DotEEBubble is one of the most controversial startup blogs in the world and you’ve probably never heard of it. In the rah-rah world of entrepreneurs, accelerators, and incubators, it’s rare to see much talk about the problems with the government-funded VC model and how the biggest players look more like scamsters than bootstrapping entrepreneurs. That’s just what this blog is – a cold, hard look at the problems that come when you throw big money at little ideas.
The blog, written by an anonymous commenter in Estonia, is a cross between a research-heavy economists report and a jeremiad against what looks to be a EU-funded startup bubble. With excitement rising about ventures throughout the EU, the site’s calm, reasoned take on Estonia’s darlings is stirring up quite a bit of controversy in the small country.
One startup that we prominently covered, Fits.me, a clothing fit “startup” that uses robotic mannequins to show you what clothes will look like on your body, took 3,773,456 euros of government money over the past few years. The company has been in business for seven years in total and its customer implementations are either well-hidden or nonexistent. In short, the company looks like a dog. DotEEBubble writes:
The blogger who runs the site refused to be named in this piece but he took a bit of time to explain his methodology, his beliefs, and the reasons behind his thorough takedowns of what he sees as excesses in the Estonian startup market. It would be interesting to see a similar tack taken in other markets. His model could be exported but it’s clear his style and intensity can’t be matched.
John Biggs: Why are you doing this?
DotEEBubble: Many in Estonia have been trying to pitch the country as the “startup nation,” but the details paint quite a different picture. In talking with some other business people in Estonia, I started realizing a lot of this is not quite what they make it out to be. A lot of the startup community and companies are propped up through taxpayer money, much of it from the EU.
What’s worse is that no one in the media was bothering look under the covers to realize how much of this was built through public funds. I decided to start the blog to bring some of these companies to light.
Estonia receives a massive amount of EU funding (more than 18% of the 2012 budget), and I think they’ve chosen to spend too much of it on risky startup companies and startup incubators. It reminds me of the .com days in the US in the late 90’s, when there was too much money chasing too few good ideas. The difference is that in Estonia, the money is coming from taxpayers and not private investors.
I would not be so critical of this use of public funds if everything else was going well in Estonia, but it’s not. Estonia has the lowest GDP (per capita) in the eurozone, and its people are the second poorest among eurozone members when measured by assets held per person. There is a television show (Kodutunne) on an Estonian television channel that is similar to Extreme Makeover : Home Edition in the US. They pick out a needy family in a rural area and renovate their house. The difference is that in the Estonian version, most of these families live in homes without indoor plumbing or hot water! It’s unconscionable that there are people living in these conditions while at the same time the government is giving millions to risky startup companies. I think they need to reconsider their priorities when it comes to public spending.
It was eye-opening what we uncovered. In one case, a company set up in both Estonia and the UK at the same time, in order to take advantage of taxpayer-funded support intended for companies in each region. Another company we wrote about got millions of euros, over the course of many years, to fund robotic mannequins.
In many cases, the companies that received government money were being run by people with no experience in the field. We wrote about an incubator for gaming startups, where none of the people running the incubator had ever worked in the gaming industry! Then there was the incubator that received nearly 700,000 euros from the government to set up in a small town of 20,000 people to promote creative arts startups, which as far as we can tell was just a few women making dresses and jewelry.
We also wrote about a private equity fund with more than 100 million euros under management, that received over 100,000 euros from the government to market their fund abroad. Do they really need this kind of aid?
The main criticism is this is all being done with taxpayer money. If private investors want to spend their money on these companies, that’s fine with me. That’s how it seems to work in almost every other country.
JB: Who are you?
DEEB: There is more than one person behind the blog, though I am the primary author of most of the posts. I own a successful Estonian software company, and we built it through hard work and without government handouts. I’ve been in the tech industry for many years, so I was around to witness the dot-com crash in the US that happened a number of years ago.
None of the people behind the blog have any stake in any of the companies profiled on the blog, so we have nothing to gain or lose when these companies do well or poorly. I like to see startups in Estonia do well, which is why I mentor some companies and also give training sessions. I never accept any payment or stake in the company for it. It’s my way of giving back to the community.
JB: What can governments do to fix these sorts of problems? Should they be investing at all?
DEEB: One of the co-founders of TechStars, Brad Feld,wrote a good post about why the government should not be in the incubator business, and I agree with him.
As for the government investing in startups, I can only see it being necessary in rare cases, like in cases where there are externalities involved that benefit the public. One example would be a new type of clean energy technology that may not be profitable on its own, but with environmental benefits to society that make it worthwhile.
This isn’t what is happening in Estonia though. The companies we have profiled on our blog include a social network for household pets, and a browser-based e-book reader. The government shouldn’t be wasting money on these types of ventures. By our estimates, the largest investor in Estonian startups in 2012 was the taxpayer. They poured more money into Estonian startups than all private equity combined.
Some will say that the reason the government is stepping in is that there is no private equity market. I disagree. Good ideas will always find funding, and there’s even an Estonian Venture Capital Association with plenty of members.
JB: What is the primary problem in the .ee environment? Is it widespread?
DEEB: Imagine opening up the newspaper every summer and reading about how many schools will not open their doors again in September due to lack of enrollment. That’s actually what happens in Estonia.
The Estonian population is rapidly declining, through a mix of emigration, low birth rate, and low life expectancy. It ranks 228 out of 232 countries when it comes to population growth. Net emigration last year was over 6,600 people, and the majority of those were people in the 20-34 age group i.e., people in their prime working years. This may not seem like a large number, but Estonia is a small country with a population of less than 1.3 million. Last year, the total number of students in 12th grade was 7,810. Imagine if 85% of all fresh high school graduates in the US left the country the day after graduation, and that gives a better idea of the impact.
The government isn’t doing much to address the problem, though I think this is common in many countries with long-term demographic problems. It’s easier to ignore it since the impact is not immediate or sudden.
Admittedly, it’s a tough problem to solve. My theory is that a lot of the emigration is driven by quality of life issues. That’s not easy to fix, but throwing money at startup companies does not seem like the solution.
JB: Are people mad at you?
DEEB: The main criticism we receive is that the blog’s authors are anonymous, but I think this is from people eager to attack the messenger because it’s difficult to attack the message. We’re very careful with our fact checking and post links to our source material.
As for the reason we’re all anonymous, it’s important to understand that Estonia is a small country, and all members of the startup community could easily fit in a high school auditorium. The community is too close-knit to write what we do any other way. Besides, none of us need the fame. We’d rather readers focus on the message not the messenger.
Other than the criticism about anonymity, the feedback we’ve received has been quite positive, and readers tell us that this is the first time anyone has bothered to analyze the startup community in Estonia with a critical eye. We’ve heard that many high-ranking Estonian government officials are regular readers of our blog, and it’s also required reading in some entrepreneurship courses in Estonian universities.
JB: So what do you like in Estonia?
DEEB: Estonia is a great place to first launch a new product or technology, because the country’s small size makes it easy to implement. For example, let’s say you’ve come up with a personal finance tool that requires access to the user’s spending details from their bank account. In Estonia, there are only five consumer banks, so it’s easy to set up those relationships since you only have to talk to five banks.
One cool thing in Estonia is how the government is so open and online. It makes it easy for people to track what’s going on and get information. In fact, so much data about government spending is online that if we can’t find information about government spending on a project after 5 minutes of searching, then that’s a sign that the project manager may be trying to hide their spending, and it makes us more likely to write about them.