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The Ecosystem: e-residency draws start-ups into Estonia’s orbit

Author: Ian Mundell, Science | Business Estonia’s e-residency scheme is not just for digital nomads. Start-ups with new technologies are also taking advantage of what it has to offer.

E-residents of Estonia: the co-founders of Smobya, from Budapest, with CEO Lidia Kuti far right.

Estonia’s digital residency scheme makes it possible for anyone, anywhere in the world, to acquire a legal identity in the country, and to start and operate an Estonian company remotely. This is popular with digital nomads and entrepreneurs from outside the EU who want to trade as Europeans. But the system also works for technology start-ups, helping them get around bureaucratic barriers at home and access Estonia’s dynamic entrepreneurial ecosystem.

Triinu Lukas, chief executive of the Beamline Accelerator in Tallinn, has first hand experience of how e-residency supports the development of start-ups formed by people based outside Estonia. Beamline grew from efforts energise the clean technology ecosystem in Estonia and now offers mentoring and investment to cleantech start-ups from around the world. Several teams have used e-residency to set up companies after being accepted into the accelerator.

For some, it is how they join the programme in the first place. “We can’t invest in companies from outside the EU,” Lukas said. “They are free to choose which European country to incorporate in, of course, but since it is so easy in Estonia, that is a frequent choice.” This was the case for two companies passing through the accelerator in 2022: Trashify, an Indian team working on a smart waste management system, and AgriEye, a Ukrainian team applying artificial intelligence to satellite data to make agriculture more sustainable.

There are also teams from inside Europe which find that e-residency and forming a company in Estonia company offers advantages over their home country. Once an Estonian company gets off the ground other options open up, such as the ability to apply for Estonian grants and engage with the country’s start-up ecosystem. “When we look at angel investors, for example, they often invest in their own locations, which are more familiar to them and more tangible,” Lukas said. “We hear that many start-ups from neighbouring countries are interested in incorporating here, since we have a more active network of investors in Estonia.”

Estonia is seen as a good place to put new cleantech products through their paces. “If you are thinking about electric mobility or the electric grid, then it is easy to validate the idea and the product in Estonia, and then export,” said Lukas. Trashify is planning to do this, bringing its physical operations to Estonia to develop the system further and then take it back to India as a proven product.

From Budapest to Tallinn

Faux leather start-up Smobya was introduced to the Estonian system through its participation in the Beamline Accelerator. Based in Budapest, the team was looking at options for setting up a company when it first travelled to Estonia in March this year. “We realised how common it is for people from other countries to use e-residency, and how easy the Estonian system is to use,” said Lidia Kuti, co-founder and chief executive of the company.

This contrasted with the situation back home. “In Hungary there is more bureaucracy, more legal processes that you have to go through, and a lot of paperwork that you still have to print out and sign. And as a start-up, being able to do everything online is a great way to make your life easier.”

Smobya was also attracted by corporate income tax being set to zero in Estonia for companies retaining or re-investing any profits. “That’s a huge advantage, and I think that quite a lot of start-ups are taking advantage of that option,” Kuti said.

So the four co-founders all became e-residents and set up Smobya as an Estonian company. They pay a service company in Tallinn, which provides a physical address and accounting services, but otherwise operate from Budapest. That sometimes creates administrative challenges, but these are manageable. “There are some issues where we always take a closer look, to make sure that we are doing everything right and we are aligned in both countries, but the benefits still outweigh the challenges for us,” said Kuti.

Smobya graduated from the Beamline Accelerator in June and is looking for seed funding. So far, investors are not fazed by talking to an Estonian company that works out of Budapest. It may even be an advantage. “Investors can see that you know your options, you are being careful and taking care of your company, and not spending that much money on administration and paperwork,” Kuti said.

Being part of the Estonian ‘brand’ is another plus. “What you read in the news about Hungary, and the image of Hungarian bureaucracy, that is not always a great light for us to be seen in, as a start-up,” Kuti said. “As for Estonia, everyone knows it has a lot of unicorns, the digital ecosystem is super-hot, and a lot of start-ups are going there to be part of that digital nation. That alone is a positive thing.”

While companies such as Smobya are not physically present in the Estonian start-up ecosystem, they are made to feel a part of it. The administration stays in contact, follows up on progress and arranges special events for e-residents. This ensures that Estonia is high on their list for the future.

“When it comes to setting up a production facility, we would definitely consider Estonia,” Kuti said. “It has a great location, an innovative ecosystem, a predictable economy and skilled labour, and these are all important factors when you are looking for a base, or to expand.”

