The situation

Regio was founded in 1990 and at present has 46 employees. In fact the first business action started even earlier, in 1989, when Regio as an university spin-off (with a unique combination of roots in Tallinn Pedagogical University and Tartu University) was the first to publish the map of Estonian roads that was not deliberately distorted. Due to the security considerations of the Soviet authorities it had not been possible to publish non-distorted maps before the Soviet empire started to collapse.

Regio has acted as a product and service pioneer in the industry repeatedly: transition to 100% digital map production in 1994, pioneering among internet map servers in 1997, rendering geospatial data services on an ASP-basis since 1999, first mobile positioning application for Ericsson in 2000, improving the accuracy of mobile positioning technology since 2001.

Co-founder and present owner and CEO of Regio Teet Jagomägi studied for a BSc in Informatics and an MSc in Geoinformatics at Tartu University. His educational background is cartography + informatics, which together makes geoinformatics.

The process

The evolution of the company since 1990 has gone through various stages: at the beginning university spin-off, then typical family company, followed by venture capital-fuelled company, being part of international stock-exchange listed technology corporation, and finally, management buy-out.

I During the period 1990-1994 an important source of innovative capabilities was continuing co-operation with the university. The spin-off enterprise that was set up in December 1990 followed the mission of restoring map production in Estonia. It was based on advanced database solutions and meant more rapid technological innovations than were implemented by competitors. After restoring Estonian independence in 1991, the new Estonian state institutions became clients interested in navigation charts and other fields of cartography. That gave impetus to long-term development projects. Accumulation of geographic information to the Estonian spatial data base has continued for years and has produced an important strategic asset for Regio.

II Employee-owned enterprise 1994-1998
At this stage the map production was fully computerised. The first and the biggest internet map server in the Baltic States was launched in 1997. Regio team was involved in developing Estonian geoinformatics standards and development concepts. It was a period of stable sales growth, many innovative ideas and "club spirit". This led the founders of the company to the logical conclusion that all "club members" (i.e. employees) should become also shareholders. However, as shares were given free of charge to employees and the share distribution was at the sole discretion of founders without clear criteria, Regio did not become a typical partnership. Although the field of activity (innovative knowledge-driven business) depends on being able to attract great minds and profit-sharing could be one way to keep talents. Regio managers might have considered more clearly a targeted profit-sharing scheme to support future growth ambitions but at the middle of 90s employee ownership did not become a motivation breakthrough tool.

III Risk capital involvement 1998-2000
In order to get resources to speed up sales and profit growth and to transform Regio from the "club" to a "normal company" the Baltic Small Equity Fund was involved as the investor. Regio gained high ranks in annual TOP-lists of Estonian companies. Software development was now more than 50% of the activities. A combination of several factors developed the technology transfer capabilities of Regio in the new emerging field of location-based services and mobile positioning middleware. Here Regio started to offer mobile location-based solutions (later known under Reach-U trademark, see www.reach-u.com). It was however difficult for an SME in small Estonia to convince big international players that it really had advanced knowledge and development capabilities. Regio management understood that it is not possible to finance mobile technology sales all over Europe only by using Estonian capital. The problem was not only about limited capital, it was also about image. They started to think how to use the imago of Finland as an innovative country to enter the global technology market from a unknown country at the edge of Europe.

In fact, the venture capital remained fairly passive in its daily operations, but was of great help when it came to negotiating with the second round of financing. Risk capital could open doors to new contacts and networks.

IV Regio becomes part of a listed company - Done Corporation 2000-2002
After discussing different financing options, it was decided to sell Regio to a Finnish company that had been listed at the stock exchange. It was a period of going international, of intensive investments in technological development work but also of increasing costs. An important gain was clear strategic focus regarding sales and distribution - instead of building an independent network or finding a partner in every (European) country, the decision was to sign a few global distribution agreements with truly international players. Two such agreements were signed, EHPT and Ericsson, but only the latter started to work. Crises however hit both information and mobile technology sectors globally and the Finnish parent company soon faced bankruptcy. Regio management offered to the trustees of the bankrupt's estate management a buy-out solution and in 2002 Regio again became an independent company owned by Estonian capital. In retrospect, the sales and buy-back did not cause any direct financial loss to Regio founders/owners. But certainly one might argue that probably some upside was lost. Thee-month delay and confusion due to the bankruptcy procedure resulted in postponing some deals. But considering the collapse of the dot-com bubble, it is very difficult to judge whether other alternatives considered in 2000 would have been better.

