This deep dive article is content that would normally only be available to subscribers. Sign up for a four-week free trial to see what you have been missing
Kersti Kaljulaid is the President of the Republic of Estonia. She previously served as a member of the European Court of Auditors and as the CFO and CEO of the Iru Power Plant of state-owned energy company Eesti Energia and economic advisor to Prime Minister Mart Laar. She graduated from the University of Tartu in the field of genetics in the Faculty of Natural Sciences and she has a master`s in Economics and Business Administration.. Kaaljulaid and American physicist, technologist and business executive Safi Bahcall, author of the widely acclaimed 2019 book Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries, recently participated in a fireside chat with The Innovator’s Editor-in-Chief Jennifer L. Schenker about Estonia’s approach to innovation, its ambition to become a testbed for moonshots and how it partners with the private sector.
Q: President Kaljulaid, Estonia made a name for itself as a country that pioneered the digitalization of existing services and pioneering new ones, such as e-residency. How did this come about?
KK : Government must always fear missing out.We aren’t a rich country, but we knew digital transformation would come. We created a necessary government ecosystem both for digital transformation, which led to an e-government system complete with digital ID, and also a genomics law. These two laws allowed us to benefit from technology which did not yet exist. Governments are usually a lazy follower. Estonia was the quick follower and the same fire actually is underneath our backsides today. We still have this fear of missing out and we still have an ambition to always create a legally permissive system which will allow investors to invest, scientists to imagine, startups to grow, and the whole society to benefit. If the government creates the necessary legal conditions and also makes sure that the people are encouraged to take opportunities, then it’s inclusive by design. This is what has happened in Estonia.
Q: Safi, what, in your opinion, is the best way ensure that any innovation, including moonshots, can be integrated with existing operations and structures?
SB: The question is what kind of structures can you create that can help you to achieve these big goals. Moonshots are those big goals, the exciting destinations that are easy to declare like ‘let’s put a man on a moon’. But how do we get there? You get there by nurturing seemingly crazy ideas. For example, it was U.S. President John F. Kennedy that declared that first moonshot. Most people don’t remember that 40 years earlier, the idea which got us to the moon – rockets – was dismissed as crazy. The idea of exploding gas in a can that can travel into space was suggested in the 1920s and 1930s by Robert Goddard in the U.S. Nobody took it seriously there. But they did take it seriously in Germany, which used the idea to create the first missiles and jet planes. The bottom line, whether you are a company or a government, you have to create structures that allow you to nurture those seemingly crazy ideas by creating a system for running experiments and scaling them. One important element is measurement. If you cannot measure it, you cannot manage it. If you’re not tracking it, if you don’t have a structure and system to measure it, then you don’t really know what you’re doing.
Q: Madame President do you agree?
KK:Putting a man on the moon didn’t change people’s lives, only a few special ones. But the washing machines did, affordable cars did. This is where the Estonian thinking comes in. We’re much more down to earth. We are looking for new technologies, but as i said we want them to be used inclusively.
Estonia is the only developed economy which I know, which does not separate itself into private and public, into government and business. People in Estonia are used to seamlessly going from public to private and private to public and you’re rewarded for that. We don’t have a legal system that keeps you in the public sector or in the private sector. Which means that we do not face the difficulty of taking ideas from private and using them in public or taking the ideas from private and nurturing them with some government help.
Actually the whole idea of Accelerate Estonia is to make sure that the government has its own skin in the game to force the government and the parliament to allow these ideas to really grow very well. It needs to be done inclusively, meaning they must somehow be useful to a big portion of society. And you cannot apply anything to a big portion of society unless you have made sure that your laws are well adapted to that. For example, Estonia has proactive government services. What does it mean? Sometimes Estonians don’t even have to know they have a right to receive a service. For example, retired people who live alone in Estonia don’t have to apply for extra help, they don’t have to know. The system knows. There is an address database that knows the retired person lives alone, and of course we pay their pensions, so we know their bank account, and the top-up arrives, just like that. Wonderful. But it cannot happen unless you have agreed that the government is entitled to do these things for the people. If it is additional money, it is easy to agree, but if it’s sometimes a different service, then people might not want that service. So, you have to agree with your people through the political process on exactly how and when the government can be proactive and how exactly people can choose not to be a part of this, how people can own their own data, how government can use this data, how exactly government has to report that they have used the data ,and what are the rights of the people if they want to complain about the data use. Inclusivity does not happen unless you take good care that the government is ready to fold all these good ideas, good developments, into their programs seamlessly. And Estonia, as far as I know, is the best place globally to do this precisely because we do not separate ourselves into the private and public. Accelerate Estonia also enjoys the strong support of the startup community.
