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Change Ventures, a Baltic seed stage venture capital fund, together with FIRSTPICK, a VC fund and an accelerator for tech startups in the Baltics, have published their semi-annual Baltic Startup Funding Report. The report focuses on changes on the investment scene in the first half of 2024 and highlights several key trends that are important for Estonian start-up companies and the Baltic region as a whole.
Baltic region sees rising startup momentum beyond Estonia
Estonia remains a world leader in startup funding per capita, close behind Israel. This demonstrates for the advanced Estonian start-up ecosystem, however other Baltic states are catching up. The first half of 2024 has shown that Estonia has increased competition from Latvia and Lithuania, whose startups, particularly in pre-seed stages, are attracting higher valuations in Q1 of 2024. Estonia still holds an edge in the seed rounds, where it draws larger rounds and higher valuations.
Decline in the number of pre-seed and seed rounds
The report indicates a noticeable drop in the number of funding rounds in 2024, particularly pre-seed rounds, which have hit record lows. Pre-seed funding has become more selective, with investors concentrating on a smaller number of opportunities, notably in AI. For Estonian startups, this means stiffer competition to secure early-stage funding, but those who succeed are attracting larger investments. The decline in angel funding since the 2021-2022 boom has also impacted pre-seed activity.
For seed rounds, the situation remains challenging. The number of seed rounds is relatively stable but dominated by bridge rounds, where startups seek survival funding before aiming for a Series A round. This is a crucial takeaway for Estonian startups as they must navigate tighter conditions and lower valuations, reflecting the struggle to transition to a Series A.
Shift towards pre-revenue startups
An ongoing and increasing trend for pre-seed rounds where pre-revenue startups secure funding continues in 2024. This signals that investors are willing to back startups with great ideas and teams with potential even before they generate income. However, seed rounds face growing pressure to demonstrate higher revenues, with a rise in investor expectations.
Legal structures and investment mechanisms
Estonian companies benefit from their country’s advanced digital governance, which continues to attract equity investment. However, convertible notes dominate pre-seed rounds, allowing startups to defer valuation negotiations until later rounds. Estonian startups should be aware that median valuation caps on pre-seed notes are stable, around €3 million, and average discount rates have slightly risen to around 20%. Seed rounds, meanwhile, have shifted more towards equity investments.
AI boom impacting valuations
In the first half of 2024 AI-focused startups, largely from Lithuania and Latvia, are driving an almost 30% rise in pre-seed valuations compared to Estonia. While this trend benefits early-stage companies in the AI sector, it also raises the bar for performance. Estonian founders should be aware that the growing attention on AI may concentrate funding opportunities in these neighboring markets, making it more challenging for non-AI startups to secure investments under current conditions.
Conclusion
For Estonian companies, the Baltic Startup Funding Report signals both opportunity and caution. While Estonia retains its leading position, increased competition, and the tightening of available capital demand sharper strategies for attracting early-stage funding. Startups focusing on AI may enjoy greater success, but others must navigate a market where angel funding is drying up, valuations are falling, and the path from seed to Series A is increasingly challenging.
These trends underline the importance of understanding market dynamics, particularly for those raising in early stages, and staying agile in an environment with shifting investor priorities.
