans to open up 20 restaurants in Estonia by 2019. By comparison, Hesburger has 30 restaurants in Estonia, while McDonalds has 10. It's nice to see they are dreaming big, but first they will have to prove the franchise can be profitable in Estonia.

Let's focus on the first store opened and try to get an idea of what they must make monthly to break even and how many sandwiches sold per day that equals.

We'll build a basic budget for the restaurant, and use that to calculate an estimated break even point.

 

Fixed Costs

We'll start with the fixed costs of the restaurant. Fixed costs are costs that are incurred regardless of sales. An example is rent, where you have to pay it whether you sell 1 sandwich or 1,000 sandwiches

First let's look at the physical space. There is the initial build out to have it looking like a Subway. Subway expects franchisees to pay between 90,000 and 180,000 euros for this build out. The Estonian one looks really nice so we'll budget it at the midrange point of 120,000 euros.


As we are looking at a monthly break even, let's break the 120,000 cost out over 10 years and make it interest-free. This build out is a long term investment in the business, but the cost must be regained and accounted for. So we'll pay back 12,000 a year for 10 years, or 1,000 a month.

On top of that we have to pay the initial fee for joining the Subway franchise. This is $15,000 in the US and for the sake of keeping the numbers easy, let's call it 12,000 euros or another 100 a month for 10 years.


Next up we have to pay rent on the space. They have 40 seats in their location at Estonia pst 7, which is next to Solaris. It's not inside one the of main malls, but it has a bunch of seating. A bit of research on City24 and we can estimate they are definitely paying more than 1,000 a month and probably closer to 2,000. Let's call it 1,200 without VAT. We'll account for all VAT later as a variable cost.

Next up are utilities including electricity, water, area maintenance, heating, and any other costs the landlord will pass on to the tenant. It's a restaurant focused on a bakery so this should skew higher than the average retail establishment. The bill will vary drastically from summer to winter but it would be highly doubtful the bill would go below 500 and quite realistic to expect it to hit 1,500 euros/month in the cold of winter. Let's budget it at 800 euros/month and hope for the best.

We've got the place built out, rented, and the lights turned on. Now let's get some staff. To calculate how many we need, we'll use the hours of business Subway Estonia lists on their Facebook page. They haven't quite got their weekend hours down yet but for this budget we'll guess they have the same Saturday hours as Friday and the same Sunday hours as a week day.
Add it all up and we get that they are open 490 hours a month.

How many employees should be working at any one time? According to our sources, Subway Estonia has 22 employees. This makes us skew the number high. Let's go for 4 and see how close we get to their amount of employees. From what we've seen at Subway this week, they do typically have at least 4 workers on shift at a time.

If all the workers are full time and put in 160 hours a month and the store is open 490 hours a month while needing 4 employees working at all times, then we need 12.25 full timers. We are still nowhere near 22. But much like the 20 stores idea, let's count the 22 number as a bit optimistic and simply say we need 13 full time employees.

How much should we pay them? Let's hope the restaurant is able to offer above minimum wage while staying a good bit below average Estonian overall wage. So we'll go for 350 net wage per full time employee. That's 4,550 euros going into the hardworking sandwich artists' pockets, but there are still social taxes to deal with.

As we are paying 350 net we still have to account for the employees' and employer's taxes on those wages. Taken together this rate is 66% of the net wage. With 4,550 net wages per month we are looking at an additional 3,000 in social taxes.

We'll definitely need a bookkeeping service to help make sure those taxes and employees are paid. For that many employees let's expect to pay around 500 a month for this service.

Time to think about things like internet, security, trash pick up, replacing lightbulbs, window cleaning, and other such minor costs. The more a small business can lock these down the better, but starting up, this going to be expensive. Subway might well be paying G4S for a premium package or they might have 0 security expense. Altogether let's budget 300 for this.

Add everything up and we get a fixed cost of 11,450 euros/month. A little safety cushion would nice so we'll go up to 12,000.

 

Variable Costs

Time to look at the variable costs. Variable costs are costs which do vary based on sales.

The first is VAT, which runs 20% We did not add this in to any of the fixed costs to keep things simple.

The second is Subway's charge for product (food). This number is relatively easy to find online and so we can put it at 30%. We think it may actually end up higher in Estonia, since much of the product is imported from abroad and transport costs on perishable goods can drive up this number.

