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Tuesday, October 14, 2014

The Truth About Estonian Startups and Taxes

The Truth about Estonian Startups and Taxes


Not sure if Estonian startup cheerleaders can handle the truth.

Last week, the Estonian tax authority (EMTA) published a list of how much each Estonian company paid in payroll (employment) taxes for August and September of this year. Shortly after that, Ragnar Sass (who readers may remember from our profile of his failed United Dogs and Cats startup that cost the taxpayer over half a million euros) published his own list showing how much Estonian startups paid from that sum. In his own words: “pure data, not some hype or bullshit bingo”

Well we over at the Dot EE Bubble also like data, so when we woke from our Viru Valge-fueled drunken stupor on Monday morning (blame Sunday’s Estonia-England match), we knew it was time to act.

Next time he should try Sovietsko and Vana Tallinn

We found it interesting that people are bragging that Estonian startup companies do what every company should be doing – paying their taxes. What’s next, a presidential parade when they submit their annual financial reports? (More on that later.)

Crowds celebrating a startup that filed their VAT declaration on time

Sadly, maybe there is reason to celebrate when an Estonian startup pays their taxes as required by law. We’ve profiled companies on this blog, like Complus Consulting that ran off with nearly 1.4 million euros of taxes owed, and Yoga Intelligence that pulled a similar trick by bankrupting the company with tax debts and starting a new one.

Anyway, back to the data. The companies on the list are probably familiar to anyone following the Estonian startup scene. These essentially represent all startup companies currently operational (with paid employees) in Estonia. In other words, this list gives us a fairly comprehensive overview of the Estonian startup environment. We sent our experienced research team to dig further into these startups, and analyze the results.

You'd also have the same look after sifting through numerous EAS funding databases.

First, the good news. A lot of Estonian startups are doing well in our book. They follow the path of startups in other countries, by using private funding to build their company and be successful, all while complying with the relevant laws and paying taxes. One example is Creative Mobile, a company we profiled last year. (Yes, we can be positive sometimes!)

Now the bad news, a bit more than half (23/45) of startups have received taxpayer money, and a lot of it:

Remember these names. They're living off your money!

Yes, you read that correct. More than HALF of the top Estonian startups have received taxpayer money.

How much? 13,318,415 euros. Yes more than 13 MILLION euros of taxpayer money.

Among startups that took taxpayer money, the average funding amount was 579,061 euros

The last column in the chart shows how many times each startup took taxpayer money. What do we learn from that? Taxpayer money is nearly as addictive as cocaine – of the startups that took government funding they received it an average of 3.7 times.

An easy choice for Estonian startups -- more taxpayer money please!

Depressed already? It gets worse. As of October 13, 7 of the companies on the overall list have a tax debt, in total worth 70,831 euros.

"Paying taxes is for chumps!"

And remember those annual reports we mentioned earlier? Five startups have not filed their 2013 annual report as they are legally required to, including Now! Innovations, Click & Grow [corrected October 15], Cherry Media, and Majandustarkvara (Erply). Two of the five, Click & Grow [corrected October 15] Now Innovations! and Sportlyzer, have direct investments from taxpayer-funded SmartCap. So SmartCap is on the board of these companies but can’t even get them to file their annual reports on time. No reason for a government-funded company to follow the government’s rules, right?

Some will say that these government handouts are good. The taxes paid by startups shows they are “giving it back”. But are they? For some startups that either pay a lot in taxes or took little government money, they pay back in taxes what they received in a month or two. Meanwhile, some, like Visitret Displays, would need to pay taxes at the current rate for 519 months – 43 YEARS – to pay the taxpayer back. Now Visitret is certainly the extreme, but the average across companies is 49.1 months – more than 4 years.

Number of months to pay back taxpayer funding -- see you in 4 years!

Lessons Learned

Is this really how things are supposed to work? Half of the top Estonian startups have received an average of more than half a million euros each of taxpayer money.

For a better way to handle things, simply look at just about every other country out there. We don't think there's one country where half of all the country's startups are funded by the government. In many free markets, like the US and UK, investing is left to private investors who are highly experienced and motivated to invest well. We've heard the argument that there is no private investor money in Estonia, but we simply don't buy that argument.  Just one quick look at EstBAN's presentation shows there is plenty of investor money available, and many private investors willing to help.

Why does Estonia need to have the government dump millions into startup companies, when every other country has successfully left this to the private market?

Footnote on Numbers

Some of the numbers include not only money from Enterprise Estonia (EAS) which typically is a handout, but also money from SmartCap which is usually in the form of an equity investment or convertible loan (and effectively a handout unless the company does well). SmartCap is the taxpayer-funded investment arm of the Estonian Development Fund (Arengufond). Despite being publicly-funded, they don’t make the numbers easily available on how much they invested in each company, so we had to go to some of our sources. If you have an issue with any of the numbers for a company, just complain in the comments (like we need to ask you!) and we’ll provide information on how we arrived at that number.


