The tech-savvy Estonian government does its best to develop the startup scene

“It may need a new name,” Erik Anderson says with a straight face. One of the stars in the new batch of companies taken in by Startup Wise Guys accelerator, where Anderson handles business development, is a company called Pubify. It’s incorporated in Hungary, and when I ask its co-founders if they’re worried the name might be misunderstood, they look nonplussed. “Publify was taken, so…” one of them, Kinga Jentetics, explains. (Pubify, like Publify, is in the e-book business.)

Estonia’s Overhyped Silicon Valley

We’re sitting in the accelerator’s cozy, bean bag-filled workspace in the old town of Tallinn, the capital of Estonia. The city hosts one of the hottest startup scenes in the world. “Few factors get us as excited as Estonian founders,” Silicon Valley venture capital guru Marc Andreessen tweeted recently after his company led a $58-million funding round for TransferWise, the international money transfer company started by two Estonians. People here like quoting a 2012 Wall Street Journal piece that said Estonia was “producing more startups per capita than any country in Europe.”

But that quote is tough to confirm with actual statistics — and that’s telling. Like most other non-U.S. startup scenes, Estonia’s is more of a playground than a legitimate industry. People refer to an “Estonian Mafia” that supposedly knows how to produce successful tech companies. But the big name startups Estonia’s promoters mention in the same breath — Skype, PlayTech (the online gaming and betting software powerhouse), TransferWise — are not even headquartered in Estonia: Skype is incorporated in Luxembourg and the U.S., PlayTech on the Isle of Man, TransferWise in London.

“The money is abroad, investors are abroad, and investors know the jurisdiction in which they are working, living, selling products and services,” Signe Viimsalu, general manager of the Estonian Business Angels Network told me. “Customers and markets are also abroad — being close to the customers may matter.”

The incredibly tech-savvy Estonian government does its best to develop the startup scene. The country has an indefinite tax deferral for reinvested profits, and liberal laws on the taxation of dividends paid from other jurisdictions and on tax optimization schemes under which overseas investments are made in the form of loans. (Viimsalu says international awareness of this beneficial tax climate is still low but beginning to pick up.) There are also plenty of taxpayer subsidies available to young tech companies. The blog DotEeBubble recently pointed out that many of the stars featured on the online “Wall of Fame” run by co-working operator and hackathon organizer Garage 48 — the threshold for which is annual revenue of at least $500,000 or funding or more than $1 million — receive more money from the government than they pay in taxes.

Estonia’s reputation also helps it win subsidies from the European Union. The teams selected by Startup Wise Guys receive 30,000 euros each in EU funding, and there’s a path for them to receive 300,000 more. That draws teams from throughout eastern Europe to Tallinn.

Still, on the whole, few Estonian tech companies have managed to draw venture capitalists’ attention and attract major funding: in all, only 28 startups have so far made the “Wall of Fame”.

In the fourth quarter of 2014, the combined contribution of Estonian startups to the country’s budget through employee taxes averaged 1.1 million euros a month. These are small firms — not exactly “unicorns” or household names.

Companies such as GrabCAD, which has developed a platform to manage and share 3D design files, Real Eyes, which measures Internet users’ emotions through their computers’ webcams, or Startup Wise Guys’ proud alumnus, farming analytics firm Vital Fields, which crossed the $1 million seed financing threshold in 2013, are never going to grow into the next Facebook, Uber or Snapchat. A lot of Tallinn startups are niche business-to-business projects. Anderson, who came to Tallinn from California because the scene here is less crowded than that in London or Silicon Valley, says this is the right approach: not everyone needs to dream of taking over the world.

So the bubbliness of the Tallinn scene is tempered with Nordic humility. The hard sell is the government’s job; the engineers and other founders are more concerned with honing their products and explaining them to investors. That’s tough enough sometimes, and small companies often need mentoring from the scene’s veterans, who have already attracted seed funding. Pubify, for example, helps small European publishers make e-books and sell them through big distributors such as Apple and Amazon. Investors don’t always understand, however, why the publishers cannot go directly to the distributors: After all, anyone can make an e-book these days, and thousands of authors self-publish. Pubify has had to learn to explain it’s one of only 10 e-book aggregators trusted by Apple.

As far as startup cultures go, Estonia’s is more modest but healthier than, say, the one in Berlin, another major European tech hub. The small country doesn’t really need and isn’t chasing a huge national champion such as Finland had — and lost — in Nokia, or a billion-dollar exit like the one performed, with much huffing and puffing, by Berlin’s Rocket Internet. It’s content to produce smart niche firms. After all, Cybernetica, the 17-year-old Tallinn company that developed much of the country’s groundbreaking e-government infrastructure, only brought in 9 million euros in sales last year.

Few of these companies’ founders will ever become multimillionaires, let alone billionaires, and the Estonian government knows that those who do are probably going to operate their companies from elsewhere. It doesn’t want much from those successes in exile, aside from the right to feel proud of them, some money in the form of tax-free dividends and the willingness to employ Estonian programmers, whom the country produces in large numbers because of an early focus on coding and math in local schools. Estonia’s startup culture is about normalcy and quiet achievement, not unicorns and fireworks.