Skype's journey from tiny Estonian start-up to $8.5 billion Microsoft buy

It was in a grim Soviet-era complex on the outskirts of Tallinn, Estonia, that a quiet high-tech revolution bubbled. In the research park where the USSR secretly assembled its first computer and designed its first space mission, a group of young Estonian computer buffs launched Skype and ushered in a communications revolution.

Eight years later, Microsoft is set to pay $8.5 billion for the Internet phone company, which has about 400 million users worldwide, in its biggest acquisition in history. Looking back on Skype's rapid rise, Jaan Tallinn, one of its founders, credits a spirit of entrepreneurship that filled Estonia in days after the Soviet Union's collapse, giving rise to a spirited community of computer developers who in some cases helped write the country's new technology laws.

"Because we started anew, we got new laws, new leaders, and new technology," says Mr. Tallinn in an interview via Skype from his home in Tallinn. "The big winners were the start-ups."

To be sure, there was great uncertainty in the early days of Estonia independence from Russia. There was criminality, there was a black market, but there was also unbridled creativity. "It was the wild, wild west," recalls Tallinn, who also helped develop Kazaa, the online music site that began as a peer-to-peer file-sharing application.

"If you happen to start a new country in the 1990s, you have the advantage of drafting new laws with the knowledge that the Internet is out there," says Tallinn.

Skype put Estonia on the map. Within the country, its success began influencing other technology entrepreneurs. "If you were an entrepreneur who wanted to do crazy things and people used to say, 'come on, it’s not possible' – well, you couldn’t say this anymore," says Tallinn.

When eBay paid about $2.6 billion in 2005 for Skype, about $150 million stayed in Estonia. Most went into Ambient Sound Investment (ASI), an investment firm owned by Skype engineers, including Tallinn. ASI has provided about $25 million to fund 30 technology or Web-based companies, many in Estonia.

The former Soviet cybernetic science park where Skype got its start is now home to Estonia’s IT creative hub. Renamed Tehnopol Research Park, it houses cutting-edge companies like Modesat, which is developing a communications technology to make it possible to introduce ultra high-speed broadband on jets and high-speed train.

Estonia isn't quite Silicon Valley. But many here see its small size and innovative spirit as the biggest incentive for big thinking.