Central And Eastern Europe Steps Up To The Plate

Tomasz Czechowicz, Managing Partner at Warsaw-based MCI Management, one of the most successful private equity/venture groups in Central and Eastern Europe, says that until recently his company struggled to find enough CEE start-ups in which to invest. No longer.

“This year we should finish with about 10-plus deals across the different stages [of growth],” he says.

Central and Eastern Europe is becoming a real innovation hub

Image: © Frank Schmidt: released under Creative Commons 4.0

“This is probably the first time we’ve seen enough supply of good companies in this major market.”

While start-up funding is substantially below European averages on a per capita basis, there are some interesting signs of progress in CEE. Hungary, for example, now has the highest VC investment as a percentage of GDP of any country in Europe.

And although big U.S. tech companies tend to migrate to established Western European hubs like London to look for tech talent, that is starting to change. U.S. networking giant Cisco, which is known for its aggressive acquisition strategy, is setting up an entrepreneurs in residence program for CEE companies and will announce the first cohort at the Pioneers Festival in Vienna, which takes place October 29th to 30th.

CEE A Real Innovation Hub From A Global Perspective

“We see the potential, over time, of Central and Eastern Europe becoming a real innovation hub from a global perspective that has solutions that can address not just regional needs, which is important, but also have a global role to play in terms of technology adoption,” says Hilton Romanski, who leads corporate development at Cisco.

That time is here now, all across the region.

For example, at the 2014 Pioneers Festival in Vienna, Juraj Vaculik and Stefan Klein will unveil version 3.0 of the AeroMobil, a six-meter-long steel and carbon-fiber car that can fly with a range of some 875 kilometers or drive with a top speed of up to 200 km/h.

The biggest target market is emerging countries in Africa and Asia where roads are poor or non-existent.

Bellabeat, a company founded in Slovenia which has developed hardware and software to monitor the health of pregnant women and their babies, is gaining international traction — including in the U.S. — with its products.

It won first prize in the 2013 Pioneers Festival start-up competition, was asked to join Y Combinator’s March class in Silicon Valley and has since raised $4.5 million in funding.

Prezi Founder’s Pride In Budapest

When Peter Arvai, now CEO of Budapest-based Prezi, was in the process of moving to Hungary to set up the company in 2008, he was met at the airport by his uncle.“It’s a half hour ride to his home,” says Arvai. “In the car he tells me these things that I hear very often. ‘Everything sucks here. By the way I can’t even think of one company that started here and made it big on the global market.’ You can imagine me sitting there thinking, ‘this is going to be an interesting conversation when I tell them that I’m here because I’m thinking of doing exactly that.’”

Prezi, a Flash-based presentation tool, is one of the region’s hottest companies. Swedish-born Arvai spends half his time in the Valley, half in Hungary, but for him setting up in Budapest was a deeply-personal experience.

“My parents are Hungarian. My father fled in the Socialist times. They raised me with this idea that while Hungary has issues, it’s also a place with remarkably talented and wonderful people.”

“My biggest challenge in the first year was to convince people that we could be successful economically and do it in an ethical way where we pay our taxes, where we get a great work environment for the people that we work with, where we care about each other.”

Prezi was the first Hungarian company to join the Budapest Pride March. Today, thanks to Arvai’s work in setting up a non-profit, there are many more. “I was getting tired of being the only company at Pride.

We created this “We Are Open” platform. People could sign up if they were for having an open workplace that would give equal opportunity to women, etc. We have 770 companies. It’s not just about gay rights, it’s about general openness in the workplace.

“For you this just seems like, ‘who doesn’t do that?’; but here this was radical stuff.”

Prezi, a Flash-based presentation tool which recently raised $14 million from Accel Partners and Copenhagen-based Sunstone Capital, is competing globally with Microsoft’s PowerPoint and is being used by both individuals and Fortune 500 companies.

There Are Several $1 Billion Companies In CEE

And Prezi’s CEO and co-founder Peter Arvai has become a role model, something the region badly needs, says David Waroquier, a partner at Luxembourg-based Mangrove Capital Partners, who focuses on investment in Russia and Central and Eastern Europe. “He is among the golden boys from these geographies.”

Other include the entrepreneurs behind cybersecurity company AVG (founded in 1991 in the Czech Republic) which is listed on NASDAQ and has a market cap approaching $1 billion, and AVAST, another cybersecurity company, which was a founded at the same time in Prague. LogMeIn (founded in Hungary in 2003) is also listed and has passed the $1 billion valuation mark.

Video service Ustream (also founded in Hungary in 2007) is tipped to be another $1 billion company.

When the more established players launched they were outliers. What’s changed is that there is now a burgeoning group of entrepreneurs with big ambitions.

To be sure, talking about Central and Eastern Europe as if it were a single space is to treat an area of more than one million kilometers stretching from the Baltic in the north to the Balkans in the south and (depending on which countries you include in your definition), encompassing in excess of 100 million people, as if it were one homogenous place. It isn’t.

Nevertheless, the countries do share a history. They have all been part of the patchwork of continental European’s shifting alliances and unions. More recently the area was shackled together under Communist occupation in the aftermath of World War II, only to see that yoke thrown off, triggered by events in 1988 and 1989 in Poland which later spread throughout the region.

