How to invest in an Estonian startup? Cross-border experiences by Nils Lagerström
May 04, 2018
What should you do consider when investing abroad? Read business angel experiences from Nils Lagerström, who shares his experiences on something that many Finnish private investors tend to steer away from - cross-border investing.
This is the first article on the series of FiBAN articles about Cross-Border Experiences by Nordic Angel Program (NAP).
Nils Lagerström is a well-known entrepreneur and ICT consultant with a long history as a Nokia Senior Manager in the international field. When he became an angel investor, he wanted to learn everything there is to the business. Even something that many Finnish private investors tend to steer away from – cross-border investing.
Lagerström joined FiBAN in 2013 with a keen interest to learn more about startup investing in general. After a while he realized that for him in spite of all the good training from Fiban, the best way to learn was by doing an actual investment and learn the hard way. After the realization, he has collected 9 companies into his portfolio which have been pre-seed level startups. Edutech has always interested him, and many of his portfolio companies are from that sector. So when he started to look opportunities abroad, it was quite clear that his first cross-border investment would be from edutech.
He found a suitable investment prospect from FiBAN’s PitchFinland event. Although he had originally considered to find the cross-border investment prospect from Sweden, he was convinced about an Estonian startup with Estonian angels already on board, searching for Finnish investors. Estonia still fit his main cross-border criteria: “Approximately one hour travel time from wherever you live to startup’s location. That’s how far I am interested to invest. Other angels take a much broader approach.” Lagerström specifies.
Having Estonian angels already on board changed the investment process a lot from FiBAN’s typical syndication process. It’s quite usual in smaller cases that startups are looking for one or two investors, not a whole funding round, explains Lagerström. The biggest difference between the Finnish investor and Estonian ones was the whole structure of the investment. In Estonia, most of the startup investments seems to be done by using convertible loans, whereas Finnish investors prefer equity from the company. This way the investor is in the shareholders’ agreement and to Lagerström, a lot of uncertainties about company’s valuation and other things are clarified.
However, domestic investors were happy to include a foreign investor to the company, and although lot of documentation was needed, the actual investment went through quite smoothly. Moving money around within EU is not the problem, states Lagerström. The biggest bureaucratic difference stems from the fact that ownership of bonds are public information in Estonia, unlike in Finland. Thus, Lagerström had to open a bank account in Tallinn, and to be able to do that, apply for the E-residency. “That turned out to be the most difficult part of it all. I had to make applications on the Internet, but additionally physically visit the Embassy in Finland and the bank in Estonia. Finally I was able to get it, and now I have a bank account in a Tallinn-based bank. If this information would have been available when I started the process, it would have been so much more easier”.
So what do you think one should consider when investing abroad?
“Knowing the investment cultures of other countries would be very beneficial. FiBAN could help with the mapping of different ways different countries proceed with startup investments. In addition, find out how to pay and report your taxes, both domestically and in the target market. Tax regulations come into the picture especially when the status quo changes – whether there’s an exit opportunity or when the company faces bankruptcy. ”