Ecosystem Fusion at Global Ecosystems Summit (GES) 2018
by Eva Rez
I had the chance to participate in the Global Ecosystems Summit (GES): similar to a food market, but here you could get the taste of various startup / VC ecosystems. GES took place on 14th June in the O2 Arena with ecosystem representatives from all over Europe — Westerns Europe, CEE, Nordics, Turkey, Israel -, Africa, Asia-Pacific, LatAm and North America. I moderated the CEE Panel, but I managed to catch some of the other discussions, and I would like to share some food for thought. It was interesting to learn that all the ecosystems “taste” a bit different, and “getting a perfect meal” is everywhere challenging.
The Israeli recipe is one, which we can all get some valuable ingredients from. Their ecosystem has been evolving organically. Due to the knowledge and network built through the mandatory military service, Israel is a good place to build a startup. However, it is not so attractive for startups that want to scale up. The reason is the relatively small market size: the population of Israel is smaller than the population of London. The region still attracts multinational companies due to the maturity of the ecosystem. And this is where the multiplicator effect kicks in: innovation brings big corporates to the country; this results in more diversity, which helps innovation cherish; the better these firms feel about their business, the more they want to create service companies around themselves; and this requires providers, which can nourish the growing demand. Ultimately, large companies will create a sustainable ecosystem.
Many CEE countries are also facing the ‘small market issue’. Especially, when it comes to the B2B segment. Like in Israel, Eastern European startup founders need to plan their scale up in advance, but at least they have a whole region to test their product or service. The good news is that the available capital is increasing in the region, the bad news is that it is still quite low: it was USD 600 million in the region excluding Russia (1% of the global investment volume) vs. USD 70 billion in the USA in 2016. (Source: East West Digital News, 2018) While the panellists were all quite optimistic about the emerging startup hubs in the region, some pieces of the ecosystem are still missing.
Contrary to the maturing CEOs in Israel, Eastern Europe is still lack of experienced entrepreneurs. Mindsets are forming but are still not completely tailored to a proper business and sales attitude. However, if founders are open to create international teams and hire people who have these complementary skills, they can become very successful.
While some countries such as Hungary have abundant capital available, which tends to spoil startups, others face the scarcity of financial resources. The positive externality is that startup teams in these areas prepare for international fundraising from the beginning, and better resonate with investors and multinational clients. On the other hand, innovation might remain below desired due to the lack of funding. Israel also faced this problem at the beginning, but one VC “brought the other”. Currently, most of the LP money is coming from abroad. In Romania, a slightly different model is building up. The European institutions (e.g. EBRD, EIF) are quite active LPs, and in many cases wealthy private high net worth individuals contribute to the funds as well. Where public money is not accessible, business angels and private VCs can become a good alternative.
LatAm shows a lot of similarities with Eastern Europe: many investors shy away from the region because of political and economic risks; legislation and bureaucracy are burdensome and lengthen the time to market as well as revenue generation; entrepreneurial education is still missing despite the well demonstrated entrepreneurial spirit (e.g. Brazilians). While LatAm is obviously the ‘next big thing’ due to its unserved and underserved population, it still needs to come up with the magic formula. The disconnection between governments, private sectors and universities hampers the breakthrough of this potentially lucrative market. However, if digital transformation gets a green light, LatAm will certainly take off.
We would think that more advanced ecosystems have no issues. They do have. The US Panel pointed out some of those. As US startups are already given a huge market within their borders, they are less prepared for the changing circumstances. In a complete cultural shock (e.g. entering the Japanese market), they are forced to learn the local culture. Otherwise, they will fail fast. The situation is somewhat different when they enter the UK market. Because of the language, they think that the cultures are identical. But they are not. These gaps exist both ways. When entering the American market, non-US startups need to understand that even a world-class team will not make it without local heros as US investors want to see the local market knowledge demonstrated within the team. Another problematic element is that many startups still do not do their homework regarding VCs, their offer and terms, not to mention the potential synergies with their existing portfolio companies.
To end on a positive note: From a US perspective, the UK market is getting more attractive. While the CEE region is well-known for its tech talent, the UK is the hub for science talent. Medtech and life sciences bring many VCs from the East coast to the UK. West coast investors are more interested in the fintech scene, which is admittedly at least five years ahead of the American competition. The government and the regulators (i.e. FCA) are very startup friendly, which further boosts the current ecosystems. Exits over USD 250 million rarely happen in the UK, but this can be an encouragement for startups to scale up their business on other markets, and to avoid early exits when IPOs would also be feasible.
It was an honour to be part of this great discussion at the Global Ecosystems Summit. Hopefully, further steps will be taken to build the bridges between different ecosystems by sharing the best recipes!
CEE Panel at the Global Ecosystems Summit — London Tech Week
