Latvia’s Innovative Approach to Economic Growth

On the world map, Latvia is located on the east coast of the Baltic Sea and has almost 2 million inhabitants. This is about half the size of Melbourne in Australia! It is nestled in the Baltic states between Estonia and Lithuania and they all have one thing in common. Their populations have all been declining since the late 1990s. This is largely driven by migration and low birth rates. How did this happen?

A bit of economic history

The Baltic states were released from Soviet rule in the early 1990s and have all been focused on rebuilding their Government, culture and economy.
During the 2000s, Latvia had one of the highest (GDP) growth rates in Europe. Their economic growth was tied to domestic consumption including privatisation of previously state-owned companies. The private sector accounted for nearly 68% of the country’s GDP in 2000 which highlights the domestic focus.

However, this focus opened Latvia up to global shocks. When the global financial crisis hit in 2008, The Latvian economy fell 18% in the first three months of 2009, the biggest fall in the European Union. During this time the real estate boom ended, domestic demand collapsed and the government trimmed expenditure including cutting state wages (Bloomberg).
This also led to Latvia experiencing the worst unemployment rates in the EU. In April 2010 it reached 22.5% unemployment, ahead of Spain, which had 19.7% (Eurostat).

As the job market declined, the ability for workers to move to different countries within the EU led to a continued population decline. Young, qualified and agile workers were leaving the Baltic States to pursue careers in other markets including the UK.
Some of these workers are coming back now, however, there is still a strong market gap.

This has led the Latvian Government to look at how to diversify their economy so it is more internationally focused and creates jobs that are globally competitive.

The Latvian startup scene

The Magnetic Latvia brand is the Latvian Government’s approach to stimulate the local economy to promote Latvia as an attractive trade partner and destination for tourism.  

According to their website, Latvia is the perfect location as ‘Latvia is not only the very heart of Baltic States, it is also a point where West meets East. Riga International Airport is the largest air transportation hub in the Baltics – 3 times the population of Latvia travels through in a span of a year.’

They also cite the ‘new’ startup industry which makes it easier to get ideas off the ground. ‘With 400+ solid startups in Latvia and growing financing opportunities, the market is far from saturation point and is responsive to good ideas. What does that mean? To succeed in Silicon Valley, you have to be a genius. In Latvia – at the moment – you just need to be very very good. However, as both the quantity and quality of startups increase, this window might be closing soon.’

With a great location, local tax incentives and an emerging scene with talented tri-lingual locals, Latvia creates a compelling proposition for business developers. However, with Estonia, the world’s first digital society just down the road, there is some stiff geographic competition.
Estonia offers e-residency documents that allow trade and tax breaks to allow for easy entry into the European market. See Planet B’s blog on it here.

Latvia has a growing and exciting startup scene with over 400 startups, half are from the financial services and software industries.
However, the most interesting part of the startup landscape is Magnetic Latvia’s approach to incubators, with 15 locations across the country.

A country wide approach to incubators

I met up with Girts Ozolins, who is the Senior Project Manager at the Creative Industries Incubator in Riga.
Magnetic Latvia business incubators are run by the Investment and Development Agency of Latvia. They are state run and co-funded by the EU’s Regional Development Fund. He explained that Magnetic Latvia is the brand launched in 2015from the Investment and Development Agency in Latvia.
Their launch has the mission to increase trade flows and introduce the world with the best of their products, technology, literature, art, science, etc. Agency is promoting Latvia in the global area as a magnetic and attractive country, perfect to live and work in, to build and develop business, offering many opportunities for business starters.

A key part of their work is developing a connected network of business incubators across the country as they know that big cities are not the only place where economic growth happens. In fact, if Latvia is to succeed in the future, they need to create opportunities for jobs everywhere, including in regional Australia.

What is an incubator?

An incubator is usually a program that provides support, tools and advice to help startups move to the next scale phase. They are an important part of building new economies as they help startups unlock advice including legal, accounting and finance as well as how to pitch to investors.

How does Magnetic Latvia’s program work?

At Magnetic Latvia Business Incubators, they have a pre-incubation and incubation program. The pre-incubation program is for very early stage ideas and offers coworking facilities, office equipment, consultations, training and mentor support for six months for free. This is done to help founders with early ideas to validate their business ideas and their viability. Many business ideas fail either too early as they don’t have access to helpful advice or too late when they persist with an idea that has not been validated. The pre-incubation period helps early-stage founders to spend the time to learn more about the market, get quality advice to either persist or change their business.
Girts said that many Latvians are starting a side hustle, where they form a new business idea whilst still working full time.
The pre-incubation program allows people with a side hustle to join a community of like-minded people and to rapidly validate their idea.