The region is also linked together as being the poorest in Europe. According to the World Bank, Bulgaria’s per capita Gross Domestic Product of just $15,941 is 1/6th that of the richest, Luxembourg’s.

Huge Competitive Advantage

And, say investors and local entrepreneurs, there are other things that link the countries. “The benefits of CEE?” asks Jan Rezab, CEO of Prague-based Socialbakers, a social media monitoring service; “Silicon Valley is crazy; when it comes to developer prices it’s gone completely insane. We can hire more engineers for the same cost and so do more. That’s a huge competitive advantage.”

This, says Roland Manger, co-founder of the Munich and Berlin-based VC firm Earlybird, and partner at Earlybird’s Digital East fund, a $130 million fund aimed at Turkey and Central and Eastern Europe, some $35 million of which has come from the European Bank for Reconstruction and Development, is a result of the region’s Communist past.

“In most of the eastern European countries, even back in Communist times, technology and science education was always at a premium.”

This emphasis on engineering and mathematics is reflected often in the kind of start-ups coming out of the region. According to Max Gurvits, partner at Teres Capital, a Sofia-based Venture Capital firm, “the focus is very often on the technology and technologically-driven solutions.”

“If you look at the exits that took place in Bulgaria and Romania recently, one of them was a company called Instinctiv that sold to Soundcloud in 2012. The founder was American. That was an analytics tool.

“Another one was uberVU which is a social media monitoring [platform] which was acquired by HootSuite in February of this year.”

However, while the region may be strong in raw engineering and mathematical talent, there are issues that have still to be addressed, say entrepreneurs and investors.

Access To Capital Is A Problem

Problems range from a lack of venture capital, lack of business skills, over-reliance on European Union money and some strong cultural issues that may be holding the region back.

As a result, says Socialbaker’s Rezab, building a start-up in the region is “significantly harder than from most other countries.”

According to Earlybird’s Manger, “Commercial experience and being exposed to industry and business is lacking. That is the biggest problem.”

Access to capital is a problem. While most will say that thanks to initiatives like the EU’s JEREMIE program, which provides money to pump-prime the ecosystem, early-stage seed money is available, there are concerns that the programs are not sustainable. There are also worries about a lack of experienced angel investors who can provide not just funds but mentorship and connections.

But others say the problems run much deeper. “Balkans culture is not exactly conducive to transparent business dealings, and that is to put it mildly,” says Gurvits.

For Gurvits this is a legacy not just of the Communists, but of even earlier influences. “There is this culture of very low self-esteem,” he says.

A Cultural Bias Against Success And Failure

“The Slavic/Communist survival bias of the last several centuries was to stay low. If you want to survive, if you want to make sure that today’s political regime, or tomorrow’s dictator, is not going to kill you, you have to lay low and go with the flow.

“There’s a big cultural issue with standing up and saying bold stuff.”

Others point to a problem that plagues most of Europe: a cultural bias against success and failure. For Socialbaker’s Rezab, the American idea that failure is a stepping stone to success rings hollow.

“Failure is looked at very differently in the region. I’ve seen this firsthand.” Rezab had an earlier start-up. “I was a ‘boy wonder.’ I was a young successful entrepreneur. I was in the national press.” But his company ultimately failed. “It comes back at you in the national press.

“Your mom reads it, your grandmother reads it. The whole market reads it. It becomes extremely difficult to find partners and people who will work with you or for you. Seven or eight out of 10 people that I wanted to work with will not work with me. People should embrace failure, but that is certainly not what is happening here.”

“In English You Say ‘Good For You.’ In Polish We Don’t Have That Phrase”

But attitudes to success are equally as ingrained, says Arkadiusz Hajduk, CEO of Poznan-based Przeswietl.pl — the “Duedil of Poland,” as he describes it. “The perception of failing as a start-up will change faster than the perception of success recognition,” he says. “It doesn’t matter if I’m not successful as long as the other guy isn’t as well. There is this old Polish joke saying if you have a neighbor and this neighbor has a beautiful house and beautiful girlfriends as an American guy you go, ‘God, please give me the same as he has.’ As a Polish guy you say, ‘God, please punish him.’

“In English you say ‘good for you.’ In Polish we don’t have that phrase.”

But talking to local entrepreneurs, there is a huge excitement in the region and, they say, things are changing fast. “What I can see from my perspective is it is changing dramatically in two respects,” says Hajduk. “One is a different kind of founder. A few years years ago it was young inexperienced students doing a start-up because they didn’t know any better.

“Now I can see more and more there are a lot of experienced founders. I am mentoring one accelerator here in Poland called Starter Rocket. Out of six teams, in only one the guys are in their early 20s. The rest the guys are over 30.”

They also refute suggestions that CEE entrepreneurs are afraid of going global. “What is happening more and more is that people realize they need to move quickly out of the region and have some footprint in the bigger markets,” says Stanislav Sirakov, a partner at the Sofia-based LAUNCHub accelerator. “Whether that’s the U.S., the UK or Berlin, we see many of our companies ready to move.”

And it isn’t just eternally-optimistic entrepreneurs who see the potential for the whole region. MCI Management’s Czechowicz agrees the future is looking very strong for the region. In fact, not in absolute terms, but relative to their GDP contribution to the EU, Czechowicz says, “there could be a situation where Eastern Europe produces more start-ups than Western Europe.”




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