Working from the cloud

Soumya Kanti Datta chose e-residency in Estonia because it would allow him to run his company Digiotouch remotely while on the move. At the time, in 2018, he was a research engineer at the Eurecom digital sciences research centre at Sophia Antipolis, but setting up under the French system felt cumbersome compared to Estonia. “The administrative part is easy in Estonia, so you can focus on the business, your networking, your partnerships, and delivering the solutions that actually bring in money.”

Being digital and mobile also fitted the company’s mission, which is to apply cloud computing and internet of things technologies to the digital transformation of industries such as manufacturing, agri-food and healthcare. “We take part in collaborative projects under Horizon 2020 and Horizon Europe, create technological solutions through these projects, and then take them to the market,” Datta said.

Running a software-based business means that Digiotouch is not tied to a particular physical location. Cloud infrastructure can be accessed from anywhere, and hardware required for projects, such as monitoring devices, is usually supplied by partners. Hiring staff has also proved straightforward. “If you figure out the tax residency, then it is easy to employ people though the Estonian company.”

This approach has worked well for Digiotouch, but now Datta is thinking of expanding. “We have two products coming up, which will go live at the end of October, so we plan to start hiring in Estonia for that scale-up.” One reason is to focus the initial stages of this growth on the Baltic and Nordic states, but he is also impressed by the local talent. “The people there are very adaptive in terms of writing software or managing software projects.” At the same time, he plans to create a sister company at Sophia Antipolis in France, to develop a western European presence and draw on the highly developed labour pool there.

Entrepreneurial nomad

Santiago Cartamil turned to e-residency after a frustrating year trying to establish a start-up in Germany. Originally from Spain, he had completed a PhD in nano-electromechanical systems at TU Delft in the Netherlands, and this work had suggested new ways to use graphene to build screens and displays.

He found the facilities he needed to advance this idea in Germany, but the administrative hurdles for setting up a tech-based company to take on the project proved too high, especially for a non-native German speaker without a business degree. “I think I’m quite creative, and I took some courses, but in Germany that was not enough,” Cartamil said.

Then, on honeymoon in 2018, he remembered hearing about Estonia’s e-residency programme. A few minutes on a smartphone and his application was in, and a couple of weeks later Cartamil had his e-resident’s card. He set up his Estonian company, Scale Nanotech, not long after.

Cartamil’s plan was to use Scale Nanotech to advance his graphene project in Germany, but then events took over. He put in a bid to the Attract Programme, an initiative under Horizon 2020 applying fundamental research results to the development of novel detection and imaging technologies and was successful. “When I registered the company, I just wanted to give it a try, fail fast and move on,” he said. “Then, after two months, I received this grant and suddenly I had money. I could start developing my technology and paying myself.”

Cartamil formed a partnership in the Gimod project with Graphenea, a graphene factory in San Sebastian, Spain. The grant was paid to Scale Nanotech in Estonia, and he continued to work in Germany, where he had set up as a small trader to handle local administration.

While this arrangement has worked well, it is showing signs of strain now that the technology is moving to the next level. Cartamil has just won a €2 million grant for a follow-up project Megamorph under phase 2 of Attract. This project involves a bigger consortium and will mean hiring some staff, which he feels will be complicated under the present business model.

But beyond that Cartamil thinks that this set-up is not the right one to take the technology to the market. “As a one-man research company, I can carry out R&D and run public projects, but a robust company to commercialise a product, that is something else.”

He plans to set up a new company in Spain that will be able to hire staff locally to help him run the project and, eventually, bring the graphene display technology to the market. Being an e-resident with an Estonian company should make this transition relatively painless. “I don’t need to move Scale Nanotech, I just need to register myself as a freelance in Spain, and that’s it.”

Cartamil did consider setting up a physical company in Estonia, but ultimately found the opportunities in Spain more attractive. And while not active in Estonia, Cartamil does feel connected to the country’s start-up ecosystem, visiting regularly for business and to talk to universities and others about the way he is working. “I think e-residency and similar programmes are an interesting opportunity for universities and other ecosystems to maintain links with the scientists they train, or to attract new talents,” he said.

It could also benefit entrepreneurial researchers. “Most researchers are linked in some way to infrastructure in universities and research centres, and that limits their options. Having the flexibility to move to other infrastructure if the conditions suit them better would help them, and force universities to open up their infrastructure more to start-ups,” said Cartamil.

This article is originally published by Science | Business HERE.


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