"Is This Tiny European Nation a Preview of Our Tech Future?" asks Vivienne Walt, writing for Fortune magazine. She paints a rosy picture of the totally digitized capital city of Tallinn: delivery robots carry packages down city sidewalks; residents access "free" high-speed wi-fi anywhere in the city; citizens file taxes in a matter of minutes using the government's blockchain system. Most impressively, this tech-friendly enclave has become a hotspot for tech companies and startups such as Skype, TransferWise, Starship, Jobbatical, and Funderbeam, many of which run on the blockchain. All of this has earned Estonia a reputation as the Silicon Valley of Eastern Europe. Walt writes:
With its government running on the blockchain, Estonia could in theory begin marketing other inventions as they unfold — creating huge new business…. It’s possible to imagine Estonia’s idea becoming a multibillion-dollar business in the years ahead — turning the whole view of government as a bureaucracy offering public services into an entity generating profits.
Enter DotEEBubble, a group of mysterious tech-startup bloggers whose assessment of the Estonian tech scene is a little less, shall we say, glowing. TechCrunch profiled DotEEBubble back in 2013, calling it "one of the most controversial startup blogs" that "you've never heard of":
In the rah-rah world of entrepreneurs, accelerators, and incubators, it’s rare to see much talk about the problems with the government-funded VC [venture capital] model and how the biggest players look more like scamsters than bootstrapping entrepreneurs. That’s just what this blog is – a cold, hard look at the problems that come when you throw big money at little ideas.
During a TechCrunch interview, one of the chief anonymous bloggers behind the site said:
Estonia receives a massive amount of EU funding (more than 18% of the 2012 budget), and I think they’ve chosen to spend too much of it on risky startup companies and startup incubators. It reminds me of the .com days in the US in the late 90’s, when there was too much money chasing too few good ideas. The difference is that in Estonia, the money is coming from taxpayers and not private investors.
I would not be so critical of this use of public funds if everything else was going well in Estonia, but it’s not. Estonia has the lowest GDP (per capita) in the eurozone, and its people are the second poorest among eurozone members when measured by assets held per person.
In that interview, DotEEBubble mentions an article by Brad Feld, founder of tech incubator TechStars, titled "Government Shouldn’t Be In The Accelerator Business." Feld's conclusion:
If entrepreneurs can’t figure out how to fund it, why should the government do it? That just seems like a situation where capital is going to be allocated poorly and the incentives won’t be tightly aligned.
Is it true that government-funded startups lead to a misallocation of capital? Frank Shostak at the Mises Institute thinks so. Writing about the evolution of Estonia's economy:
Another important factor that revitalized the Estonian economy is a fall in money supply during the period May 2008 to November 2009…. A fall in money supply arrested the transfer of real wealth from wealth-generating activities to non-wealth-generating activities. This amounts to the strengthening of wealth generators and to a weakening of non-wealth-generating activities. Because of a time lag, the effect of this decline in money supply is still in the system, i.e., it continues to benefit economic fundamentals.
Since Q2 2011 the government has reversed its stance and embarked on massive spending…. It will give rise to new bubble activities and will strengthen the old bubble activities. In terms of real GDP, it is quite likely that we are going to see a visible strengthening ahead in its growth momentum. At some stage, however, the weakening of wealth generators is going to be felt and the Estonian economy is going to suffer because of the reversal in its fiscal and monetary stance.
Shostak wrote that in 2012. Is it possible Estonia's current booming tech industry is just a giant bubble enabled by government spending and running on the fumes of its austere fiscal policies from a decade ago?
I think the thing to remember here is that not even innovation is exempt from basic economic laws. If private investors don't see the ROI in a business idea, it means there's not sufficient demand for whatever flashy new product or service it's proposing to create. But the government doesn't care about ROI. All of its "capital" is just taxpayer money that won't hurt the government one bit if it disappears forever down a dark hole of bad startup ideas. I'd rather have real innovation, instead - innovation based on what consumers want and are willing to pay for.