Despite the dizzying amount of talented startups operating in Central and Eastern Europe, the region can sometimes be overlooked by global investors. This looks set to change, though: last year marked the best year in the last decade for the region in terms of venture capital raised by CEE (Central and Eastern European) startups. We spoke to hubraum’s Investment Manager Cezary Iwan and Investment Analyst Gabriela Brodzińska to find out more about what the future holds for the region.
Cezary has 11 years of experience in investing and operating several VC companies in Poland. He holds a PhD degree in Economics and is a graduate of master’s and doctoral studies at the European University Viadrina in Frankfurt (Oder).
Gabriela Brodzińska previously worked at a startup which created Smart Home solutions and is passionate about venture capital market, technology and innovation. She graduated from the University of Economics in Krakow with a degree in Corporate Finance and Accounting.
Gabriela points out that we’re well-placed to comment on this topic, since hubraum is a “globally active startup incubator — and that applies to hubraum’s investment portfolio, too.” While many of the startups we’ve invested in are from Europe, we “also have investments in the United States (Monolets, Phytunes), and no shortage of investments in solutions created in other parts of the world like Australia (tagSpace) or Korea (Immersive cast).”
Hi Gabriela, hi Cezary, thanks for being with us today. Let’s start with an easy question: When it comes to the eastern and western parts of Europe, what differences are there in terms of securing investment?
Gabriela: Looking at western and eastern Europe, the western market is more mature, but this isn’t the only difference. There’s both more funding and many more startups available in the western market. It’s easy for investors to find interesting solutions but investors also have more competition. Nowadays the best startups can choose which investors to invite to the table and will examine additional value aside from funding more closely — like the investor’s industry expertise or whether they have a good client network in a specific area.
Despite being a less mature market, Eastern Europe has recently become more and more tempting for investment not only from investors based in this region but also from the west and US.
It’s great to hear startups are thriving there — but what about investors? What issues are there in terms of the Central and Eastern European approach to investing in startups?
Gabriela: I’d argue one key issue is that governments of this region have tried to support the sector by investing money into startups. This sounds great on paper — you’d think it would be fuel for innovation. However, since they’ve taken the approach of needing to invest a certain amount of money in a certain number of years, this has a knock-on effect. It means startups who were undeserving of receiving investment (whether because their ideas weren’t fully developed enough or there wasn’t a clear enough USP) received that investment.
What other differences are there between CEE and Western Europe, when it comes to investment?
Cezary: VCs in CEE invest $300-500,000 in a seed round and expect rapid international expansion. At the same time, most of the local VC firms are not able to help with that expansion. They have a few contacts and business cards, but no real hands-on experience doing business with foreign partners. Perhaps for this reason, the support offered to startups is often limited to a cold intro.
This is slowly changing as some local VC firms are already well connected, and more and more foreign investment is entering the CEE market. But for the time being, offering support with internationalization remains a weak point for many VC firms in CEE. US and Western European firms can bring more value in this regard.
Last but not least, there’s the issue of speed: on average, it takes several weeks or months for VCs in CEE to make a decision and close a deal, while in the US it is not uncommon to close a seed-stage deal in a few days. This requires adaptation on the part of CEE-based VCs since timing and flexibility are crucial in an increasingly competitive and international venture capital market.
Speaking of the way fear might shape investments (or lack thereof), how has the pandemic influenced investment in Europe?
Cezary: The European VC market has proven immune to the turbulence caused by the COVID-19 pandemic. VC funds and early-stage companies looking for funding quickly adapted to functioning under the new circumstances, by, amongst other methods, switching to communication, working and finalizing transactions remotely.
Funding for European startups showed unprecedented growth in 2021, on all fronts – capital invested, deal volume and exits reached all-time highs. According to PitchBook’s European data set, there were 10,583 venture deals in Europe last year worth €102.9 billion. Of those, some 2,865 deals were first-time venture financings worth €9.9 billion. Those figures were up from €3.6 billion and 2,457 deals in 2020. Follow-on rounds took up the rest of the capital and deal volume (Source: www.techcrunch.com).
CEE startups secured in 2021 over 1,000 rounds that together exceeded €5.4B in VC funding. Compared to 2020, where startups raised over €2.2B, the total amount of investments on year to year basis was doubled, and the average round size almost tripled. According to vestbee.com, startups from Poland, Estonia, and Romania stood out by raising €792M, €1.2B, and €780, respectively.
Baltic startups raised more than €1.5bn in 2021 — triple the amount raised in 2020 — according to the Baltic Startup Funding Report, released by Change Ventures. And the pace appears to be increasing: €1bn of the fundraising came in the second half of 2021, and 2022 got off to an even faster start.
2021 was a record year in terms of investment value on the Polish VC market. EUR 792 million has been invested in 379 companies. This means that the value of VC investments in Poland increased in 2021 by over 70% y/y. Compared to 2018, the increase is almost 23-fold!
The pandemic did not discourage foreign investors from investing capital in the CEE region. In Poland, for example, international funds that most often provide capital to companies on their own (that is, without local partners) have gained the dominant share of the market. The share of international funds that invested in Polish companies in the total transaction value increased from 21% in 2020 to as much as 50% in 2021.
Also the total value of transactions of Polish VC funds in foreign companies increased from €101,5 million in 2020 to €366 million in 2021. This is a 3.6-fold increase compared to 2020 (Source: PFR Ventures, Inovo Venture Partners).
Timing is obviously one factor for investment, but geography feels like a significant second factor. How much does location affect investment?
Cezary: Until recently, most funds had a specific geographic focus. For many this is still the case, for various reasons. Most often, it is a strategic decision related to the knowledge, experience and relations regarding a specific market, the legal and formal conditions as well as the economic and political situation and trends in this area. In addition, investors tend to invest in fields and places with which they are familiar.
For some time now, however, due to easy access to information and seamless remote communication, more and more funds are open to investment opportunities from any part of the world. Everyone knows by now that no single geography dominates invention and great investment opportunities are available everywhere.
That’s inspiring to hear! Finally, what advice would you have for startups based in Central and Eastern Europe in terms of raising funds globally?
Cezary: I’d argue that good preparation for fundraising remains a key issue – what does this entail? Come up with a clearly defined value proposition, a professional and informative pitch deck, and ensure you communicate your idea clearly and formulate an easy-to-follow narrative.
I would definitely suggest that startups from CEE carefully analyze who would be potentially the best investor for them and determine what added benefit investment will give the company apart from money. Choosing a well-known fund in the US does not always mean a better choice today than partnering with a much smaller and less known local investor.
The brands themselves in the VC world do not prove anything today. The most recognizable US VC firms often have many partners and junior partners working with portfolio companies. If, following investment from such a firm, the startup does not grow as expected, it is not unusual these days that people from the firm stop receiving calls from founders and remove the company’s logo from its website. CEE startups often assume in advance that any foreign VC firm will be better than a local one, but this is not always true.
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