Q:Leadership is key to making innovation happen but as many corporations have unhappily discovered there is an autoimmune system in the middle that rejects change or anything new. Safi in your book you explain that there is a need for people who can mediate between the two sides. Can you expand on how to do it?
SB: How do you balance the core and new? This is a question that companies, nations and regions are struggling with all the time. Many leaders fall into a common trap of emphasizing one or the other. Here’s an example. Last year I found myself on a nuclear submarine with an admiral responsible for transforming the U.S. Navy for the 21st century. I was standing just a few meters from the nuclear engine. If you are in a nuclear submarine, deep under water, hundreds of kilometers from shore, you don’t want to be surprised by some clicking noises from your nuclear engine. That’s not good. You also don’t want to be surprised by a new kind of torpedo. That’s also not good. Either way you’re dead.
Making sure the nuclear engine is working well, without any failures, is your core. Coming up with new ideas for defence and for new weapons is the new. Balancing the core and the new, whether you are in a company, in the military, or running a country, is so difficult because these two groups don’t understand each other and often don’t like each other. The group that’s making the money and the group that’s spending the money have different jobs, they speak different languages. Soldiers and the people in companies who are responsible for the core are people focused on minimizing risks. But if you want to try something new, you need to fail. You need to fail a lot. You need to take a lot of risks, to get past the nine things that don’t work until you discover the tenth one that changes the world.
One thing leaders who are good at balancing the core and the new do well is show equal love to their artists and soldiers. That reduces the common problem that one group feels demoralized when leaders either favor operations or innovation too much. Another thing successful leaders do is create a team of specialists, people whose number one job is to bridge the divide between these two groups. That’s because the biggest problem with innovation is not in the supply of new ideas. It’s the transfer between those two groups.
So two things that companies can do: love your artists and soldiers equally and create a team of specialists to help in scaling, to help in transfer, to bridge the divide.
Q: Madame President what is your take on this?
KK: We tend to always do things together here. So we don’t need to create groups of specialists on one side and on the other side and put them into the room and close the door and wait for the white smoke to rise. We do these things naturally. So if someone asks what you do differently and then starts to analyze, that this is it. I am sure that in order to keep our competitive advantage, all we need to do is grab the new ideas, not to be afraid of these ideas and make sure that these ideas can fly and serve the whole Estonian population.
Q: Madame President Estonia’s next goal is to become a testbed for moonshots. What problems would you like to see Estonia solve.?
KK: Everyone is so focused on only digital but Estonia is a country, where I believe, personalized medicine can happen sooner than any other place in the world, because we have a population-level genome foundation which analyzes Estonian people’s genomes. It’s voluntary to participate and only you know your results and we protect people’s data, so people trust this system. This means the Estonian people and families have an opportunity to learn which kind of diseases they are at the risk of contracting and can take action accordingly and use modern technology to monitor if their health is going in this direction. It’s something Estonia could achieve next.
We are also testing self-driving cars. In Estonia, the law allows a car on the street to be driven remotely or remotely managed. It can be done already. Similarly, delivery robots drive on our streets and people are more and more used to having them. As you see, we are still in most aspects quick followers and quick users of technology.
Q: Estonia is a small country. So in some ways it is easier. but I still think that governments of all sizes can learn how to keep legislation apace with technology developments. Most governments are not succeeding. What is Estonia’s secret sauce?
KK: Twenty years ago when we first experienced FOMO [fear of missing out] we thought that in five to ten years other countries will surpass our advances so if we wanted to achieve something, we had to move quickly and move now. Now we don’t worry so much but we keep working to maintain our competitive edge. I totally disagree that smaller nations have an advantage here. Estonia has 1.3 million citizens who are unhappy if they have to go to some government office queue to get a service. Other governments have tens of millions of people, but the unhappiness of every person is just as big. Our sole advantedge is that keeping our citizens happy commands less resources. The Estonian tax burden is one of the lowest in Europe and despite that we deliver European social market economy services to our people. It is challenging. Try doing that in a good, competitive way with just 10% of the tax burden placed on citizens that other countries levy and yet, we are managing. For example, if you’re looking at how we handled the pandemic and COVID, Estonian mortality rates are low. Our medical system is one of the most efficient in the world because there is a big “e-” element there. I mean all the data, analysis, pictures and database, you have a history about your health at your fingertips, and by saying ‘you’ I mean each and every person, not everybody’s doctor. The doctor needs to first ask the patient whether he can have access to the data or not. I hope I’m giving you the feeling about the Estonian ecosystem and how it’s working. What we are doing scales. Estonian companies are constantly proving this.
