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The process of new venture creation – towards the booming ICT start-ups

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Estonia has enjoyed success stories in ICT implementation in a broad field of public and private sectors for last 15-20 years. The key event for that development was the launching of the Tiger Leap program in Estonian schools, 1996. The program fully equipped schools with computers and Internet access and other ICT services. Computer science classes were provided in 84% of schools in the following eight years. Since 2014 World Economic Forum considered Estonia among innovation-driven knowledge-based societies, and some years later – being hidden entrepreneurship champion in Europe. Besides, Estonia has become one of the developed start-up ecosystems where young ICT companies are booming.

These events mentioned above refer to the successful combination of educational and entrepreneurial ecosystems in Estonia. The presentation aims to disclose the role of ICT start-ups as the engine of the innovation-driven development in a small society. Case studies analyse the entrepreneurial process and journey of ICT start-ups suggesting dynamic stage model approach. This approach discloses complexity of the entrepreneurial journey from opportunity recognition to venture launch. Findings of studies show growing importance of digital technology, ICT start-ups and the entrepreneurial ecosystem in the welfare of Estonian citizens.

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The process of new venture creation – towards the booming ICT start-ups

  1. 1. The process of new venture creation – towards the booming ICT start-ups Prof. Tõnis Mets Klagenfurt, April 24, 2018
  2. 2. Estonia
  3. 3. 3 185 km Raagmaa et al 2013
  4. 4. Estonia - basic facts • Population – 1 300 000 • Area – 45 226 km2 • Currency – EURO • GDP per capita $29,500 (WB 2016 PPP), 1987: ~ $2,000 • Member of WTO – 1999; EU and NATO 2004, OECD - 2010 (Dec), Eurozone 2011 • The Wall Street Journal’s Index of Economic Freedom for 2018 Estonia ranks 7th • World Economic Forum's (WEF) Current Competitiveness Index 2016 Estonia ranks 29th • WEF 2017/18: Higher education and training – 19th • Ease of Doing Business Index 2018 ranks Estonia 12th • Networked Readiness Index 2016 ranks Estonia 22nd • E-residency law, 2014
  5. 5. Important milestones, selected facts, Estonia: • Own state: 1918-1940, Soviet occupation 1940 • „Singing Revolution“, regaining independence, 1991, disconnecting from the East • Restart of private business initiatives, 1987 • Tiger Leap program, 1996, followed by e-government – political entrepreneurship • Entrepreneurship development programs, 2000 • Estonian Development Fund: > €5M investments per year into startups, since 2006 • Member of GEM, 2012; TEA Index, 2016: 16.2 %
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  8. 8. Content: • Entrepreneurial/startup ecosystem in Estonia: http://www.startupestonia.ee/ • ICT as the source of knowledge economy • Trends in ICT startup development • Case studies: New startups and investors replacing foreign direct investment (FDI)
  9. 9. Development stages of Estonia and GDP per capita, current prices, EUR (based on Schwab 2014, Statistics Estonia 2016) 9 0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 16 000 18 000 Innovation- driven stage Efficiency- driven stage Transition from efficiency- to innovation- driven economy Recourse-based Knowledge-based Catching-up period
  10. 10. Ecosystem for development: New type of investors • Old Soviet industry was not sustainable anymore after 1991 • Estonia has been successful with FDI, but this FDI is not interested in knowledge creation (R&D) • Now: money is moving out – negative FDI balance since 2011 • Seed capital comes to Estonian startups after moving HQ to global centres • New businesses to be sold ASAP? 10
  11. 11. After-crisis developments in Estonia • Fewer employees – productivity growth in old industries • New startup programs and entrepreneurship booming • >10% of new ventures come from software field • World Economic Forum: Entrepreneurial economy in Estonia • Doubts from industrialists – support of traditional (oil shale, furniture production, etc.) industry! • Forbes: any use for ordinary Estonian people?11
  12. 12. ICT sector in Estonia (Statistics Estonia 2016, current prices) 12
  13. 13. Why ICT and entrepreneurship? Some milestones: • Tiger Leap program in Estonia, 1996 • E-governance – paper-free assemblies, 2000 • Electronic ID-card, 2002 • E-services: https://www.eesti.ee/est/teenused • Crises 2007-2009 • Entrepreneurship policy, since 2000 • The role of ICT as the engine of the innovation-driven development in a small society?