Next up is Subway's marketing fee, adjusted to the local market: 10%

Add it all up and we have 60% variable cost.

After these costs are paid the owners get 40% of each euro to pay all the fixed costs plus make a profit.

With fixed cost and variable cost in hand we can make a basic equation which will show how much money our estimated Subway must make for the owners to not lose money in an average month.

-12,000 + .40x = 0
x= 30,000

Our estimate shows that Subway has to make 30,000 euros a month in revenue to earn absolutely nothing. On these estimates, it is interesting to note that the most room for variance can occur in the fixed costs as the variable costs are mostly set by the franchisor and government (taxes). In other words, the only way to get this number lower is to hire fewer people, or pay less rent.

30,000 / 30 days a month results in a daily required take of 1,000 euros.

Now for some fun: let's look at their prices and see how many sales that equals.

Thanks to all the media coverage including photos of their menu, we see the cheapest sandwich is 3 euros and the most expensive is 6 euros for a footlong sub. In addition to sandwiches they sell drinks, chips and cookies. With these items and price points we can guess an average sale will be 5-6 euros. Let's use the low end of this (not everyone orders a footlong), so 5 euros per sale.

1,000 / 5 = 200 sandwich sales per day.

 

A Moneymaker?

So can Subway sell 200 sandwiches a day? Remember that is in order for its owners to break even, not to make a profit.

We can quickly do the math to figure out how many sandwiches per day they have to sell if each of
the two owners wants to take home 1,000 euros a month. First we'll add in the profit tax rates at
21% to get to 2,420 then add that to the fixed cost in the equation. A little bit of math later
and we see in order to get this decent level of profit they need to make 1,200 euros a day or
roughly 240 sandwiches. In a 15-hour work day that is a sandwich every 3.75 minutes.

Can they do it? It's not difficult to imagine selling that type of volume during the lunch and dinner rush times, but will they also do that kind of volume at times of the day like 9am or 4pm, for example? We don't think so. Even the lunch rush will be limited by how quickly they can make sandwiches. The fastest Subway sandwich maker in the world can make a sandwich in 45 seconds, so we're guessing preparation times will be closer to 2 minutes at best.

What they will probably do is work on cutting back their fixed costs, especially staffing. Right now, they open at 8am every morning during the workweek, and we don't think many people get a craving for a roast beef footlong sub at that time of day.

We do enjoy a Subway sub from time to time, and their arrival in Estonia was welcome. But with the limited size of the Estonian market, we don't think they will have the success they hope for.

Creative Mobile : Success to Be Proud of

Creative Mobile : A Real Estonian Success Story

Some of our readers have said we are too negative, and we only focus on failures. Our response to that is if you want to read only positive articles, you can go to just about every other media outlet covering the Estonian startup scene. They seem to blindly herald any minor positive news from an Estonian company as a true triumph, and discreetly ignore any failures.

It is a fair criticism, though, to say that we've never really explained what companies we think are good, and why. We have been following Creative Mobile for a while, and we think they are a great example of a true Estonian success story.

 

The Story of Creative Mobile

Creative Mobile is a mobile game development company that was started in 2010 by Vladimir Funtikov, Sergei Panfilov and Serhiy Slyeptsov. Funtikov, the CEO, was 23 years old at the time of the company's founding, and is a college dropout from Tallinn Technical University, where he studied after moving to Tallinn from Narva.

Their success is clear. Their apps have received over 100 million downloads, and in the first half of 2012, the company had revenues of 4.2 million euros, and a profit of 3.4 million euros during that same period. That's an impressive profit margin, to say the least.

The company is based in Tallinn, and has grown from 5 employees to over 70 employees. So far, they plan to remain in Estonia and not move abroad like many other Estonian startups.

About their success, in January 2012, Funtikov said:

“Our financial situation is very, very healthy, largely thanks to Drag Racing being among the top 5-10 highest grossing games on Android throughout the second half of the year [2011], and successful launch on iOS. Not only do we remain 100% self-funded, but we're also investing and actively looking for companies we can work with as investors and publishers.”

