The New Europe, they say! CEE & its tech hubs

Tech startups thrive where the founders can quickly access big markets, human & venture capital, so that they can fully profit from investments in disruptive technologies & scalable business models. Not to say that it is a necessity for a country’s future economic growth & societal progress, as startups might create new industries & generate economic development not only locally, but more often on a global scale.

We know the usual global tech hubs like Paris, London & Berlin.., but innovation is starting to be more distributed & other regional hubs are becoming a gateway to their region:

Europe has more tech talents & entrepreneurs than anyone can imagine (two times more popping out every day than in the US), but we still seem to ignore a part of Europe, because of history, culture & economic position. With the geopolitical situation of Russia & Ukraine, we tend to look pass the tremendous progress that Central & Eastern European (CEE) countries have accomplished. This region has come a long way since the fall of communism:

Insulin, modern contact lenses, parachutes, the Rubik’s Cube, Skype, and several of the world’s leading computer anti-virus companies all originated in Central & Eastern Europe. The current generation of entrepreneurs did not have local role models to look up to from the beginning, and fighting post-communism corruption in private companies tooks a while to get rid of. Nevertheless, we can now see the rise of some “tech hubs”as we call them, in CEE countries in regions such as Poland, Russia, Romania, Hungary, Czech Republic & Slovakia growing faster than any region in the world (with the exception of Asia Pacific).

Juraj Kotian, head of CEE macro research at Austria’s Erste Group, forecasts growth in these five biggest CEE markets in the near future.

The CEE is an attractive, highly investable region that catches the eye of more & more investors & actors that are contributing to this region, to scale bankable entrepreneurs by leveraging startup experience, providing growth capital & network from Europe (& beyond).

INVESTORS, there’s a new region to take a close look at!

“We are very positive about the future of the startup and investment scene in CEE. The arrival of seed funds have filled a very important gap and give an initial boost to the best regional entrepreneurs. We see more and more companies from the region raising series A and follow on rounds from top tier European and American venture capital firms,” said Stephane Gantchev, Venture Partner of LAUNCHub

• CEE: combined population exceeds 100M, with fragmented regions & populations ranging from 1,3M in Estonia to nearly 40M in Poland: a market at scale
• Last year’s GDP of about $1.4 trillion was larger than that of the Nordic EU region
• Many countries have strong foundations of internationally integrated software development skills as they have great technological, engineering assets & high educational level, including in the critical fields of mathematics and high- performance computing partly as legacy from their communist past
• Meetup is showing growth in tech events in Bucharest, Lisbon & Prague
• The CEE region has a more stable & integrated economic market with 11 memberships in the EU, OECD (The Organisation for Economic Co-operation and Development) & NATO
• Slovakia, Slovenia & Estonia have already adopted the euro as the single currency, with other CEE countries expected to join the Eurozone next
• CEE political environment has been largely constructive with the embrace of pluralistic, multi-party democracy following the fall of communism, a new governmental generation on the rise
• CEE also enjoys increasingly supportive tax regimes with favorable corporate tax rates ranging from 10% in Bulgaria — 22% in Slovakia, (compared with ~30% in Germany & OECD average of more than 24%.9 )
• Daimler, announced planned investments totalling €1.6bn to expand an existing manufacturing plant in Kecskemet, near Budapest & build a second one alongside it
• Government debt is at about 50% of GDP in the CEE, compared to 100% in the Eurozone & the USA
• The CEE situation is an ideal connection between Western Europe, Middle Est & Asia (with access to the Adriatic sea, Baltci, Black & Mediterranean Seas)
• Very well educated & affordable engineer & tech workforce, bilingual & in some cases, trilingual
• Russia shows significant numbers in investments with nearly $900m in 2016
• EIF plays a significant role in CEE countries with the JEREMIE program in Lithuania, Romania, or the launch of EstFund in Estonia, a €60 million fund-of-funds
• Trends per country: gaming & AI in Belarus, cybersecurity in Czechia, fintech in Latvia, e-commerce & gaming in Lithuania, software & life science in Poland, software in Romania, gaming & cybersecurity in Slovenia, Eastern Europe with Russia is the 2nd largest community after the USA, in blockchain & the 3rd largest Bitcoin mining pool
• Russia and neighbors has the world’s largest data scientists community. And Yandex Data School is the largest non-university based school of data analysis
• CEE is record on the global ICO scene: one third of the ICOs & pre-ICOs conducted globally in 2017 and one quarter of the funds raised. 139 identified ICOs or pre-ICOs out of 260 operations in total across the region, with Russia as regional leader, Estonia (26 operations), Ukraine (19), & Slovenia (13) up next

East West Digital News 2017

In terms of regions the fastest, biggest growing markets for startups have been in Scandinavia, Israel, the Balkans countries, & broadly across Central & Eastern Europe (or “New Europe, as we’re starting to call it). We’re still not seeing a critical mass of startups coming out of Southern Europe (Italy, Spain, Greece etc) — Seedcamp, active VC in CEE

Overview of the ecosystems I — Fragmented market, with a global vision

East West Digital News’s freshly out of the ove report gives a more detailed overview of these ecosystems:

East West Digital News 2017

Of the challenges, startups face in these countries are the fragmented markets. This has pushed them to have a global overview very fast, BUT most entrepreneurs aim for the USA from early on, then the EU. The US is a clear choice for most companies, given the huge, singled language market for growth, compared to the (not impossible, just) slow, challenging cross-border consolidation process that Europe & the CEE region has. Few startups consider Asia as their top international market (only 3% in Poland & Hungary). The Czech Republic is the first market where Slovaks decide on opening a branch of their company abroad.

