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Central and Eastern Europe have had less venture capital at their disposal than their GDP or population could warrant. But with new funds lured in by their startups’ talent pool, global mindset, and capital efficiency, this could be starting to change. Let’s explore. — Anna
What do UiPath, Vinted and Wise have in common?
Startup founders in Central and Eastern Europe will soon have more dry powder to chase.
In recent weeks, we learned that Underline Ventures was halfway through raising a €20 million fund to invest in Romania and nearby countries; that Poland-based Inovo VC was targeting €100 million for its third fund; and that Spanish-born Demium was launching a new fund to invest into Central European startups, with plans for a second close of €30 million to €40 million in September.
These three funding sources have differences, but they share a geographic focus on Central and Eastern Europe. Their reasoning behind why this region is attractive for venture capital presumably also overlaps.
Talking to TechCrunch, María José Lara, Demium’s head of communications, explained the opportunity that the fund sees in Central Europe: “Countries like Poland or the Czech Republic are relatively large countries with populations that are filled with exceptional and well-prepared talent. At the same time, [the region] is at the beginning of its journey in building disruptive companies.”
In short, new funds are betting on the region’s future — and we’ll take a closer look at some of their arguments. But first, let’s consider some data on the current state of things.
Defining Central and Eastern Europe
Before anything else, let’s clarify what we mean by Central and Eastern Europe. It has multiple definitions that can change depending on context. In venture capital, the most relevant one seems to be the OECD‘s, which encompasses “Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, Slovenia, and the three Baltic States: Estonia, Latvia and Lithuania.”
This group of countries is somewhat heterogeneous when it comes to startup scenes, but less so than if you also include Germany, Turkey or Russia, as some definitions do. However, that leaves us with a problem: We have country-specific reports, but we don’t have venture capital data for the whole region we just defined.
In its mid-year analysis, the Global Private Capital Association noted that “CEE VC investment hit a record high of $4.3 billion in 1H 2022.” But since the GPCA’s research on CEE includes Turkey, Russia and neighboring CIS markets, its tally is partially skewed by a mega-round that would be out of our scope — the $768 million Series B funding round of Turkish instant delivery company Getir.
Despite its broader borders, the GPCA’s estimate for venture capital investment into CEE in the first half of 2022 is relatively small. For instance, it barely outpaces EY’s count for Germany alone: €3.38 billion (which is roughly the same amount in U.S. dollars). However, that comparison needs to be put into perspective.
Last week, I touched on the fact that the list of European countries that attracted the most VC funding looks completely different when we take population size into account. Forget Germany, but also the U.K. and France: According to Dealroom’s latest European Pulse Check report, the top venture capital receiver per capita in the first half of 2022 was Estonia, by a vast margin.
That Estonia is punching above its weight is less and less of a secret in Europe and beyond, thanks in part to startups that have become global brands, from Skype and Wise to Bolt. But a global mindset isn’t unique to Estonia, or even to the Baltics: This penchant for international expansion seems to be a common trait across CEE, even in countries with not-so-small populations.
Global-first startups
CEE has actually become so good at creating global startups that the data has become somewhat controversial: What still counts as a local company? Should you look at where the startup was founded, or where its main office is based? Romanian-born UiPath, for instance, was headquartered in New York City by the time it went public in 2021.
There are pros and cons to both ways of counting. On one hand, ignoring HQ location might mean exaggerating the actual number of unicorns in CEE. On the other hand, seeing UiPath as a U.S. company would be missing out on its impact on Romania’s tech ecosystem.
The path and life cycle of Romanian startups simply wouldn’t be the same without UiPath. As often happens after large exits, executives from UiPath went on to work at or support other startups. For example, one of its early employees and former head of growth, Vlad Ionescu, is now one of Underline’s venture partners alongside solo general partner Bogdan Iordache. And UiPath’s former chief culture officer, Andreea Baciu, recently became a board adviser to Nestor, a Y Combinator-backed HR startup.
Nestor has Romanian founders, but just like UiPath, its HQ is in the U.S. Again, this speaks of startups that think globally from day one — a pattern that CEE VCs are hoping to encourage further. “We empower the next generation of experienced Eastern European founders to build global-first startups,” Underline stated in a deck it shared with TechCrunch.
It is not just that CEE founders are building the same startups that they could build in the U.S. In a recent podcast, Warsaw-based ffVC partner Maciej Skarul noted that capital efficiency played a role in making CEE attractive for U.S. VC firms like his employer.
“There has been evidence that CEE startups are three times more cost-efficient than their Western peers,” Skarul said, while in his view, “the talent is on par if not better in some instances.” For ffVC, this represents an opportunity to help “build global U.S.-focused businesses for a fraction of the cost.”
CEE’s talent pool is also a key motivator for Demium, which works with founders so early that this often happens pre-team and pre-idea. “After nine years,” María José Lara said, “we’ve learnt that this model works best in markets where there is a wealth of talented people but [which] faces obstacles to realizing their potential. So, the CE region is exactly the kind of market where we can add the most value.
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What’s next
One of the obstacles facing entrepreneurs in Central Europe is both external and recent: In its notes about VC in CEE in the first half of 2022, the GPCA indicated that “activity slowed in Q2 as the war in Ukraine escalated.”
Indeed, while Ukraine is not part of CEE as defined by the OECD, the Russian invasion of the country has had an impact on neighboring countries, including startups and funds operating in the region.
Demium, which started operating in Poland and Ukraine in 2019, took provisions to help founders leave Kyiv if they wished, and some chose to move to Warsaw or other locations. The fund also sped up the launch of its operations in Prague, while assessing the possibility of starting new hubs in Budapest and Bucharest.
After the initial decline in activity, it wouldn’t actually be surprising if the war led to more tech-related investment into Ukraine’s European neighbors, whose geostrategic importance is now clearer than ever. Coincidentally or not, several Central and Eastern European hubs are set to be part of the network of NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA), which incentivizes research on dual-use technology (with military and civilian applications.)
NATO or not, investments into sectors such as AI and space will take time to pay off. But CEE startups didn’t get where they are overnight, and the effects are compounding. Underline’s LPs, for instance, include founders and early employees from the very same CEE scale-ups that are likely to keep on snowballing. This is how startup ecosystems blossom, and this will be worth watching.