Once the idea has been validated, they move into the incubation program. Girts works in the Creative Industries Incubator which focuses on the design, arts, textiles, marketing, architecture, publishing, music and many more creative industries. The incubator is designed for entrepreneurs with a clearly defined business idea and who are not registered for more than 3 years.

The incubator offers:

  • Co-working room and office equipment necessary for the business;
  • Free advice, training, and workshops;
  • Mentors’ advice provided by experienced entrepreneurs and experts;
  • 50% co-financing for:
    • R&D and operational (finance, IT, accounting etc.) services.
    • Equipment purchase (amount of up to 10,000 EUR and up to 5,000 EUR). The entrepreneur pays for the service in the amount of 100 % before receipt of the grant.

The co-financing is a lucrative and important offer by Magnetic Latvia Business Incubators as financing is often one of the biggest challenges for startups.

The role of a project manager

Girts has a lot of experience in the startup scene in Latvia and abroad. He coordinates the startups and helps them connect with each other as well as potential investors.

Girts showing me some of the creations from the startups in the creative industries incubator.

An important skill to have in this space is asking tough questions. Because of his experience, Girts has first-hand experience he shares with startups in the incubation phase.

‘I know the challenges and obstacles that many startups face and sometimes it is helpful to ask the tough questions so they can start to overcome the issues before they become insurmountable.’

Girts Ozolins

Another key role of his is to create a structured program that helps provide tools and opportunities for other startups to connect. They are constantly iterating and improving the incubator program. Girts said that one of the challenges they are currently looking at is how they connect all 15 incubators. Currently, they have monthly networking events where startups meet up and visit the headquarters of someone in or affiliated with the program. This is great for networking however it has geographic boundaries. They also have a closed facebook group for each incubator, but they are looking into creating a skills database that startups can use to understand the skills of their broader community better.

The role of Government

The Latvian Government have been helping to drive the growth of the startup industry through the investment in the incubators but also by developing policy.

There are two policies that are helping to grow the number of startups in Latvia:

  • Tax incentives- a favorable tax regime for startups. The law foresees two benefit scenarios: 1) a special flat tax regime, currently 302 euros/month per employee, regardless of salary paid, combined with the 0% individual income tax rate, or 2) 45% co-financing for the highly qualified specialists. Read more on StartupLatvia – Law Benefits .
  • Startup visa- (officially – a temporary residence permit), is offered to all non-EU startup founders who are willing to come and develop their startup ideas in Latvia. One startup can have up to 5 founders with a startup visa. The application process takes one month. The visa is given for the period of maximum 3 years and it is also issued to the spouse and children. Read more on StartupLatvia – Startup Visa

Success to date

They have had over 600 startups come through the incubator program across Latvia. From September 2016 to December 2018, the total turnover of LIAA Business Incubators in the reporting period is EUR 24,969,677. Over EUR 30 million has been invested into projects by the fund and each year there are over 700 events.

One startup, Solfeg has reaped the benefits of being part of the incubator. They are an online music teaching platform that helps people to maintain the habit of practicing an instrument with content from top musicians. Through the program, they have successfully redesigned their business model a year ago. Since then, they have attracted VC investment in Latvia, have grown their user base and paying customer base several times. They also have got into Swedish accelerator programme in Malmo, Sweden (will graduate in June, 2019) and have attracted some Swedish business angels investors in the business development.

Another is Grafomap, a great idea of changing a simple map poster into a design gift with a personal touch.
Their target market is the majority in the United States. They have tripled their sales and reached their revenue goal in 2019. They have grand plans for the startup and are highly engaged in the incubator network to help them continue to achieve their goals.

Overall

It was great to meet Girts and some of the team and hear stories about some of the businesses who have become part of the incubator community. The Latvian Government’s approach is really impressive because they have created policies to enable new industries as well as invest in infrastructure that builds new industries in both urban and regional communities.

There is a vibrant startup community that looks beyond the big cities and I think this model needs to be replicated as other countries experience housing density stress in large cities. The future of economic growth in many countries has to incorporate programs and infrastructure that connects regional and urban environments.

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