The young, new generation of entrepreneurs are more & more connected to the global market in which they believe in, instead of fragmenting it to the US, the region or the EU. Local successful initiatives immediately went global. (That was the case for Prizeo funded in Bratislava in 2012 but soon acquired by Los Angeles-based rival Chideo.)

Europe needs to regroup, tackle the Single Market subject for startups to prosper & scale faster healthier.

Operating in global markets remotely can be very tricky in these regions where the ecosystem is not only structuring itself but growing as the challenge to reach coaches, clients & investors is… at least 20 times bigger than taking a train from Bordeaux to Paris to pitch your startup to VCs & Corporates, or have your advisory board. And still, a lot of global startups come out of the eastern nascent, immature ecosystems.

Maxim Gurvits, an early stage VC with Teres Capital says, “I think this is the biggest problem in getting to and establishing Product Market fit. Once beyond that stage, most CEE startups do well, but getting to that stage in the absence of an ecosystem is hard.”

In a digital economy, there should be no barriers & we need more links to bridge the gap between EE & CE. What helped the CEE ecosystems get a more global perspective, but also attention & connections, were international events.

Startup Weekends are a globally recognized event which unlocks and activates startups’ local potential. Startup Weekend events have been celebrated in the Visegrad region since 2011. Owing to these events, the Visegrad community and its leaders were able to create a strong network, a common startup business culture and unite in creating a symbiotic ecosystem (Thank you Techstars for the data).

Overview of the ecosystems II — Less financing, but growing interest from investors

One reason companies from this region have historically struggled to grow internationally is a lack of private funding. The traditional funding alternative for CEE companies, banks, are often inaccessible, and sometimes not advantageous (poor risk management, the non-bank financial institutions ended in bankruptcy, underdeveloped public markets, total market capitalization of the region at ~$340 billion, or only ~23% of GDP, compared to 63% of GDP in the Eurozone).

VC activity is the lowest in the EU & around 1% of total globally, but highly growing for the past years (at a rate even higher than the EU average), VC investment in Eastern European startups increased from $9.5m in 2011 to $283m in 2016.. (source OECD, Netguru and Mattermark). Crowdfunding is also popular (eg Slovakia).But CEE is record on the global ICO scene in alternative funding to bridge the gap.

BUT, CEE are still fighting to get funding and fuel their growth.

Because the CEE companies often need to fight negative perceptions or misconceptions from potential Western customers or business partners.

Because investors overlook opportunities due to small & fragmented local markets & lack of information about the markets. Nevertheless, foreign investors have enjoyed huge returns on investment after investing in startups from the region.

Because products with CEE origin are often seen as of lower quality compared to Western equivalents (more about consumer goods & less so for technology products).

Because regional companies are perceived as less experienced in dealing with international clients.

Because the CEE countries do not have the “founder fever” yet (everyone does not want to be founder of something, they want to create a value, a product or a social project with impact) & a more traditional corporate career is seen as more experienced, more driven, and resilient., more stable as a career path to take.

… the best students in CEE are often attracted by corporates, banking, or consulting career, rather than setting up their own businesses.

BUT

The perception is changing, as evidenced by the Czechs voting into power last a party led by a high profile entrepreneur & more recently Slovakia electing an entrepreneur-turned-philanthropist as their president, but the progress appears slow & uneven still to the Westerns, but more to the local entrepreneurs, driven by their desire to build their company.

Estonia is an example of how countries can see governance & entrepreneurship come together with the use of modern technology. The Estonian government bet on digitization in the early 1990s & thus skipped the paper era straight to the digital era, with a technology-led economy.

• 98% of bank transfers in Estonia are done online
• 25% of people vote over the Internet
• health records are stored in the cloud
• you need 15 minutes to register a company
• you need 5 minutes to file an annual tax return online (not to mention that its enabled by digital signatures & online background checks.

This investment in technology can help other CEE countries dim down corruption as in Estonia & encourage a culture of entrepreneurship. Estonia can be a great example to follow by adapting it to the local ecosystem, economy, culture & market by CEE countries to flourish even more their local ecosystems (Estonia benefits from the highest number of startups per capita in the world, and high-tech industries account for about 15% of GDP).

The adoption & application of international best practices is a necessary prerequisite, however, each ecosystem is different & need its own model, and not becoming a Silicon Valley copy cat. It’s better to see more hubs per region gaining traction & growing, than having one hub per region. This is a sign that all ecosystems mature, and the CEE region can take advantage of innovation’s advantages as a whole, and distribute it.

Some recommendations:

Get more local info on these startups scene from local international events as Techsylvania, Leading Eastern European Conference; PODIM; DigitalTalk, How to Web, Code Europe, ..

References:

• East West Digital News 2017 Report
• Atomico & Slush Report: The State of European Tech 2017
• Bogdan Florin Ceobanu’s Articles on the Romanian startup scene
• http://scaleupeuropemanifesto.eu for Europe, DSM,..
• CBInsights
• GPBullhound
• https://www.linkedin.com/pulse/great-companies-come-from-central-eastern-europe-ewa-a-treitz/