Meet Fortumo, the $ 10 million Estonian startup that was “randomly thrown together”

Fortumo, a mobile payments startup from Estonia, made headlines recently in the tech press when they raised $ 10 million in Series A funding from Intel Capital and Greycroft. Fortumo offers mobile payments in 80 countries. They were one of the first to recognize the potential for payments that would be billed directly to consumers’ phone bills – and certainly the first to focus their energy on the emerging markets rather than on Europe or the US.

Since being founded 2007, Fortumo had grown organically, but now it needed cash to fuel its global growth – just because of how fast the mobile industry is growing, says co-founder and CEO Rain Rannu (photo, center).

Fortumo’s decision to raise money is a bit reminiscent of AppGratis, which also raised a massive $ 13 million series A round after bootstrapping successfully to about $ 1 million in revenue per month (!). As Appgratis founder Simon Dawlat described it on his blog: ‘the whole goddamn world is switching to mobile at breakneck speed. The mobile wave has grown into something that looks more like a monster tsunami. Market growth is outpacing everyone.’

Fortumo is a spin off from Mobi Solutions, the company that Rain Rannu founded with 5 others more than ten years ago. The founder’s story flies somewhat in the face of all the advice founders get to pick their co-founders carefully: they were literally thrown together.

Rain Rannu: “It was pretty unique, I think: we were just randomly selected and put together during a product assignment at the university. Of the 6 or 7 people in that team, five of us decided that we worked together so well that we wanted to found a company together, which became Mobi Solutions. Everyone from that original team is still involved in one way or another with Mobi Solutions, although not all of them decided to join in on Fortumo.”

Rannu’s own motivation for starting a company was having a father who was an entrepreneur, he says. “I felt that being an entrepreneur was the position that would allow me the biggest amount of personal freedom. I could decide what to do, and then how to spend my time and on what. When we started, we were lucky enough to be presented with a very attractive opportunity: we realised that mobile could be used for a lot more than just calling. It was the time of the first premium SMS services, and we found that interesting, and wanted to be a part of it.”

“We went into mobile because we thought it would be so much fun, but it also turned out to be very, very lucrative and fast growing.”

In 2006, mobile payments appeared on the radar of the Mobi Solutions team: the potential to allow consumers to pay stuff via their phone bill was just too big to ignore, says Rannu. “There are 1.2 billion credit cards in the world, but 5 billion mobile devices. So with mobile operator billing you can reach three times more people than with credit card payments. That was the core idea, and we’ve been proven right on that account.”

But it’s not like the operators will push the credit card companies out of business tomorrow, says Rannu: “First of all: the operators don’t feel like becoming banks too much. And they’re also more expensive than a credict card company – they take a bigger cut from the transaction. A credit card company takes 3 %. An operator takes anywhere from 10 percent to 50 percent. Credit cards provide more security than operator billing. That means operator billing is no good for physical goods that cost money to manufacture.”

“But it’s ideal for virtual goods, or any microtransaction that costs up to € 50. Our early adopters were the mobile gaming developers – now it’s increasingly digital content like music and books.”

“We spun out Fortumo in 2007 to take advantage of that. Initially, we rolled out in 7 countries in Europe. Then, we added Central and Eastern Europe, Western Europe, and then Asia. By now, we’re in 80 countries.”

Fortumo’s beginnings in Estonia – not exactly the center of the startup world – gave it a perspective that helped exploit a key advantage: emerging markets. “A lot of our competitors focused on the US or Europe. But those consumers have so many options. They have ten credit cards, a PayPal account. But in some places in Central and South Americ, or Asia, there aren’t so many options for payment. But people do have a mobile sim card. If you can charge the purchase via the phone bill, that can make the difference between someone who can consume your service and someone who can’t.”

“We had experienced how frustrating it is not to be able to conclude transactions online. Estonia is very well developed digitally, but with the majority of debit cards, it was impossible to do online purchases. So we knew that there were certain barriers to online transactions in some countries. That gave us an angle.”

Fortumo started out as a platform where mobile developers could sign up and add in app payment to their applications. The business model remained very similar to what it was when Fortumo started, with one important tweak. “In 2009 we realised that players like Angry Birds, Gameloft and EA would never sign up on a self service platform. They need a personal contact. So we attracted someone to do business development to deal with the huge merchants.”

Here’s how Fortumo’s payment process works:

I ask about the experiences of dealing with telecoms – which operate at a different speed than a startup. It could cause problems with runway, I suggest, when you’re waiting for the telco to decide whether to work with your.

Rannu: “Definitely. But we already had a lot of experience dealing with them at Mobisolutions. We knew a bit about how they work. And of course, we were attractive for them. They knew that we were the only way they could get a share of the app economy. Otherwise all the money would go to the credit card companies.”

“We never really had to worry about runway, also because we were funded from the profits of the parent company. And by 2009, we were independently profitable. That helped us a lot compared to other startups in our industry, we never had to spend energy on financing.”

“Our recent decision to raise money was really to take advantage of the possibilities for growth. Intel and Greycroft can help us in many ways, not just by their money. Intel has a global network that spans every continent. They can add a lot of value. And the capital allows us to grow more aggressively.”

But what about the idea that a VC is “a boss you can’t fire”? “Of course,” says Rannu, “governance is more formal when you get outside investors. But it depends at what stage you raise money. In a really early stage, you’ll be giving away more control. If you can show traction, you can negotiate more entrepreneur friendly terms.”

I ask whether the explosive growth is what allowed a randomly selected band of students to stay together more than ten years. Growth allows you to buy the peace when there are conflicts. Offices in Talinn, San Francisco and Beijing help when certain people can’t stand to be in the same room anymore. “Obviously it’s easier when a company is growing. But I’ve also seen cases where success caused fights between people. For us, it just worked out relatively well.”

And how about managing that growth? There are a lot of challenges, he acknowledges. “My role as CEO is primarily to make sure we take advantage of opportunities. A lot of money and energy goes to that. To make sure we have the best people, attract them, keep them motivated. Once we have that, my job becomes a lot easier. If you have a team of great people, they pretty much grow the company on their own – you don’t need to micromanage them.”

Asked for a book that influenced him, he says ‘The Lean Startup’ by Eric Ries. “I guess a lot of it, we already did. But in deciding what projects to implement, how to run a project, how to run a project it has resonated a lot in the team. In engineering, we implemented the “5 why’s” process. It gave us a theoretical framework.”

It looks like Fortumo is well on its way to become the stuff of Estonian legend – much like Skype already was – Skype was founded by a Swede (Niklas Zennström) and a Dane (Janus Friis) but coded by three Estonians. The company still has its largest office in Estonia.

Rannu is clearly proud of his fellow Estonian entrepreneurs: “I think we have the biggest number of startups per capita. There’s just 1.3 million of us, but we have had quite a number of breakout successes, like Skype. It’s a really good place to build a startup. People are entrepreneurial, we have very good infrastructure here. Every government service is electronic, e-banking is ubiquitous. And we’re not handicapped by our large home market, like the Russians sometimes are. When you’re small like Estonia, you have to think global from the very start.”

[Photo: Fortumo]

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About the author

Raf Weverbergh

Editor of whiteboard. Raf Weverbergh was a magazine journalist whose work appeared in magazines like Rolling Stone, Playboy, Mail on Sunday, Publico and South China Morning Post. He is the co-founder of FINN, a corporate communications agency where he advises startups and multinationals on their PR and Mustr, the easiest media database for PR professionals. You can contact him on Twitter, Linkedin or Skype (rafweverbergh).