Lessons learned for Regio managers at this stage were related to capacities that are essential to manage rapid growth. Finnish managers of Done corporation failed to manage growth. A consulting company involved in the process was however a more useful source of knowledge. They were good at explaining the strategic choices of the distribution channels. Estonian managers also understood that they should not underestimate their own management competencies in the international comparison and could sell strengths of their SME in more assertive ways to potential investors and clients. Justified self-confidence is also an important capability for international business and technology transfer.

V Regio is independent again 2002
Regio has managed to cut costs and to move from -22% profitability in 2002 to +6% profitability in 2003. In 2003 the turnover of Regio was €1.5m. The main objective is to strengthen the company. In the short term this means annual 30% sales growth and up to 15% profitability, in a mid term growth of annual sales to €10m, and minimum 50% of it from exports. This is a much more challenging task than all the previous ones Regio has undertaken. Regio has decided to conduct an in-house training cycle that will develop capabilities for growth. Training of the staff is focused on sales skills but also on the changing roles of managers in a rapidly growing organisation, on managing international projects and communicating internationally, on developing quality systems and on creativity for identifying new business opportunities.

The outcome

Regio has become more cost-efficient but faces challenges in increasing finance for research and development efforts for sustainable growth. Simultaneously there is active search for new growth opportunities.

Despite dramatic strategic changes Regio has developed its key competences in the following areas and technologies:

1) Experience on putting geospatial data to work for enterprises, in particular involving technical skills in the following areas:

• Geographical Information Systems (GIS)
• Oracle Spatial
• Mapinfo programming
• Symbian development
• Geospatial database creation and maintenance
• Online access to geospatial data

2) Combining wireless, IT and location-based technology with content for mobile operators and service providers, in particular involving technical skills in the following areas:

• Mobile positioning
• Operator-grade Java development
• Location-based services

3) Creating user-friendly map products, in particular involving skills in the following areas:

• Cartographic design
• Map publishing

Although it seems that Regio has diversified business fields, they are all linked to knowledge about location and positioning. There have been many internal discussions on whether the company should have better focus and spin off some activities. This may happen in the course of annual revisions of the company strategy.

Regio has followed its core competence and developed during different development stages international entrepreneurship, marketing, networking and innovation project management capabilities. Regio team has learned how to win the attention of a global technology vendor and create value together with the vendor to its clients. They are more flexible than "big players" and are well prepared for changes. Regio managers already know how companies in Western and Central Europe might benefit from strengths and weaknesses of Estonian technology companies. Regio management has applied the balanced scorecard approach in order to identify success factors that could support the vision of Regio as a €10m SME in 2006. Some of this turnover has to come outside Estonia.

Management vision is that Regio is a respected supplier to our customers in the Northern Europe and our products are applied worldwide via our distribution partners

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Learning points

1. An innovative company has to develop constantly its capabilities and sometimes to change its corporate culture to match variable business conditions and evolving lifecycle of the company.
2. It has to be realised that a technologically innovative product is not enough. One has to develop capabilities for marketing and interaction with distribution channels and acquire resources for financing sustainable growth.
3. A SME that is interested in going international has sometimes to make risky strategic moves. You should however keep your key competences in order to have the basis for continuing if all strategic alliances do not succeed.
4. Ownership structure and strategic goals should match each other. Managing rapid growth is a test for managerial competence in an SME. Training and developing programmes that support organisational capabilities for growth should be started before management failure has led from growth to crises
5. High growth potential fields are often more risky and will not be profitable from the start. If we take the example of Regio, production of maps has high profitability at present but mobile location-based solutions have high future growth and profit potential. A way to finance growth internally is to combine "rising star" sectors with less risky "cash cow" product profits and to manage relations at the personal level between business units that have very different financial objectives.
6. Before looking for a risk capitalist an entrepreneur should clarify his/her future steps. Are you ready for selling the company if your final target is management buyout? Are you the manager who has capacity to accomplish the buyout? Does the risk capitalist bring to the SME only money or also management competences and access to new networks?
7. When building strategic alliances you have to assess strategic capabilities and business risks of your foreign partners. SMEs in Eastern Europe sometimes overestimate business competence and put too much trust in the vision of their Western partners. They should look for more alternatives in order to develop sustainable strategic alliances.

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