Report commissioned by Google
CIVITTA in collaboration with GOOGLE has prepared the most extensive report ever on the startup ecosystem in the Baltics. The results show that the growing number of startups is already generating a lot of economic growth, with the potential for an even bigger impact in the future. But the challenges of finding funding and talent are slowing the pace at which startups can scale.
Creating a startup is a hard job – we know that well! That is why we decided to dive deep into the startup ecosystem to assess its health, measure its economic impact, and look for ways to make that impact many times bigger. We hope this report will be a useful guide and help other ecosystem players support startups in their journey.
The insights in this report are drawn from desk research, interviews with major players in the startup ecosystem, and surveys of startup founders and potential employees.
Recent years have witnessed a growing number of startups in all three Baltic countries. Estonia has the lead in this race with the largest number of startups (1,300+), followed by Lithuania (1,100+) and Latvia (600+).
Revenues in the startup ecosystem are now large enough to have a direct impact on each country’s economy. In 2021, they totalled EUR 1400 million in Estonia, EUR 1.8 billion in Lithuania and EUR 400-500 million in Latvia.
This also means that a significant amount of taxes is being paid into the state budgets. And employees working in startup industries are earning almost twice the average pay in their countries.
Most startups in the Baltics are helping take business culture to a new level too with their focus on sustainable business models, employee well-being, clean energy, industry innovations, and climate goals.
The report shows, however, that among the seemingly large total number of startups, only a few have reached a notable size in terms of revenue, funds raised and employees.
Clearly, startups have a huge potential to become a major contributor to the Baltic region’s economies. If we could reach the level of Israel’s startup ecosystem today, the economic impact would be five times bigger.
To raise the ecosystem to the next level, though, the Baltic countries need more very successful startups (so-called “scaleups”), potentially employing thousands of people and generating significant revenues.
The number of startups in the Baltics grows every year, but only a few manage to scale-up and become successful businesses. Sadly, a rather significant slice of the startup pie in Baltics involves companies with less than 20 employees that are still struggling “to hit the glow-up”.
We asked startup founders what the main challenges in the ecosystem are that are preventing startups from growing. They named two: the shortage of top-tier employees and shortage of funding.
People in the Baltics are entrepreneurial. A survey shows that 1 in 5 persons would consider founding a startup themselves. Working at a mature, well-known startup is also considered an attractive career option.
Small and more recently-founded startups don't benefit from such attitudes when recruiting, though. According to the survey, people in the Baltics see them as riskier employers and would require a roughly 40% higher salary to consider joining a new startup compared to a mature one.
Globally, the most common approach to shortages of talent at any startup stage is offering stock options more widely (not limiting them only to the founders).
From the employee survey, it is clear that stock options are not very widely used or understood in the Baltics, especially in Latvia and Lithuania. Only 9% of people working in startups in Lithuania said that was the main reason for joining, and in Latvia, just 2% said so.
By contrast, in Estonia, where stock options are more widely used, 24% of people who work at a startup said that was the main factor in their decision to join the company.
The employee survey also shows that the more people know about stock options, the more they consider them to be important when joining a startup.
This is especially relevant for startups that seek to attract the types of talents that are in highest demand in the Baltics: C-level executives and IT and engineering specialists. The study shows that these are professionals who know quite a bit about stock options, can understand their value, and might even have a financial cushion enabling them to go with a lower salary and a good stock options package.
Stock options for employees are also an essential ingredient for the long-term success of the ecosystem. In the event of a major success - say an IPO or an exit - employees can earn a large amount of money from shares they own, allowing them to become angels themselves, invest in other startups, and mentor others… sparking a so-called flywheel effect.
Since 2017, venture funding in the Baltics has increased dramatically. The speed of growth in funding has accelerated as well - it takes less time to move to subsequent rounds. But funding options are still listed as the predominant challenge in the Baltics startup ecosystem.
One of the study’s most interesting findings is that resilience and persistence play a huge role. It takes on average about 23 approaches to sources of venture capital to get funding – more persistent startups ultimately do get funded.
In addition to that, having a serial founder on the team correlates with greater success in attracting funding: 65% of startups that attracted funding in Estonia, 58% in Lithuania and 59% in Latvia had at least one serial founder on their teams. Having a serial entrepreneur on the team also correlates with successfully attracting foreign funding, which becomes very important as startups get more mature and need larger amounts of money to grow.
The clear implication for young startups is that you need to grow your network so you can ask for help and mentorship, and, ideally, invite a serial founder to join your founding team. That would increase your chances of success significantly.
This discussion also highlights the importance of networking and know-how in the startup ecosystem. Creating more opportunities to network and exchange knowledge with serial founders would benefit the entire system. The work of startup associations like Unicorns Lithuania, Estonian Founders Society and others are very important in this regard.
Interviews with startup founders showed that Baltic startups are in the unique position of being in direct communication with the authorities and being able to affect policy-making processes in the Baltics.
But engagement with local policy-makers is no longer sufficient for the startup ecosystem, as digital markets are increasingly regulated by EU legislation which is drafted and debated in Brussels. One notable recent example is the General Data Protection Regulation (GDPR), which has had a huge impact on all businesses globally.
Therefore, startups that want to grow beyond the limits of the Baltic states and establish themselves in global or EU markets need to not only follow EU digital policy but also actively participate in EU legislative processes themselves.