  14. 14. ICT and entrepreneurship Entrepreneurship skills should be a part of literacy – 3rd literacy after reading and writing, and computer proficiency. Anzori Barkalaja, Director of the Culture Academy
  15. 15. Number of employees by the size of software development companies 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1-9 10-19 20-49 50-99 100-249 >250 Statistics Estonia and Commercial Registry, 2016
  16. 16. Number of people employed, sales, export, profit and value added of software companies -200 0 200 400 600 800 1000 1200 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EmployedX10 Sales, m eur Export, m eur Profit, m eur Value added, m eur Statistics Estonia, 2017
  17. 17. The export-import balance of Estonian service export 2013-16, million euro Statistics Estonia, 2017 185.1 217 256.3 286 958.7 980 940.7 826.4 102 116.1 161.5 218.3 2013 2014 2015 2016 Balance ICT Logistics Building
  18. 18. Unicorns - startups from Estonia, see also: http://www.startupestonia.ee/startups http://hub.garage48.org/estonian-startups • Playtech, 1999: FTSE 250 Index, London Stock Exchange • Skype, 2002: investments $25m, acquired by eBay for $2.6 billion, 2005 • TransferWise, 2011: investments $396.4m Expected soon: • Taxify, 2013: investments $2.2m
  19. 19. The number and share (%) of entrants to ICT studies in HEIs by study years Ministry of Education and Research, 2017 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 0 200 400 600 800 1000 1200 1400 1600 06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 ICT intake ICT %
  20. 20. Investments into Estonian startups, million euro martin@garage48.org, 2018
  21. 21. Ecosystem and welfare: concluding remarks • Statistics Estonia: GDP growth from software • Highly paid jobs in ICT/hitech startups => jobs in traditional sectors • Conclusion: Integration of Estonian and global entrepreneurial ecosystems? • Warning signal: not following national smart specialization strategy, government compromises the future of innovative knowledge-based Estonia 21
  22. 22. Main conclusion In the socioeconomic context, Estonian ICT startups remain a success story, not depending on the venture capitalist or traditional industrialists’ view
  23. 23. Some examples ICT+
  24. 24. 24 Click&Grow (C&G), inventor of intelligent houseplant pot Mattias Lepp, 2009 Experienced IT entrepreneur, participant of “Brainhunt” • Pre-history: own software development company • Opportunity recognition: from inception, based on product idea from NASA • Globalization: USA, United Arab Emirates, Russia, Great Britain, Germany, France, Sweden, Canada, Brazil, China and Japan • Funding: Estonian venture/angel capitalist already in the intial phase of product development, Kickstarter campaign • IP portfolio&strategy: Patenting; involving university researchers; involving customers in Kickstarter campaign • Competitive edge: First-mover, emotional attractiveness of the product for the customer • Bus. model and strategy: B2B; Leverage via networking with traders, no market pressing
  25. 25. From smart pot to smart garden
  26. 26. Click & Grow
  27. 27. Click&Grow • The Hands-Off Hydroponic Garden • http://www.clickandgrow.com/
  28. 28. Fits Me / Massi Miliano • Massi Miliano was founded in June 2006 by Heikki Haldre with the idea to create robotic mannequins for virtual tailoring fitting rooms. The firm started as technology developer with the support of the state agency Enterprise Estonia and private and institutional investors. • Researchers of the University of Tartu and Tallinn University of Technology were involved to development process from the very beginning; the first patent applications were dated from the year 2007. • Heikki Haldre & Paul Pällin are co-founders of Fits Me registered in London, 2009. 28
  29. 29. Fits Me, cont. • The company has designed a virtual fitting room for e-shoppers to fit and suit clothes before making a purchase in e-shops. Technical solution for that is flexible bio-robot mannequin adjusted to mimic of the buyer’s body and visualizing to a person how a piece of clothing fits her/him. In 2012 Fits.me moved headquarter to London and in 2015 it was sold to Japanese e-commerce giant Rakuten (Lunden and Lomas 2015). 29
  30. 30. Fits Me 30
  31. 31. Main facts: Fits Me • Total capital raised: 15.42 M€, 15% from Estonia • Price of sales not known, some doubts about investors’ happiness • ~50 highly paid jobs created, value added ~80000 € per employee year • 0.7 M€ taxes from labor annually • Competencies created and remained in Estonia 31