  1. I took another table of startups and their taxes paid, total for of 47 startups was 1 771 459 EUR/2months, which makes payback of about 1 year. So even if none of the smartcap investments come back (which is not very probable - one of the first ones CrabCAD was great success), then state will get the money back in one year, and the startups work much longer than 1 year. Taxpayer money well spent. My table: http://pastebin.com/bhJjwGTh

    1. That looks like similar data to what Sass posted, but why are you including startups that didn't get taxpayer funding? They have nothing to do with it.

      Why should successful companies like AdCash and Creative Mobile, that pay lots of taxes but took no taxpayer funding, be used as a justification to give so much taxpayer funding to other companies? It doesn't make sense.

  2. It is really surprising how hating something so passionately makes you live in a different world. In a world where:

    - the return on your portfolio is based only on a subset of examples. In real world, a16z does not leave out Twitter nor Facebook from the calculations
    - there is only one type of tax present, applied to the salary. No additional forms of taxes present in real world, such as the capital gain taxes are anywhere in sight
    - the rate of return of your capital is calculated using the current data, not extrapolating any kind of change over time. The fact that in real world some of the companies had 10x less employees and 10x smaller tax base is of no concern in this magic world
    - the exits do not count. For whatever reasons, in this world, Grabcad $100m exit will not contribute a single penny towards the rate of return.

    And to topit off, in this fantasy world, achieving close to 25% rate of return of your capital is considered a lousy outcome. In this world, Warren Buffet is a bozo and cannot invest his way out of a paper bag.

    1. Enterprise Estonia isn't and shouldn't be a venture capital fund. I'm sure VC's don't include companies _they never invested in_ in their calculations, so why should a company be listed that never took taxpayer money?

      Using that logic, they should look at all startups in Estonia. How about Urmas's Kohvik that opened up last year? It's a startup, and he pays taxes, so let's include cafes also!

  3. 1. "Two of the five, Click & Grow and Sportlyzer, have direct investments from taxpayer-funded SmartCap." - Get your facts straight - Click&Grow does not have anything to do with Smartcap.
    2. Learn the difference between grants and investments. You list here Enterprise Estonia Grants and somehow twist it to pile blame on Smartcap. I understand that You dont like them, but this kind of "logic" does not increase Your credibility.
    3. While not in all EU countries have governments so directly involved in investing, all of them have their grant schemes. You are welcome to check Tekes.fi for example. Actually, while our own Enterprise Estonia has closed mosed grants schemes accessible to startups, Tekes is more than happy to give them to Estonian startups relocating there. So while we grumble about grants ruining free market here, actually not giving enaugh grants comparing to our neighbours, already is ruining our companies opportunities in international scale.
    4. Your payback calculations assume that none of the startups will grow - which again is strange logic. While many of them ultimately fail, there is no reason to think that their current size (and level of taxes) is what they aimed at.
    5. When You go to ANY investor, everybody of them confirms that they would be happier to invest if company has product, client, market traction etc. Small investors cant afford to wait that long (it doesnt mean they wouldnt like) because they dont have enaugh money for bigger rounds, so they invest in perhaps prototype phase. But everybody knows thtat it is harder to find money if you have little to show. And thats why government grants exit - to amplify founders money so that they can go further before running out. While some market distortion undoubtedly exists, it is not so big - as You yourself demonstrate: pretty much everybody who has good enaugh idea, can get this grant. Actually could... as i said before, these programs are mostly closed now, so there is little reason to continue this.

    1. You're right about Click & Grow not being part of SmartCap. It was correct in our table (note only "EAS" not "SC,EAS" listed next to it), but we just looked at the wrong row when writing that sentence. It was meant to be Now! Innovations. Article corrected. Thanks for pointing out the error.

  4. It's not only about startups, there are millions and millions of taxpayers money wasted on entire industries here in Estonia who would otherwise just go bankrupt for not being competitive which is creating an unfair competitive advantage. They basically work with a damage waiver. If the company is loosing money, the government will come to help, whether the business is sustainable or not. Wrong!

    They should rather invest all that money into education here in Estonia.
    Everybody is talking about turning Estonia into a hub for R&D in Europe but besides talking about it, nothing has happened within the last 5 years.
    Academic quality of the Universities in Estonia? Way below EU average.
    Research done by Universities in Estonia? Almost none.

    If you look at the salary levels for teachers and professors, it's no surprise there is not much quality left. A caretaker in the US makes more money than a University Professor in Estonia.

    1. In Estonias case - state aid is necessary evil. We are lagging behind more advanced EU countries and our companies are somehow supposed to be competitive - but the nasty secret is that every state in EU is giving state aid. How on earth should Estionian companies be competitive while even countries more advanced than Estonia, are giving aid (and distorting market)? Numbers are freely available - http://ec.europa.eu/competition/state_aid/scoreboard/non_crisis_en.html

    2. Yet somehow, amazingly, American companies are able to compete and outperform many European companies in the high-tech sector, without any government handouts.

