Article October 31st, 2022
Seven essential elements of a thriving start-up sector
Why do entrepreneurs choose to work where they work? Why have some nations become important hubs for start-up companies? It’s rarely accidental. Inevitably, the countries that attract start-ups have done so very deliberately, with carefully targeted steps taken by governments to create an attractive, supportive environment for entrepreneurs.
So, what can we learn from Estonia, Singapore, Denmark, and others who have attracted vibrant and successful start-up communities? This was the topic of discussion at one of our recent workshops which brought together thought leaders from the public and the private sector in Estonia and the Middle East. They agreed that several essential ingredients are needed to create a thriving start-up sector.
If the goal is to attract ambitious start-ups, setting up and administering a business must be as simple and straightforward as possible – and that inevitably means a digital system. Those countries that are most successful in attracting entrepreneurial start-ups tend to have digital-based systems for most government services, such as paying taxes, and a straightforward and simplified digital system for setting up and running a company. Estonia’s e-residency initiative, for example, allows entrepreneurs from anywhere in the world to set up and manage an EU-based company entirely online.
Access to talent
Growing businesses need talented people, so the immigration and employment system must allow for the movement of talented workers to feed the booming start-up sector. Start-up hubs tend to offer fast-track visa applications for entrepreneurs – Startup Denmark, for example, is a government scheme that encourages entrepreneurs to relocate. In contrast, Estonia’s Start-up visa allows global entrepreneurs to settle in the country for 18 months to establish their company and enables Estonian start-ups to hire talent from outside the European Union.
A strong supply of finance
“Typically, start-ups are initially funded by business angels – who often already have a successful track record with an entrepreneurial company – and then turn to venture capital as they become more established,” said Gerri Kodres, a VC specialist and Investor of the Year 2019 in Estonia. “A fertile environment for start-ups needs to pay attention to both stages of financing.” Outside of the U.S. (where financing is entirely limited to the private sector), governments or state-backed agencies are often heavily involved in financing the riskier, early-stage start-ups, as the presence of a quasi-state investor gives other investors confidence. This is especially important when a jurisdiction has no previous history of nurturing start-ups.
In Estonia, the state entrepreneurship agency developed a program funded by the European Regional Development Fund, Start-up Estonia, to support business angel funding. An early-stage venture capital fund, SmartCap, was also set up and run by the government to build the country’s venture capital market.
A mutually supportive partnership with the government
A tax system that encourages and supports start-ups is a basic necessity; as Kersti Kaljulaid, former President of Estonia, said, “Governments don’t do things; companies do. The government’s role is to create the legal system that allows new companies to thrive.” But the relationship should be ongoing; a mutually beneficial partnership between the public and private sector, where both parties have a vested interest in the growth of start-ups, acts as a strong support system for entrepreneurial business. In Estonia, for example, corporates are only taxed on their profits once they start paying dividends to shareholders (or are deemed to have been distributed) – so, in effect, the government is invested in their success.
As we’ve seen over recent years, the business environment in any country can shift quickly. Governments must be agile to meet the needs of growing businesses, such as adapting the legal climate to account for new technological developments or introducing new incentives or immigration initiatives when human capital is in short supply.
Clear communication channels
Legislative agility begins with knowledge, which stems from regular and frank dialogue between the government and entrepreneurs about the issues businesses face and what they need to thrive. A formal structure for exchanging ideas, such as a panel of experienced entrepreneurs who meet regularly with government representatives to discuss emerging issues and the needs of growing businesses, is often the most effective approach. “There are always small things that can be improved,” said Taavi Rõivas, former Estonian Prime Minister and Chairman of Auve Tech. “For example, stock options were not widely used in Estonia before the start-up sector emerged. But this was raised with us, and it became clear that we needed to make stock options more attractive than they were in neighboring countries.”
A support network for start-ups
Entrepreneurs need and thrive on networking, collaborating, and exchanging ideas. Start-up events, where knowledge can be shared and founders can meet with professional venture capitalists and other investors – to hear the advice they might find difficult to access elsewhere – will help the start-up culture flourish.
Building a healthy start-up ecosystem takes time, hard work, and patience. These seven steps represent the building blocks for creating an environment where innovation and entrepreneurship can thrive – to benefit the entire population.
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