14 November 2023
According to the 2022 Central and Eastern European startups report, CEE is one of the fastest-growing regions for venture-capital (VC) funding in Europe, growing sevenfold since 2017, and at twice the rate of Europe excluding CEE. In the past five years, the combined enterprise value of CEE start-ups has quadrupled to €190bn, and the region boasts over 40 unicorns.
Software leads the way
In terms of sectors, companies in the Web3 space such as Serbian start-up Tenderly are drawing attention. The company, which provides tools for Ethereum developers, has been embraced by developers across the board and its customers include some of the leading companies in the Ethereum ecosystem.
AI may also present a wave of new opportunities. Polish company Elevenlabs, which specialises in audio and voice AI software, recently raised €17.3mn in funding, including from Andresson Horowitz.
Gaming and enterprise software still stand out from the crowd. CEE enterprise software start-ups alone have a combined valuation exceeding that of all of their fintech, transport and ecommerce counterparts combined.
Joanna Nagadowska, co-author of the report, points to Bulgarian fintech start-up (and now unicorn) Payhawk, which helps businesses manage expenses, as just one of the success stories. “Payhawk took [just] three and a half years to hit a €1bn valuation. It’s extraordinary.” The role it continues to play in raising the profile of other Bulgarian start-ups is equally noteworthy. “It is an amazing example of how one company led to the beginning of an entire ecosystem,” Nagadowska enthuses.
Bogdan Iordache, general partner at Underline Ventures, tells a similar story about Bucharest unicorn UiPath. “Since the UiPath listing, the top seed funds now come in person to Bucharest to meet founders. That was just not happening before. There is a realisation that you can build big companies out of Romania and an expectation that there will be a transfer of knowledge from those big success stories.”
Iordache believes that the landscape has changed fundamentally. “Ten years ago, there were a small number of funds, mostly backed by governmental or European programmes in each country and little collaboration across the region.” Now there is increased investment activity from major European and US private equity companies looking for later stage investment, exits and start-up M&A, more local capital through angel investors, and technology giants such as Google, Amazon and Adobe increasing their headcount in the region.
This interest is heightened, Nagadowska believes, because CEE start-ups are seen as less capital-intensive, more resilient, focused on breaking even, less speculative and less unicorn-obsessed. “These characteristics make them very attractive [given] current investor caution,” she confirms.
Owing to lower cost structures and generally better efficiency metrics, CEE start-ups can be more attractive to later-stage investors from other regions. This is also true for start-up M&A, and Nagadowska expects more private equity (PE) companies to begin looking into CEE for good deals.
The challenges and the responses
While the future is bright, CEE start-ups face ongoing challenges, not least the war in Ukraine. This has undoubtedly caused disruption, but the start-up sector has proved resilient. Nagadowska attributes this to several factors, including a younger, tech-savvy demographic, and low unemployment. Another factor is their common history.
“There is a shared understanding and experience when it comes to the lasting impact of the post-second-world-war era of Soviet rule. These geopolitical turbulences turned people in the CEE into the best problem solvers and innovators, as they live in constant ‘survival mode’.”
She points to software developer MacPaw, which in preparation for the invasion, swiftly relocated its Ukranian employees and prepared to go fully autonomous with minimum support. Other businesses quickly adapted their services to the significant inflow of people from Ukraine to neighbouring countries. Booksy, a Polish online scheduling platform for beauty and wellness businesses, translated its service to Ukranian to facililate the onboarding of Ukranian women looking for a means to earn money.
The passing of time
Current market conditions should pose less of a problem, believes Iordache. “We are far away from the exuberance of 2021, resulting from the post-pandemic assumption that there would be a new normal, dominated by digital. There is still an element of uncertainty. But I think, with acceptance of the context that we are now in, activity will pick up.”
A greater challenge — and one that cannot quickly be overcome — is time. “There is a level of maturity within an industry that comes from professionals going through cycles and seeing what works, what doesn’t, and figuring out the paths to growth,” says Iordache. As a nascent sector, CEE start-ups currently lack the experience of their more mature Western counterparts.
Another challenge is the relocation of entrepreneurs out of the CEE region. Almost one-fifth of CEE start-ups that raise over €1mn move their headquarters abroad, generally to the US or UK, with an estimated €50bn impact on the CEE region in terms of enterprise value.
The chance to give back
However, relocation out of CEE is not the end of the story. Founders who choose to set up headquarters elsewhere can still contribute to their former ecosystem.
Take UiPath, now headquartered in the US. As well as helping to raise the profile of Bucharest within the investment community, the transfer of knowledge can lead to a “virtuous circle of new investors, advisers and founders,” says Iordache.
Nagadowska’s hope is that one day, each of these ecosystems can be linked, making the whole greater than the sum of its parts. “I dream of a well-connected network and this type of a community spreading across the entire region, rather than just particular countries.”