Q: Safi, you advise governments and regions around the world. How, in your mind, does Estonia compare on innovation?
SB: The ability to balance delivering services well, which is about reducing risk, and encouraging the new, which is about taking risk, requires a special leadership mindset. And it seems like Estonia has had it and done that unusually well for the last 20 years.
Q: Even companies and nations that have been considered very innovative still struggle with the thing that holds them back from innovating – it’s a fear and stigma of failure. No matter how much the person on the top says the innovation is fantastic, the person in the middle who comes up with a crazy little idea… if they launch it and it fails, it can hurt their career. Getting over that fear and stigma, is a challenge even in the best organizations in the world. How does the President think about encouraging and reducing the risk and stigma of failing and encouraging new ideas and experimentations even in her own team and staff on social policies?
KK: Before commenting on my own team, I would say the Estonian government sector is as risk adverse as anywhere else globally. It’s natural for us to be and our private sector understands it very well and our startups sector as well. That’s why they lend us a hand when we need to test more radical ideas that have less to do with the core and involve more innovative use of technology. And they always complain a lot about how difficult it is to cooperate with the public sector and I believe that is totally normal. I’m really grateful they are doing it. What facilitates and helps to come back from that feeling is that retained earnings are not taxed. Normally you earn money, use this to innovate and sometimes you include somebody else’s money, but Estonia starts taxing corporate income only at the dividend level. When you run out of ideas and want to take out your money and take it to Mallorca and buy a big boat and a plane, then we tax. Otherwise the government is always there with the enterprises taking the same risk with them. When the innovation goes down the drain, they will never get taxed on this. We are aware of the risk and patiently wait. Sometimes we fail, but then we fail together with our companies. Maybe this explains it macroeconomically.
In my own team, we just joke and move ahead. What I found to be best is if you make an error or if there is a situation where people think a couple of years ago there was an error and you can still do something to remedy it, you can easily do it. It comes naturally to us, I don’t know why but I find it really easy to admit I made an error because otherwise people keep coming back to it, trying to make me admit it, so my attitude i admit it today and move forward tomorrow.
Q: What is venture capital’s role in funding moonshots? Safi’s books speaks about phases of transformations and systems thinking but VC have certain return expectations in a short amount of time and they are usually quite impatient.
KK:. To be honest I don’t really appreciate government money competing with private money. As much as possible, there must be a place for the market. The European Green Deal [ a set of policy initiatives by the European Commission with the overarching aim of making Europe climate neutral in 2050] is an example.
Government should create connections and networks but then the capacity to save energy should be an option for private companies to build. There is a clear division on where the government needs to invest more to guarantee there is security and when you leave it to the market. It is a natural thing to do but we all know that governments tend to forget it nowadays. I am really critical of this. Simply because money is cheap for everybody, including the government, you shouldn’t dole out public money. It will make your economy poorer because you will probably not be able to support the huge amount of great ideas running in tens of thousands of different directions. You have to choose but this means you will disadvantage other technologies. You shouldn’t do it because the economy will turn out to be poorer and If the economy turns out to be poorer, then it will be less resilient during the next downturn. So I advise government only to create a market, guarantee the markets, and then leave room to venture capital.
So you might ask why Accelerate Estonia? In May I made a global call to entrepreneurs who are searching for a way to test solutions to problems in the real world. Estonia’s national test bed program Accelerate Estonia was created to experiment with moonshot solutions to global challenges. The program combines the audacity of entrepreneurs with the transformative power of the public sector to tackle the systemic constraints behind urgent global problems. We want ideas that could use Estonia’s legal framework as a test bed. The only way to make sure that the government and the parliament understand that these ideas might need changes to laws is to make sure public money is invested. Estonians are always very careful with rushing in with public money unless we have made ourselves a business case, otherwise we leave it to the private capital if we can.
Q: What is your point of view Safi? There is a lot of talk about how how corporates and startups can team to help solve the U.N.’s Sustainable Development Goals but government is not usually included in the equation.
SB: It’s really rare to come across a leader who really understands the economics of what the President is just describing. When and where markets are working well and where and when they don’t. Most governments either take the position that they have the money so they should spend it or they say ‘let’s leave everything for the free market.’ Both are the wrong answers. There are somethings that free markets cannot do.
This deep dive article is content that would normally only be available to subscribers. Sign up for a four-week free trial to see what you have been missing