Time to get out of the Playground

As “great companies can come from anywhere” [1], so will the funding. In the past years VC funding spread out from the handful of core hubs to new peripheries. By now nearly all countries have a venture fund. Geoffrey See — a Kauffman Fellow — supports founders out of North Korea! 

My region — Central Eastern Europe [2]— has been a benefactor of that trend. There were no VC investors to speak of in 2007. Now there are close to 100. The volume invested jumped up from nothing to around EUR 150m last year [3].

The Mismatch

It is a good start and a good base. What is missing?

Make the region as great as its talent

The CEE region is a typical Playground Ecosystem, a term coined by TheFamily in 2015. Many regions went through that phase before they became true Entrepreneurial hubs.

Playgrounds have great Human Talent and willingness to innovate (Rebellion), but dwell on solving engineering challenges, as oppose to building products. They are bad at customer-centric product development. That’s why each week I hear pitches from CEE entrepreneurs of building “technology platforms”. They plan to commercialize them through application licenses, which in other words means — they want their clients to develop their product for them. Needless to say, it rarely works this way.

The missing element to move from the Playground to Entrepreneur’s Ecosystem is Smart Connected Capital (SCC). We as investors have the obligation and the privilege to build it and become leaders in the CEE capital formation.

Smart Connected Capital

The spirit of Smart Connected Capital became ingrained in me during my time at the Kauffman Fellows program in Silicon Valley. Investors that live it have become agents of change in their ecosystems. Creandum in Sweden. Frontline in Ireland. Credo in the Czech Republic. 

Smart Connected Investors have three characteristics. They know how to build long term alignment between investors & entrepreneurs (1), they have deep actionable networks in the key “big capital” hubs (2) and they understand the value of human talent (3).


Long-term alignment through follow-ons and options

In my mind long term alignment is created in two ways. By supporting the founder through her entire entrepreneurial journey and by correctly incentivising her key team members. Investors that follow through all the way up to the exit are unlikely to request off-market terms in a seed round. In CEE there are only a few funds that are in the position to do so. Rewarding the key personnel with options and regularly refreshing the stock option pool is necessary for alignment of interests, but it is still surprisingly rare.


Network Capital

There are no unicorns without funds from “big capital” hubs, such as Silicon Valley, NYC or London [4]. Creating deep, actionable networks in these hubs is the largest value an investor can bring to her portfolio company down the road. That means being able to call top Silicon Valley funds and to get a sincere answer within at most a week. At Black Pearls VC we focus on building strong, personal relationships with the fund managers in the USA and Western Europe. Kauffman Fellows has been key for that.


Knowledge of Human Capital

The best VCs I know spend a lot of face2face time with the teams they invest in. The earlier you invest, the more critical it is to know the people in the team and their motivations. I never invest in teams that have not worked together for at least 12 months. Most of the CEE investors are technocrats and focus way too much on the less important aspects of an early-stage investment, such as a financial plan.


The experience from other ecosystems such as Ireland or Sweden shows that SCC gains substance when private money is put on the table. Governments are great in preparing the Playground. Polish Development Fund Starter and the National Center for Research & Development encourage private investors to support innovative projects by sharing investment risk and bringing the best VC teams into the mix. But it is the private sector, with the wealth of experience in building business, that brings it to the next level. At Black Pearls VC we have, among others, top Polish serial entrepreneurs such as Maciej Grabski (WP) as well as the Foundation for Polish Science on board.

It is time to move out of the Playground and help the CEE companies become as great as its talent. The next unicorn is around the corner.

 — 

[1] Quote by Niklas Zennström, founder of Skype and Atomico Ventures.

[2] Central Eastern Europe in VC terms usually encompasses the „new“ European Union states: the Baltics, Poland, Czech Republic, Slovakia, Slovenia, Hungary, Bulgaria, Romania and Croatia.

[3] Invest Europe, 2017.

[4] At least not in Europe and North America.