Estonia’s E-Residency program was launched just over nine years ago with the intention of encouraging founders to register their businesses in one of the most entrepreneurially-minded of E.U. states. And according to the Managing Director of E-Residency, Liina Vahtras, something interesting has happened. Rather than attracting businesses from outside the EU, many of the e-residents hail from countries within the trading block. In other words, founders who already have access to the single market are, nonetheless, seeking a base in Estonia.
So why would anyone do that? Well, it may be something to do with the fact that making it easy to register and run a startup company can play an important role in the development of a tech ecosystem.
Figures released earlier this month to mark the ninth anniversary of the initiative claim that E-Residency has contributed 200 million euros to the national economy. That’s undoubtedly good news for the Estonian government, but it raises the question of why a small country on the eastern edge of the European Union might be attractive to foreign entrepreneurs.
A European Bridgehead
As Liina Vahtras acknowledges, the original idea was to provide a bridgehead into Europe for international businesses. Subsequently, the decision of the United Kingdom to leave the E.U. was seen as a further opportunity. With barriers to trade about to come into force, the logic was that British companies would seek a base in Europe, allowing them to carry on trading as normal. By making it easy to do so, Estonia could take advantage of the post-Brexit opportunity.
Those original target residents from outside the EU have played a part in the growth of the E-Residency program but it’s not the whole story.
Forty percent of our residents are from the EU,” says Vahtras. “So it is not access to the E.U. single market that is attracting them, it is something else.”
In her view, the answer is bureaucracy – or the lack of it. “One German entrepreneur said to me, you have no idea of how lucky you are. It’s so easy to start a business,” Vahtras adds.
This has become one of the selling points. For instance, Spain is now seen as a target market. We see a product/market fit with Spain, where setting up a company is very expensive.”
A Parallel With London
All this has echoes of the UK in the 2010s. One of the reasons London became a magnet for entrepreneurs from all of Europe and consequently for VC cash was the comparative – and you probably have to stress that word – lack of bureaucracy around company creation. There are other factors too. Government support from the tech economy; a flexible financial services regulatory regime that allowed innovations such as equity crowdfunding to be piloted; and London’s status as both a world city and a financial center. All of these factors played a part.
That gave London (and more generally the U.K.) a bit of a head start in the innovation economy race but Brexit resulted in the flow of European talent coming to Britain slowed to a trickle. An entrepreneur-friendly visa system intended to draw people from around the world may redress the balance, but that remains to be seen. Certainly, in areas such as Deeptech, the U.K. remains the most important hub but France and Germany are coming up quickly behind.
And for Estonia – and for other’s too – there’s a chance to draw some of that European talent, with companies that can either base themselves physically in the country or work remotely. Aside from access to the E.U. and ease of company registration, the government also points to Estonia’s very deliberate support for startups and an advanced digital infrastructure.
That’s a point made by Vicky Brock, co-founder of trade security company, Vistalworks. Originally conceived in Scotland in response to a challenge issued by the devolved government, tax authorities and police to develop technologies to combat the trade in illicit goods, the company launched in the wake of the Brexit referendum. As Brock explains, there was good reason at that point to establish a European base, not least because in law enforcement terms, the E.U. had the “joined up processes” that Vistalworks needed for its model to succeed. “Part of me thought this thing (Brexit) wouldn’t happen,” she says. “But I knew if it does happen it would be problematic.”
The company considered Germany, but that was rejected because of the paperwork. The E-Residency program offered a more cost and time-effective way to get a European base.
But Brock says other factors made it attractive not simply to use Estonia as a notional base but also to create a company which operated from and paid taxes in the country. “There was transparency, the rule of law and a business culture based on trust and data,” she says.
Perhaps less obvious was the importance of govtech in one of Europe’s most administratively digitized countries. “When you register a company, open a bank account, register for VAT, you realize that this is what this country is set up to do,” she says. There are also some tax advantages, not least the non-taxation of retained profits.
But as Vahtras stresses, “E-Residency is not a tax scheme.” For companies operating elsewhere, their taxes are paid locally and not in Estonia.
So what about the Brits? Well, things seem to have stabilized after Brexit “There was a rush of applications during Theresa May’s prime ministership,” says Vahtras. “But that has slowed while companies from elsewhere within the EU are moving in.
And there is something of a race going on to create startup-friendly ecosystems beyond the big hubs. For instance, fellow Baltic state Lithuania is also seeking to attract foreign startups and tech talent and recently one of the poster children of UK tech – Revolut – set up a base there. Ireland has also had a lot of success in attracting tech investment.
These are perhaps not obvious choices for tech startups but ultimately the ability of nation-states to not only grow their own ventures but attract talent from overseas could begin to – even in a small way – redraw the innovation economy map of Europe.
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