Thursday, August 04, 2016

The Estonian E-Miracle, Day 2

We headed into Day 2 of the journey through e-Estonia with our heads still reeling at the extent of the innovation and the possibilities.

Selling the Estonian E-Miracle
So, it was perfect that we had a chance to sit down with Indrek Pällo, the Director of Estonian Investment Agency at Enterprise Estonia, and the guy charged with actually taking this “product” and selling all of this globally.

He’s tasked with attracting jobs, direct investment, helping to create export markets, and increasing e-residency.  Like almost any marketer, he faces the challenges of Awareness and Perception.

On the pro side, what Indrek has going for him is a country where doing business is easy, the IT education and training is very strong, English is essentially a 2nd language, taxes are low, and work ethic is high.

Estonia ranks 13th among economic freedom, has top credit ratings from the various agencies (we’ll leave out “The Big Short” wisecracks here), 80% internet usage and a per capita GDP of 13, 210 Euros.

They have more startups per capita than any country in Europe and are #2 in the world behind Israel, so innovation is deep in the DNA.

On the con side, what Indrek has going against him is a location challenge (not super central) that is exacerbated by its neighborhood (read: Russia) and a small market/employee base.

And bigger than all that, is an awareness problem globally that Estonia is truly the “real deal” or perhaps, better said, that Estonia is even out there as an option.

Still, all that notwithstanding, Estonia has managed to become a regional center of excellence for offshore work for Swedish, Finnish, and Danish companies. They have no desire to become a low-cost center like India, for example. Not only because of the economics, but because of the scale. 

For example, if a huge company shows up in Estonia and says, “ok, we need to hire 2,000 people,” that’s not necessarily a good thing…initially.  They just don’t have the (talented) bodies. So they either need to attract them (see or grow them…which takes time, the technical universities of Tallinn and Tartu are leaders in that respect.

Indrek’s team is more likely to say, “let’s start with 40 or so and see if it makes sense.” They are looking for highly-skilled jobs in InfoTech and mechanical engineering, not vast numbers.

 It’s a different mindset.  Think Navy Seals versus a battalion.

When companies think “regional hubs” or “easy to do business,” they might think Singapore, London, Berlin, Dubai. 

With 15 salespeople (essentially) worldwide, Indrek’s job is to change that and he and the team are on their way.

They were responsible for generating over 20% of the total foreign investment in Estonia in 2015.

Still his job won’t be done until Estonia is listed as #1 in “Top Global Places to Do High Value Knowledge Work” (not sure that’s a real index, but you get the gist).

The “Estonian E-Miracle” story needs to be known by far more business leaders than it is right now.

X-Road at the X-Road of the Estonian E-Miracle
We then had a chance to go deep into the heart of what makes the Estonian E-Miracle work. That would be the X-Road system.  Developed at a cost of 50 million euros (compared to the 2 billion that Finland has spent and the 20 billion that the UK has spent—and which aren’t done), it is the core plumbing, if you will, that connects all of the government services with each other in a secure way.

Built by a company called Cybernetica, and led by CEO Oliver Väärtnõu, it “create[s] a secure and standardized environment for interconnection or enabling data exchange between a multitude of different information systems.”

Simply put…it makes Estonia work as smoothly as Estonia works.

The technology is peer-to-peer, which means that there is no central server or data center that is vulnerable to attack.  It works over the public internet, so there’s no private network that needs to be maintained. It is decentralized. 

As Oliver says, “X-road was build to support the democratic process.”

With X-road (or as Cybernetica now sells it to other countries the Unified eXchange Platform), countries (or cities/municipalities) have the ability, as Oliver says, to “create government e-services…or just leave it in the corner or use it as a hammer. Whatever they want.”  But they have the technology to make government really work well and serve as an enabler.

That’s a ridiculously powerful concept and so foreign to most of the world…but it’s the essence of modern Estonia.

And now, Cybernetica is bringing it to the rest of the world, along with their other cutting-edge solutions in border surveillance (they help protect Estonia’s eastern front), maritime radio communications, and visual aids to navigation.

These guys are HARD CORE.  Of their nearly 120 employees, over 80 are involved in R&D and Oliver says that “this is the lifeblood” of the company.

In fact, 20% of the employee base is in a separate business unit that is a non-profit R&D function. That’s how committed they are.

It has been since Soviet times, actually. The institute was founded in the 1960s to do basic research and was actually responsible for many contributions to Soviet technological development.

Through a unique partnerhip with the government after independence in 1991, they were able to continue and then, in 2000, management bought the company from the government.

As we spoke w/Oliver, I felt like we were at the absolute epi-center/ground zero, if you will, of the e-revolution that should impact government entities around the world. (Bonus points if you can zoom in on this picture and figure out what is printed on their walls).

Exploring FinTech
We also dove deeper into the Estonian start-up entrepreneurial scene, having two meetings with FinTechs startups Funderbeam and Fundwise. [FinTech is shorthand for Finance Technology]. These are companies that are either seeking to seriously disrupt the way that banks and financial institutions do their business or significantly improve it.

Mads, the CMO of Funderbeam, is a man possessed by a passionate vision…namely, start-up investing shouldn’t be limited to the rich and connected. It should be democratized and available to anyone who wants to put in a few hundred or thousand dollars. Joined at the end of our meeting by Bjorn, a native Minnesotan, successful Jobbatical placement, and Sprinklr fan who saw my Swarm check-in, I couldn’t help but think that we were getting a sneak peek into the future of a part of finance.

Instead of a few, well-placed and well-connected investors putting tens or hundreds of thousands of dollars using a heavily paper-based process, Funderbeam sees a world of Kickstarter-like projects, but instead of an item or experience, you get shares (sort of) in the company. 

Led by syndicates, you can find a company that looks promising, put your money in (I’m leaving out some details), but you get a “token” that is cryptographically secure and backed on the blockchain, representing your interest.  And the best part?  These tokens can be traded freely. So, unlike most early-stage investments, you don’t have to wait for an exit or spend a lot of time looking for a buyer of your portion of the company.  You float the “tokens” and sell them on an exchange.

Think Nasdaq for any private company.  Not so surprising since their CEO, Kaidi Ruusalep, is a former Nasdaq Tallinn official.

My only issue with Funderbeam? As an US citizen, I can’t participate in it…yet. SEC/IRS laws make it really difficult. Aaargh!

Attacking the challenge, albeit from a slightly different angle is Fundwise. The CEO, Henri is working with the Estonian business registry to simplify the process of crowdfunding private companies. There’s a pretty nice video on their website.

These two teams were a microcosm of the entrepreneurial energy that is sweeping the country.

Is everything perfect?
Of course not.

I failed miserably in my effort to set up a bank account. My mistake was in not registering a business first. Fortunately, the law has changed that in-person visits to the bank will no longer be mandatory and later this year, I should be able to fix that via Skype.

Still…what you have here is a country that is “digital by default,” is committed to innovation, has a need for innovation for both economic and security reasons, and has created, and this is perhaps the most important thing…a culture of innovation.

Overall, we had 9 meetings in the course of two days. It was pretty action packed, but as my friend Jacob said before I left, “there’s value in immersion.” 

And indeed there is.

If you are fascinated by innovation, technology, geo-politics, or having it stay light until 10pm in the summertime….Visit Estonia.

Notes: Click here to see the entire e-Estonia itinerary.

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