      How is that possible? Americans certainly aren't any smarter than Europeans, and some would even say they're dumber!

    3. Up until last week when it was increased, the entire Estonian university research budget was only 1.39 million euros!


      Instead of giving money to some of these stupid startups, why not just give it to Estonian universities to improve research quality?

  5. Estonia has one of the lowest average life expectancies in the EU, and one of the highest rates of HIV infection.

    If you ask the average Estonian person on the street if it's better to spend their money improving everyone's health so they can live longer lives, or to put money into a social network for dogs and robotic mannequins, which do you think they would choose?

    1. And these are the only options? Either one or the other? Let me put it differently: Estonia is among the few member countries in EU with lot of relatively wild woodlands left but these need our attention and care to undo what damage has already been done, what would You prefer - spend money on planets green lungs or to spend it on some people stupid enaugh or not caring about themselves enaugh that they become drug addicts and HIV carriers? This the choice! (Or is it?)

    2. Yes. It is a government's job to promote public health and protect natural resources. These are even listed in the Estonian Constitution (Section II.28 and Section I.5). Every government should do that. In addition, that's the type of duty that the private sector cannot really do on their own.

      What's not in the Constitution, and also something that many governments do not do, is invest into private startup companies. That's something the private sector can and does do.

      Now, if Estonia was doing well at responsibilities the government is expected to take care of, like public health, maybe there is less to debate. But the data shows Estonia ranks quite poorly in the EU in many social areas. Why not spend more to improve living conditions of the people, and less on handing money to startups?

    3. Easy - You eat well today or plant some for tomorrow too. So these evil startups got 13 MEUR grants and investments. Healt Insurance Fund's budget is over 0,9 BILLION EUR. This 13 MEUR would have not made any difference there. And were they there - they never would have been seen again. But these 13 MEUR will bring returns. If You believe authors of this article, then in 4 year, if we take into account some successful exits or profit makers or fast growers already demonstrated (Fortumo, Smartpost/Cleveron, Modesat, Grabcad etc) , then probably much earlier. Actually, perhaps they have already paid back more if we take into account other kinds of taxes and other ways money is flowing back into economy...

    4. Great idea! Half of all Estonian startups received taxpayer money. You seem to think this is a great idea, so how about they expand it so ALL startups get it? They can register their startup online, then they'll get a deposit in their bank account of half a million euros, which is the average all Estonian startups have received from the taxpayer.

      There are NO better ways for the government to spend 13 million euros than on startups, right? Despite Estonia ranking quite poorly compared to other EU countries on numerous social and quality of life measures, there's nothing that can be done. More money for startups! They'll save the day!

  6. My argument is that this money is not lost but it recreates growth. And in proportion to the money already spent on health and social, it is minuscule. So yes, i think money spent on (promising) startups is good idea. We can always improve selection process and finetune other related mechanisms, but in general, in this time and place, i think some state support is good.

  7. I'm an expat(not from UK/USA as you can notice from my writing :) ) that recently moved to Estonia and I'd like to congratulate you for giving an different viewpoint towards the startup culture here, different than the propaganda that's booming from the loudspeakers everywhere here in Eesti(and most of the world TBH).
    I honestly think that the Estonian government instead of drinking the startup Cool-aid should've turned Estonia into an outsourcing paradise in the mold of Bulgaria and Romania...A recent article in the baltic business review is saying that the Kuehne+Nagle centre here is the biggest reason why the salaries in the IT are rising...not some fancy pants startup....

  8. Also, thank you for a different point of view. I think its only great to see such a lively and intelligent debate :)

    Personally I support the startup movement. I haven't been living in Estonia for the past 8 years, but if so, I'd rather give my tax to some young entrepreneurial guys naive enough to believe they can change the world, rather than improving general livelyhood or even healthcare. Even if it means myself suffering at some point because of it when moving back. Why?
    Because I believe this is a form of education that is otherwise almost impossible to get and will give us significant returns otherwise. Having studied in a very practice oriented university and not in Estonia, I still firmly believe running a business is your best business school. If you've been an entrepreneur once then you know what Im talking about.

    The thing government should do however is:

    1. To make sure this money is utilised with some focus in mind. I would argue for example how useful is another Taxi app startup or price comparison website or even Cherry Media etc. Things that we know are a big gamble in the tech world and have a ton of competiton outside the borders. Also, our developers are far from cheap, so there should especially be consideration about what markets the startups seek to enter and how they are planning to scale. And yes, "technology" as a focus area is way too broad these days

    2. To make sure there is proper accountability for funds used. If you're a young entreneur who's just blown off 300k EUR of taxpayer money, you should really be ready give answers for it before the public. Having some element of fear is useful in the game of entrepreneurship, so you won't have everyone applying who thinks they have a new fantastic penny auction site