Incubation in Entrepreneurial Ecosystems

12. Estonia

Abstract

While Estonia does not have a flagship incubation support programme at the national level, it is nonetheless home to an impressive number of incubators and accelerators given its size, which often benefit from national, local or EU funding. A standout feature of Estonia’s incubation system and overall entrepreneurial ecosystem is its international orientation, with policy excelling both in attracting incubators, investors, startups and talent from other countries and also in enabling Estonian startups to go global.

Overview of incubation system

According to Startup Estonia’s ecosystem dashboard, there were 23 active incubators and accelerators in Estonia as of May 2024.1 This is a relatively high number for a country of 1.3 million people. Among them are large international operators – such as the Creative Destruction Lab and Tenity – as well as smaller, home-grown incubators, such as Startup Wiseguys. In some cases, these home-grown initiatives have gone on to become international.

Most incubators are located in Estonia’s two largest cities – the capital city Tallinn and Tartu. The incubators that are based around these two cities benefit from the presence of education, training, and research and development facilities and a critical mass of financial and business capabilities. Few towns in other parts of Estonia have sufficient scale for generating tech-based entrepreneurship.

The larger and internationally active accelerators in Estonia generally offer different programmes at different stages of startup development, as well as sector-specialised programmes. Smaller, regional incubators tend to provide more basic programmes.

Most of the incubators and accelerators operating in Estonia are multi-sector but a number do focus on specific technologies or sectors and there is a trend towards launching thematic accelerator initiatives. One example is the Health Founders accelerator, which is one of the first specialised health technology accelerators in the Baltics. Recognising the limited scope of the national market, incubators and, in particular, accelerators in Estonia have a strong international dimension, often considering potential connections with other countries, including neighbouring Baltic and Nordic markets.

The Estonian incubation system is complemented by several venture capital firms and equity investors. Along with capital, they often also provide startup and scaleup support and mentoring services. Startup Wise Guys, Changing Ventures, SuperAngel, and Tera Ventures offer investment vehicles mainly focused on early stage (seed), while BaltCap and Ambient Sound Investments are more focused respectively on buyout and later-stage venture capital. Business angels are also important actors in the ecosystem, offering support services alongside early-stage capital.

Major policies for incubation

Estonia’s incubation policy began over 20 years ago, before Estonia’s accession to the EU, when the Ministry of the Economic Affairs and Communications requested a study on the status of incubation in the country. Some incubators and accelerators already existed at that time, but a national policy had yet to be formalised.2 The policy developed over the past two decades has taken a broad approach, aiming at enabling general conditions for tech-based entrepreneurship rather than focusing on funding specific incubators or accelerators. The main policy objective in this space is to encourage and attract startup entrepreneurs and international incubators and accelerators to operate in the country and work with national players to make Estonia increasingly appealing to national and foreign investors.

A central public entity in this space is the Estonian Business and Innovation Agency (EAS), which is the main national agency dedicated to developing Estonian enterprises and to increasing export capacity, tourism, and foreign investment attraction. Its two main operational subsidiaries supporting the startup ecosystem are Startup Estonia and SmartCap:

• Startup Estonia was launched in 2016 and is the country’s main ecosystem orchestrator. It plays a key role in fostering collaboration and connections between ecosystem stakeholders and has built a positive reputation within Estonia’s entrepreneurial ecosystem. Startup Estonia also provides startups with access to information and visibility, for example through its startup database. In addition, it publishes model templates to facilitate the startup process, for example template founders’ agreements or IP agreements.

• SmartCap funds Estonian-based venture capital funds and makes co-investments with private investors. SmartCap’s commitment for an investment can range between EUR 500 000 and 5 000 000.

In parallel, important reforms have improved the regulatory landscape for entrepreneurship in the country. In 2014, the ground-breaking e-residency scheme opened up the relatively small Estonian ecosystem to international startups. With the support of the ERDF, investments in private research and development competence centres and other innovation support measures were also enhanced.

While the EAS does not have a dedicated programme to support incubators. Incubators can receive financial resources for capital and operational expenditure through national funding, grants and ERDF funding. However, access to these resources is subject to eligibility criteria. Accelerators are mainly supported through public calls for tenders, and to a lesser extent through grants and direct funding. For example, in 2024, the Enterprise and Innovation Foundation and Startup Estonia launched a tender for the development of an incubator in the field of health technology and services, whose task is to give impetus to health care innovation and lead the development of the field over the next four years.

Although SmartCap’s main activity is managing an investment portfolio, it also offers support to accelerator initiatives, usually in partnership with Startup Estonia. The delivery often happens through public tenders, an example being a EUR 700 000 public procurement for a science accelerator in 2022. In addition, SmartCap commissions studies which can guide the development of Estonia’s incubation system and policies, such as its 2024 research on deeptech business accelerators and its 2020 survey of Estonian startups’ investment needs.

Conclusions and lessons for other countries

The Estonian incubation system has developed significantly over the last two decades with the twin aims of promoting startups based on Estonian research and innovation potential and attracting ventures to Estonia. Other small, open economies can draw inspiration from Estonia’s success in creating global scaleups and unicorns and fostering the development a dynamic entrepreneurial ecosystem over a relatively short period of time. Policy lessons from Estonia pertain not only to its but also its wider startup globalisation policy. The main takeaways include:

• Efforts to co-ordinate policy support and create a cohesive incubation and acceleration system have been key to maximising efficiency and synergies. The creation of Startup Estonia with a specific co-ordination mandate has played an important role in improving national policy co-ordination. Although relatively small, the agency has established co-operation lines with other players, creating a sense of coherence and inclusion in the system. It has also steered the emergence of new incubator and accelerator initiatives towards specialisation in targeted fields.

• The Estonian system is not designed around a single ‘ideal’ incubator or accelerator. Private-sector accelerators co-exist with public or quasi-public entities, such as science and technology parks and universities. This allows for a diversity of support options for startups and scaleups and enables new approaches to be tested.

• Estonian policymakers have paid particular attention to building a network of experienced mentors, including individuals who developed or invested in Estonian unicorns. There is also a mechanism for matching startups with the mentor with the most relevant and specific expertise.

• Estonia simultaneously aims to support local companies in internationalising and to attract foreign players into the Estonian entrepreneurial ecosystem. The policy mix for internationalisation thus encompasses talent attraction, the creation of an ecosystem attractive to foreign founders, accelerators and investors, and the provision of support for the international expansion of Estonian startups.

• Startup Estonia is developing an ambitious data monitoring system to track the performance of the country’s startups, in partnership with DealRoom. More complete and reliable data on startup activities can strongly assist the performance monitoring of incubators and accelerators. This approach also reduces the reporting burden of performance monitoring systems on the incubators, accelerators and startups.

Notes

← 1.  https://ecosystem.startupestonia.ee

← 2.  Business incubation: review of current situation and guidelines for government intervention in Estonia. January 2003. Innovation Studies 3, Ministry of Economic Affairs and Communications of the Republic of Estonia. DOI: 10.13140/RG.2.2.36588.16009. Available at: https://www.researchgate.net/publication/312612643_Business_incubation_review_of_current_situation_and_guidelines_for_government_intervention_in_Estonia.