Illar Kaasik

Managing Partner, Prudentia Advisory

“Just play with the thought that the five Estonian made unicorns (Skype, Playtech, Transferwise, Bolt, Pipedrive) would be listed on the Tallinn Stock Exchange. Based on the latest known valuation, the value (Enterprise value) of these five companies would be EUR 15bn euros (assuming all but Playtech are debt free). To put this in perspective, the current market value of the companies listed on the Tallinn Stock Exchange is EUR 2.5bn”. This was a consideration raised by Mattias Wallander in his November 2020 opinion piece, commenting on the ranking of top 101 most valuable companies in Estonia in 2020.

In the summer of 2020, Wise (TransferWise) raised USD319 million in another round of financing, bringing the company's total value to USD5 billion, or nearly EUR4.2 billion. Goldman Sachs and Morgan Stanley are scheduled to begin the stock market listing process for Wise in 2021, and the company's value is projected to grow to USD10 billion, and according to some speculation even up to USD25 billion.

Compare this to the fact that the winner of the TOP101 most valuable companies in Estonia in 2020 was Eesti Energia, the value of which, according to Prudentia and Nasdaq Tallinn, was EUR1.6 billion in 2020. The Estonian Start-up Leaders Club, now the Estonian Founders' Society, has mapped growth companies related to Estonian investors. As of the beginning of 2021, they have raised a total of approximately EUR1.8 billion of capital, which is comparable to the total value of Eesti Energia. We can see that there are significant differences in the numbers, even reaching an order of magnitude, and it is very difficult to compile a comprehensive overview of all the most valuable companies in Estonia. Equally, it is not so easy to answer the question, which is the most valuable company in Estonia and what is its price?

Several parties have asked Prudentia to compile a TOP ranking of growth and technology companies in addition to the TOP101. The success story of a group of Estonian start-up investors, which emerged from the sale of Skype, has grown into a serious and sustainable industry. However, assembling a Start-UpTOP is not an easy task considering the specifics of growth companies. Growth companies are in a development phase with many rapid changes. Often companies are not profitable and do not generate positive EBITDA. Instead, the capital invested in the company must ensure the rapid development of the product and service planned in the business model and its introduction to new markets. Therefore, due to high development costs and an intensive market penetration strategy, the income statements of these companies cannot be positive. Good examples here are Elon Musk’s Tesla or Bolt's competitor Uber.

Various methods are used to assess companies when compiling value rankings, of which the two main traditional models are the comparable company analysis, based on multipliers and the discounted cash flow method, based on the company's future cash flows. When compiling the Estonian TOP101 ranking, we use a method based on multipliers and only companies registered in Estonia are evaluated.

Which is more important - "Estonian blood" or local tax residence?

In approaching the task of compiling a TOP ranking of Estonian start-ups, we first encounter the problem that most of the growth companies related to truly high-value Estonian investors are registered outside Estonia. The Founders' Society compiles statistics on the capital raised by growth companies related to Estonian investors. Among the 30 companies that raised the most capital, there are only 7 companies registered in Estonia. Considering that there is public interest in knowing the values of companies established by Estonian investors, we could then agree that we will accept the position that the company's registered office may also be outside Estonia.

Even more problematic is the actual assessment of the value of growth companies and obtaining basic data for this purpose. As growth companies do not usually make large profits, it is not possible to use classical company valuation models to evaluate them. Instead their future development potential should be evaluated instead. I will describe some of the approaches for doing so here:

- Valuation based on potential market share. To use this method, the total market value in which the start-up operates must be established. Then we assess how much market share the company can gain over, for example, a 7-year period. This can then be used to forecast the company's future income. When forecasting future income, the fixed and variable costs of the start-up company, the need for working capital and its cost to the company must also be taken into account. At the same time, the assessment must not be based solely on an optimistic scenario.

- Customer-based valuation method. This method is based on sophisticated analysis that assesses how well a company finds new customers and retains existing ones, and ultimately makes a profit per customer. The data obtained is usually used as a single input in the discounted cash flow method.

- Benchmarking method, i.e. estimating the value of a company based on transactions with similar companies. This method is very widely used due to its simplicity and comprehensibility. The application of the method may be hindered by the lack of comparable transactions and access to information. It must also be kept in mind that start-ups operate in a sector where market conditions are likely to undergo very large and significant changes in a short space of time.

- Determining the value of a company according to previous rounds of financing. This method is likely to give the best idea of the actual market value of the company, as it shows how much investors have actually agreed to pay for the company. The problem is that such information is mostly confidential and protected by a shareholders' agreement. Time is also a very important factor. Changes both within the start-ups themselves and in the sector in general happen very quickly, therefore, judging by the value of a round of financing that took place six months ago may lead to the wrong result.

Thus, information on rounds of funding, comparative transactions with similar companies and discounted cash flow methods could be used in compiling the TOP of growth companies. The creation of such a TOP ranking however is complicated by the availability of comparable high-quality data to the assessor in one period of time seeing as in a sector that is highly competitive and, in many cases, based only on future projections, such information is largely confidential.

The website of the Society of Founders tells us that almost 6,000 people work in growth companies in Estonia today, compared to 5,000 in Eesti Energia. Thus, there is no doubt that the analysis of what is happening in the growth companies’ sector is of great interest to the public and is important for the future of the entire Estonian economy. Thus, as the compilers of TOP101, we will also map out the possibilities for forming the TOP of Estonian growth and technology companies. We will try to do this in cooperation with the Estonian Founders' Society, the Estonian Private Equity and Venture Capital Association and other leaders in the field.