  32. 32. 32 Feature of the model Description of observed features of the journey RemarkEntrepreneurialprocesspattern (Re-shaping) Propositions Pre-incubation Experienced in e-commerce and fashion shops, Heikki Haldre initial idea is to create scanning technology for human body for tailor purposes Start-point based on former competencies Intention Interest in creating innovative technology for garment fitting services for e-shopping; founding Massi Miliano OÜ Idea, 2006; Early funding: loans Idea Development Feasibility study of technology, R&D, prototype of robot- mannequin, first tests, 1st patent application 2007 2006-2008 New Venture Idea (NVI) Idea of virtual fitting room 2008 Concept Development The concept of virtual fitting room SaaS, development of robot-mannequin, customer tests in the UK, USA 2009-10, Fits.me Holding 2009: virtual fitting room solutions on a software-as-a-service (SaaS) basis 2009, EE: €0.7m, involvement of new owners Opportunity Confidence Starting sales of services in UK, USA, Germany, Italy, Estonia 2010-2011 Business Development Continuous development with customer tests. Fit Advisor service 2013. HQ in London, 2012 Venture Launch Sales 2013: ~2.8 m€, profit 0.27 m€ declared, 57 employees Massi Miliano Post-Launch Merge of US startup Clothes Horse Dec 2014. Acquired by Rakuten, July 2015; positioning as data acquisition and analytics company 2017: Fashion IQ – insights tool
  33. 33. Entrepreneurial journey: Fits.me Venture maturity Stage Intention New Venture Idea Opportunity Confidence Venture Launch Pre-incubation Propositions Idea Development Concept Development Business Development Time P2006 2008 2012 2014 20152011 20132007 2009 2010 R&D Robot- mannequin 1st patent application HQ in London Loan: €23k Widening ownership €2.6M seed investment Acquired by Rakuten Loan+subsidy: €102k Virtual fitting room, first tests, variaty of instruments €5.5M A round investment €4.2M B round investment Merge of Clothes Horse Founding Fits Me Holding Ltd Virtual fitting room, continuous tests 1st Robot- mannequin Fit Advisor
  34. 34. Fits Me, some conclusion • In the entrepreneurial process, initial body scanner idea was replaced by bio-robotics, integrated further to the virtual fitting room. The latter was complimented with the Fit Advisor. And finally, in the Rakuten corporation Fits Me became the advisor for brand owners and retailers. This is a long journey of learning and competence development, but this is also the story of reshaping business idea and its technological embodiment. 34
  35. 35. 35 Mobi Solutions – M-business Mobile payment services (web): Fortumo, 2007 • IT & business students, Oct. 2000 – just a moment EMT (Estonian Mobile Telephone) launched mobile-parking service model => Intel (2010), Microsoft, …. • Pre-history tech-learning: 2000-2008, searching for M- service (and) business models, testing on local markets • Opportunity recognition: from inception, implementing Living Lab methodology, • Globalization: 81 countries (2014, 4 billion mobile users), 2015: digital market prognosis 268 billion US$. • IP portfolio&strategy: no special measures and strategy • Competitive edge: Easy to use; no fees (from concrete service only), 80000 developers worldwide (21.02.2013) • Bus. model and strategy: B2B; Leverage via subsidiaries and BM replication (offering own ready BM for clients)
  36. 36. Case: Mobi Solutions, mobile payment 36 Model feature Description of observed features Remarks Entrepreneurialprocesspattern Propositions Business and IT students starting their specialty; Rain Rannu had a little international & business experience Tartu, Estonia Intention Interest in growing mobile technology and business Initial idea, 2000 Idea Development ~200 different products & services tested; earning for NPD; mobile payment “Every-Man M-Business” 2003 Started on growing market New Venture Idea (NVI) After 5 years sales of different products idea to globalize the platform “Every-Man M-Business” 2006 Longer prepa- ratory period Concept Development From local to global service & business model (BM) Both models used Opportunity Confidence Local/regional OC reached very early, 2001 as service provider; bootstrapping for NPD; Global OC 2006 Two related opportunities Business Development Start without BP, from local/regional to global strategy; Fortumo’s offices: Tartu, San Francisco, Beijing, Dehli Mobi HQ: Tartu Venture Launch First products locally in 2001; mobile payment platform & BM to rent out: Global spin-off Fortumo, 2007 Serial events Post-Launch Bootstrapping from inception; profitability of Global business, 2009; sales ~$30M, 2014 Fast growth 2008-
  37. 37. http://www.mobi.ee/; http://mobisolutions.com/ Your company here?
