Why African startups may soon move to Estonia

The African startup ecosystem is seeing a period of consistent and sustained growth, with funding rounds on the increase year-on-year for the past five years.

In 2017, total funds raised  was $195 million, it increased by 71.5% in 2018 to reach $334 million and grew by another 46.7% totalling $491 million in 2019.  The graph figure below shows the annual growth in the number of funded startups since 2015.

Despite these impressive numbers, Africa has one of the lowest unicorn per  capita ratio in the world. This has led credence to some views that the African environment is not viable enough for the region's innovative founders. The regulatory bottlenecks, security issues and general instability make scaling and growth very difficult and founders have to find innovative ways around these externalities, whilst also trying to grow their startups.

This is why incorporation is important. It is a fundamental question that must always be considered by any founders; where you set up your company may make or mar your chances of success. This is why a lot of founders and teams have begun moving their startups outside Africa.

Big names like Flutterwave, Paystack, Andela and Paga to name a few, are known startups that have chosen to be incorporated outside Africa. In fact, most startups that choose to be domiciled outside Africa, roughly 70%, choose the USA. Delaware, California and New York are some of the most popular choice destinations for these startups.

Beyond all these known destinations however, a name that has been getting a lot of attention is Estonia.

Why is Estonia becoming a choice destination?

Estonia is a small landlocked country in Europe, with a population of roughly 1.3million inhabitants. Estonia does not have any key industries or significant mineral resources, so the government has invested heavily in information and communication technology. The Estonian government for instance, openly embraced blockchain technology, with a digital signature system meaning the entirety of the country’s public services are available online.

The country is home to over 1000 startups growing at breakneck speed. Two new unicorns have emerged this year already, taking the total to 7 and elevating it to the top in unicorn per capita in Europe.

• Skype
• Playtech
• TransferWise
• Bolt
• Pipedrive
• Zego
• ID. me

The Estonian government has also helped startup companies to promote innovation, through corporate tax exemption. If profit reported is reinvested, and not distributed as dividends, it is exempted from corporate taxes. The ratio of government debt to GDP,  at 9.0% is by far the lowest among EU countries.

With regards to financing, Estonia ranks well above a lot of its peers too. Estonia has attracted a relatively large inflow of venture capital, surpassing the UK and Finland, and second to only Sweden in Europe. According to the Estonian Investment Agency (EIA), 92% of the capital invested in startups between 2006 and 2020 was from overseas, mainly the US and other parts of Europe.

There is also the government owned KredEx which supports startups by offering preferential conditions for loans and credit guarantee. KredEx, with financial institution ALTUM, operates and manages the Baltic Innovation Fund, the largest fund-of-funds investment initiative in the Baltic States. Through this fund, Estonia owned KredEx invests in venture capital funds to help their financing. It also invests in startups directly, especially those in their early stage, through its subsidiary SmartCap.

What does this mean for African founders?

Estonia is providing the regulatory, tax, financing and supporting environment that startups need to thrive; and African startups are no different. Statistically, African startups will have a greater chance of becoming unicorns in Estonia. Estonia’s startup space is an ecosystem where founders can get almost every service and support they need with these services being accessible with minimal time spent.

Through its e-residency program,  Estonia has well earned its designation as an “e-country”.

E-residency is an initiative by the Estonian government that seeks to achieve a“transnational digital identity that anyone in the world can apply for”. E-residents have access to the Estonia business environment and can use public e-services through their digital identity. This digital identity is a means of identification using digital signatures, so owners can safely identify themselves and make use of Estonia’s digital services.

Once the ID is received, which normally takes a few weeks, it enables the holder to immediately start building within Estonia’s ecosystem. For African founders, this could prove a massive springboard for their startups. This would essentially mean breaking into the European Union market and having access to 26 European countries.

E-residents, from any part of the world, don't even have to worry about travelling and can operate their businesses from wherever they are.Through this E-residency ID,  African founders can digitally sign contracts and other documents., be connected to Estonian banking, support and financing systems.

The support systems provided by Estonia are immense drivers for growth for any founder. African founders can essentially be digital nomads, having their companies be incorporated in the EU without the need for a physical presence. They operate like a standard EU company, with all the attendant incentives and benefits. Startup applications will keep growing and there is no doubt that at this current trajectory, Estonia will have one of the largest concentrations of startup founders from Africa.

Final Thoughts

Judging by its concerted effort to woo founders, it won't be long before African founders move to Estonia in large numbers. Factors like taxation, a favourable regulatory environment, funding, government support, access to the EU and a maturing ecosystem are a big attraction to any founder.

It should be noted that some Africa focused startups are already based in Estonia. One such company is Planet42, a South African car subscription company incorporated in Estonia. The company recently raised $10million to expand its operations and growth efforts.

The truth is African founders prefer to have their base of operations and market in Africa but be incorporated elsewhere, due to the relatively favorable conditions. Getting these founders to stay in Africa will curb capital flight, brain drain and boost the economy. African countries need to embrace the internet culture of Estonia, as innovation will only thrive in an enabling environment.