Liisi Karindi / EBS Junior Researcher
Similar to situations around the world, the past year also presented a serious existential challenge to Estonian startups. As was acknowledged at the event summarizing the ecosystem in 2023, the years-long party came to an end - instead of a billion, the sector was only able to attract a few hundred million euros. Despite this, the contribution of startups to Estonia's economy continued to grow. According to Startup Estonia, the startup sector, along with ICT, now accounts for 7.2% of our country's total GDP. Although the number of employees decreased by 4% from the previous year to 12,484 people, taxes paid from labor to the state treasury grew by 18% to 323 million euros. This increase is due to the sector's high average salary - 4,253 euros per month, which is 2.2 times higher than the average gross monthly wage in Estonia.
However, this statistic also highlights one of the sector's more serious concerns - labor and its cost. After raising funds, startups count on the time they have until the need for the next round of investments. This interim period can be used for "real work" such as product and business development, but the preparation for a new funding round must also be taken into account well in advance. The length of time depends on how quickly money is spent. Founders often face the dilemma of whether to do more with existing resources (risking potential burnouts) or to hire additional manpower from the market to grow faster and increase their competitiveness. Considering the high salary mentioned above (translated into a payroll fund of 5,690 euros per month), hiring means significantly higher financial costs, thus shortening the period for work and raising more funds.
As the average salary numbers further indicate, startups deal with highly qualified labor for which there is a high demand worldwide. In the context of a small country like Estonia, this means a great effort to find such employees and recruit them to a developing company. An additional challenge is the limit set for people wishing to come from third countries, at 0.1% of the total Estonian population, currently 1,303 people, which is divided among all sectors. According to Startup Estonia, however, 82% of foreigners working in startups come from these so-called third countries, i.e., outside the EU. Although the state is aware of the sector's needs and concerns and has come up with some solutions (such as support for partially covering the labor taxes of research and development sector employees), many startup founders still consider creating teams and moving their companies to countries where equivalent labor is cheaper and more accessible.
It's said that every crisis is also an opportunity. Startups, as a form of entrepreneurship, are created precisely to find solutions to big and complex problems. Accordingly, the general mood in the sector remains optimistic, and new opportunities are offered in areas such as security and defense, the green transition and sustainability, and of course, artificial intelligence and deep technology. The important thing is that there are enough people willing to take on the significant difficulties and risks associated with startup entrepreneurship - and this includes young people. As Triin Kask said at the Estonian Startup Awards gala: the biggest challenge is that instead of building businesses, young people would prefer to become YouTubers or influencers. But that won't advance Estonia.
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