What They Did

We really like this company. They achieved success through hard work, and producing a quality product that consumers are willing to pay for. From the research we've done, it appears the company has a true startup culture in terms of eschewing hierarchies and rigid management policies.

They also understood the importance of metrics, and using that to guide product development and market strategy.

Finally, and we think this is really important: they worked a lot. Their people weren't working 8-hour days and clocking out at 5pm on the dot. To some, working hard seems like a no-brainer, but walk into the offices of some of the incubators in Tallinn, and it's sad to see it's a ghost town at 5pm.

 

What They Didn't Do

We also like what they didn't do. As far as we can tell, they did not take any money from EAS. It's actually a complicated process to get money from EAS, involving writing lengthy proposals and filling out numerous forms. The proposal process is so complicated in some cases that EAS has a list of companies that will help you write the proposal, and EAS will even pay for it!

That's a story for another day, but the point here is that instead of spending lots of time dealing with EAS, they just focused on what matters -- producing their product.

We also noticed they were not regulars at the various startup networking events that occur in Tallinn every few days. When we advise startup companies, we encourage them to cut back on attending these events. There's nothing wrong these events necessarily, but it's usually the same people there every time, and that takes away from valuable time when they could be working on their product.

 

Shunned by Estonian Startup Scene?

What really fascinates us is how this company was virtually ignored by the Estonian media and startup cheerleaders, until they had achieved really great success. Almost all coverage about the company started in late 2012. We could find only two articles from before that, both written in January 2012, one in Eesti Ekspress (the article title starts with "Local Russian firm") and the other in the Arctic Startup blog. Meanwhile, the company was profiled by a foreign blog already in April 2011 back when it was only 5 people.

Äripäev, Estonia's main business daily, did not even mention the company until July 2012, and wrote a feature about them only in August 2012.

Looking at the Twitter feed of Estonia's president, we see similar treatment. We found only one tweet from him since his account was created mentioning Creative Mobile:

Meanwhile, we found 8 tweets from him mentioning TransferWise, which is a UK-based company founded by Estonians:

Why was this company largely ignored by the Estonian media and thought leaders? Our theory is that they didn't fit the usual mold for a typical Estonian startup. They didn't go to the startup events, they didn't take EAS money, they didn't join an incubator, and they are Russian-speaking Estonians. The conspiracy theorists among us would say the last item is the main reason they were ignored, but the optimists among us hope that's not really the case.

Regardless, we can't quite fathom why a company that is clearly a great success isn't getting the recognition they have earned.

Challenges Ahead

Despite this success, like any company, Creative Mobile faces challenges in the future.

The game industry is highly competitive, but it also has some unique attributes that makes it even more difficult to be successful. Unlike many industries where there may be a long tail for market share, with games usually you have to be a top hit, or you fail miserably. There's no middle ground.

There are a few reasons for this. One reason is user app download behavior. If your game is not in the top list on the app store (it's "below the fold" in newspaper terms), then the download rate drops dramatically. Another reason is that many games suffer from (or utilize) the network effect, so a game is only fun if everyone else is playing it also (social network and dating sites have the same issue). Finally, game players are just plain fickle, and what was fun last year may no longer be fun for them this year.

The data bears this out. Here is data showing Creative Mobile's gross revenue rank over time for the Nitro Nation Drag Racing iPhone app in the US market (they have stated the US is their largest market):

Note that the vast majority of their users are using the Android, not iOS version of their app, but we suspect the trend is similar, and it's common. User interest (and spending) in most games declines over time. Remember Words with Friends (or Tetris, for the older crowd)? People just got bored of them.

Their newest game (Drag Racing), released just a few months ago, shows a similar trend:

Looking at data on the top game publishers, by both downloads and revenue, Creative Mobile does not appear on the list.

It's just a highly competitive industry (and it's also why we think all the Gamefounders startups will fail -- more on that another time). So how can this problem be addressed?

One option is to release more apps, so there are more opportunities to acquire customers, and even better if the app focuses on a slightly different market (like a card game instead of a driving game).

Another option is to reduce up-front risk by being paid to develop an app, or publishing and marketing an app someone else wrote.

What did Creative Mobile do? They did both. No wonder we like them!

They released a card game and an arcade game, and then they released a game produced by another game developer (A-Steroids).

That, dear readers, is how to run a successful Estonian startup.