Start-ups are playing an increasingly important role in the Estonian economy – about 550 start-ups are operating in Estonia, paying more than 3,700 people an average of around 2,200 euros a month in earnings, and employing hundreds of people outside Estonia.
The impact of start-ups on the economy will probably soon become defining because their growth rate is many times faster than that of established companies. Start-ups are the main drivers of trends on the job market and pose new challenges for the education system and society. As Estonia is a promising place for start-ups, talented people are also gravitating here from other countries and our own top brains do not have to leave the country to find employment. The innovation spawned at start-ups takes us a step closer to a knowledge-based economy. It is no wonder that interest in investment into start-ups is growing: last year, a record 330 million euros was invested into Estonian start-ups.
But to get investors – whether they are friends and acquaintances or business angels – to want to put their money into start-ups, they have to believe in the business model. That immediately brings up the question of how to view a business where economic results cannot be used to gauge the company’s potential? Rapid growth is encoded in the DNA of start-ups and fast growth usually means being in the red for a while. So a start-up does not have much to show at the outset besides a brilliant business idea and belief in it.
How to sell trust?
Start-ups, then, are operating in a dark room, figuratively speaking – they do not know exactly what their customers need but rather are testing the market and product and at some point they usually suffer setbacks. That means the two key factors for gaining investor trust are the executive and the team. It is the team’s experiences and specialised knowledge and the leader’s capability to keep people’s motivation high that give – or don’t give – investors confidence that the start-up’s business model will be successful. If a team is capable of learning fast, including what works and what does not, it has vitality and that is what backers want to see. Telling the company’s story is also very important – it is possible to “sell” the team and its skills even if there is no product to show yet.
Something else that really contributes to success is being able to achieve the lead position in the respective field. Being tops in a market is a big advantage because it comes with media coverage, essentially free marketing. That in turn means better opportunities for finding funding, talent and business contacts.
Products and services beyond people’s dreams
In broad strokes, it can be said that start-ups create needs the market does not know about yet. A good example is the producer of Estonian electric cars, Nobe. Electric cars are not new, but Nobe is: it has three wheels and a striking retro look. Last September, Nobe raised more than 250,000 euros through the FundedByMe investment platform in Sweden, the prototype for the car is ready, and the first customers have placed pre-orders. Will Nobe be a success story or not? No one knows – there has not been such a product before.
I hope Nobe does not fall into the trap of offering a convenience product that is not what people really need. To avoid this trap, you have to ask yourself: what problem are you trying to solve by developing your product or service? Why should anyone pay money for it and how many people can afford it? The Estonian start-up Creatomus has succeeded in answering this question. With a clientele of real estate developers, Creatomus is not a construction company but a tech company that deals with optimising the residential building construction process, from planning of details to the start of construction, reducing bureaucracy and time expense by at least one-third. This solved a major problem in this field, and that has ensured rapid growth for them.
Start-ups also “feed” the traditional economy
Rapid growth is a natural part of the development of a start-up and their needs grow apace. Among other things, that means business opportunities for businesses in the traditional economy such as business advisory service providers and law offices. Our experience at Grant Thornton Baltic shows that consultation for start-ups “forces” us to learn and tackle topics such as AI – machine learning – and blockchain technology. Thus, there are two benefits for us as a traditional business – besides selling services such as accounting, company valuation or financial forecasts, we can also amass much new knowledge. And knowledge, of course, is one very important resource for ensuring growth and sustainability.