It’s time to get out of the playground.
Venture funding into Central & Eastern Europe is on the rise. But the region needs more than capital to excel.
VC funding has steadily increased worldwide, including in Central & Eastern Europe (CEE) . Until a few years back, there were few VC investors to speak of. But just last year, close to 100 firms invested a collective $180m (€150m) into the region .
Great companies can come from anywhere
− Niklas Zennström, founder of Skype and Atomico Ventures
Based on the premise that great companies can come from anywhere, investors flock to discover new opportunities. But a crucial ingredient is missing in the CEE ecosystem to realize its full potential.
What makes a great ecosystem?
In 2015 TheFamily, a European organisation supporting entrepreneurs, introduced a model explaining the three key ingredients of a thriving Entrepreneurial Ecosystem:
- A great ecosystem is made up of Human Talent/KnowHow, Creativity/Rebellion and Smart Connected Capital;
- If all of these elements are present, the Entrepreneurial Ecosystem flourishes;
- If any of the elements is missing, there is no sustainable Entrepreneurship, but other types of business (e.g. Contractor Economy if only KnowHow is prominent like e.g. India for a long time)
What are the properties of CEE?
CEE has exceptional Human Talent. As the first generation born in the European Union, the CEE youth is ambitious, determined and hungry for success. They rank top quartile in PISA studies and kill it in top coding competitions. 200,000 students graduate in engineering every year, most in IT and mathematics. Yet there are only 2 unicorns to speak of (compared to 20 in Western Europe). Only 2% of the EU VC investments go to the region , though it represents 20% of the EU population.
CEE has the Rebellious and Creative spirit. Political movements under Communism prove the former. The fact that many CEE founders are staggeringly successful abroad (e.g. Klarna, Wish) prove the latter.
This makes Central Eastern Europe a typical Playground ecosystem.
In Playground environments research is often entrapped in academia and startups dwell on solving engineering challenges, as oppose to building products. They are bad at customer-centric product development.
Each week I hear pitches from CEE entrepreneurs of building “technology platforms”. They plan to commercialise them through application licenses, which 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
- They have deep actionable networks in the key “big capital” hubs and
- They understand the value of human talent.
Long-term alignment through follow-ons and options
In my mind long term alignment is created in two ways:
- support the founder through her entire entrepreneurial journey and
- continuously incentivise 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.
There are no unicorns without funds from “big capital” hubs, such as Silicon Valley, NYC or London . 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 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 the investment risk with them. 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.
 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.
 Invest Europe. (2017) Central and Eastern Europe Private Equity Statistics.
 At least not in Europe and North America.