  38. 38. Entrepreneurial journey: Mobi Solutions Venture maturity Stage Intention New Venture Idea Opportunity Confidence Venture Launch Propositions Idea Development Concept Development Business Development Time P2000 2000 P2006 Global Spin-off Fortumo 2006 2007 2013 Over 200 products tested, most launched for some period Involving Global investors International sales 2003 NPD project supported by EE 2005 Subsidiary in Latvia 2011 Office in San Fransisco Pre-Incubation
  39. 39. GrabCAD, platform creator, revolutionary of engineering industry 39 Feature of the model Description of observed features Remark Entrepreneurialprocesspattern Propositions Young engineers Hardi Meybaum and Indrek Narusk had already prior professional competencies Started with Futeq, Tln Intention Interest in selling engineering services, 2007 Initial idea Idea Development From own needs as service provider spun out crowdsourcing idea, first success cases 2009 New Venture Idea Initial CAD library idea transferred into virtual plat-form for collaboration and knowledge crowdsourcing Seed fund €260k, 2010 Concept Development Library 2010, sharing, collaboration; public and private domains of the crowdsourcing web platform, 2011 Opportunity Confidence Reached by HQ moving to Boston 2011 + winning the competitions of SeedCamp and TechStars + investors Business Development Engineering 2007; Platform 2009; Workbench 2013, teams in Estonia, UK (Cambridge) and USA (Boston) Venture Launch Ongoing process; 1M users, success cases; biggest client: General Electric, 2014 Post-Launch Acquired by Stratasys for ~$100M, Sept. 2014
  40. 40. 40 GrabCAD, revolutionary of engineering industry
  41. 41. 41 GrabCAD, revolutionary of engineering industry
  42. 42. Entrepreneurial journey: GrabCAD Venture maturity Stage Intention New Venture Idea Opportunity Confidence Venture Launch Propositions Idea Development Concept Development Business Development Time P2007 2008 P2008 2012 2014 2015 HQ in Boston $1.1M investment 2011 $8.15M investment 20132007 2009 2010 Workbench Period of Futeq Founding GrabCAD Eng. Design Service Library concept GrabCAD sold to Stratasys Meybaum left GrabCAD Pre-Incubation
  43. 43. GE and GrabCAD asked designers to improve upon this bracket. It weighs 2,033 grams (Photo Courtesy of GE and GrabCAD) 43
  44. 44. GE Announces Winners of 3D Printing Design Quest, Dec. 11, 2013 • The redesigned brackets reduce engine weight and fuel consumption. M Arie Kurniawan, based in Salatiga, Indonesia, won the first place prize of $7,000. • Phase II winners include: • 1st Prize Winner- $7,000 cash • M Arie Kurniawan, based in Indonesia. • 2nd Prize – $5,000 cash • Thomas Johansson, Ph.D, based in Sweden. • 3rd Prize – $3,000 cash • Sebastien Vavassori, based in the United Kingdom. 44http://additivemanufacturing.com/2013/12/11/ge-announces-winners-of- 3d-printing-design-quest/
  45. 45. M Arie Kurniawan was able to slash the original bracket weight by nearly 84 percent to just 327 grams (0.72 pounds). His design is inspired by the H-beam profile. (Photo Courtesy of GE and GrabCAD) 45

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