Fundraising and investment activity in Central Eastern Europe (CEE) continues to rise, as do the number of start-ups and unicorns. In this piece, we combine insights gleaned from speaking to investors at three very different firms: Multiple Capital (Fund of funds), Uniqa Ventures (Uniqa Insurance’s VC arm), and Wille Finance (Family office). These insights help paint a clearer picture of the advantages and benefits of investing in CEE start-ups and businesses, including the region’s large number of highly-skilled developers; its passionate and circumspect founders; low starting valuations; and exciting opportunities for high impact at local levels.
Editorial note: Writing about Europe is hard today. When this article was first conceived, it was mere days before war broke out in Ukraine. For Wolves Summit, a company based in Poland and with strong ties to Central Eastern Europe, this news was shocking and heart-breaking.
We could have held off a day or two to compile this follow-up piece. But the conversations we’ve had with LPs over the last few weeks, if anything, have reinforced our position on the unique opportunities for investors in Central Eastern Europe. The forethought and passion of its business leaders, prolific expertise in tech and development, and favourable regulatory and administrative ecosystems, remain unchanged. And so Central Eastern Europe is—still—a good choice for investors, and likely will be for years to come.
Investments in Central Eastern Europe (CEE) continue to rise with relative stability, with private equity investments reaching a record 566 companies in 2020.
Indeed, the value of startups in the region now exceeds $15 billion, 19 times what it was in 2010, and Central Eastern Europe has seen the birth of 34 unicorns, including 28 in the last seven years. The region also boasts a large (and growing) number of highly skilled and accomplished developers and, importantly, strong founders and business leaders.
Thus, while venture capital has been historically slow to expand into the region, early adopters are seeing healthy returns and enjoying rewarding collaborations with local start-ups and investment firms.
So what is drawing investors to Central Eastern Europe? A series of conversations with LPs in anticipation of the upcoming 2022 Wolves Summit in Warsaw, Poland, has highlighted several key factors.
An exciting start-up market, especially in tech
As mentioned in the introduction, CEE boasts a thriving start-up market, especially in tech. Bolt, Wise, Vinted, PandaDoc, Grammarly, GitLab, and Pipedrive are just a few of the household names to come out of the region. Not only have startups increased in quantity (compare 464 funds raised in 2019 to 466 in 2020 and 365 in the first half of 2021), but individual exit valuations continue to increase as well.
The reasons for this abundance of skilled developers and programmers are manifold, among them an ingenuity (and drive for success) born out of surviving the crushing hyper-bureaucracy of the Soviet era. But there is also the fact that the market is simply not as crowded as in more developed milieux like London or Berlin.
Experienced, impassioned founders, thinking long-term
Unsurprisingly, all the LPs we spoke to were aligned on the fact that a strong team of founders, demonstrating forethought and passion, was one of the most significant factors when selecting companies for their portfolio.
For starters, in the words of one LP, there are fewer cushy jobs here: “The driver, the motivation for a lot of young people [in Central Eastern Europe] who are well educated, especially within technology—computer scientists, engineers, etc.—there is no other choice than founding a company and trying to do something with technology.”
In the relative vacuum that was Central Eastern Europe’s start-up CEO space, a new generation of educated, driven founders has taken root, ready to put all that technological know-how to good use. In fact, 31% of CEE unicorns were bootstrapped—built without external investors—compared to just 7% for the rest of Europe, a feat that suggests forethought and passion enough to satisfy any LP.
One other LP remarked that roughly 50% of their portfolio included Eastern European businesses—not by design, but due to a “natural bias” for strong founders.
Lower valuations across the board, with high potential
Five years ago, the winning model for many investment firms was to find “hidden gems” in Central Eastern Europe at low valuations, and then bring them to London or the United States, present them to investors, and eventually make their return by arbitraging valuations paid out in these established markets.
“But I think that has definitely changed,” commented Andreas Nemeth of Uniqa Ventures. “This [fundraising] has been democratised. Startups are actually directly doing business now with VCs from the States as well. We don’t see that as the winning model anymore.”
Thus, while valuations are lower across the board, the high potential, as demonstrated by the number of successful start-ups in the region and relatively strong returns on investment, is leading more and more investors to seize on these opportunities. Incidentally, this makes life easier for start-ups and founders, too.
“Four years ago, when we invested in Twisto, the founder told us it’s easier to talk to us, as we were based in Vienna and a Central Eastern European-focused fund. He had to explain to all these London-based investors where they were coming from. That has changed.”
The opportunity to have a big impact on local players
Finally, investors based outside CEE have found that they are able to have a bigger impact with their investments—and to be more selective besides.
As one LP remarked, “Try to cherry-pick companies in London. It’s almost impossible. As soon as there’s a signal, everyone jumps on that company. If you can look at companies and cherry-pick the right companies and be an investor, a real investor and get ownership in those companies—I think that’s the beauty of niche areas [like Central Eastern Europe].”
Local firms and banks have also helped smooth operations for investors. Uniqa Venture’s partnership with a local bank in Austria, for example, has allowed it to reach into geographies where it doesn’t necessarily have a team on the ground or isn’t as close to local founders. “There is more than just the financial investment, return perspective,” says Andreas, “but rather a partnership … where we can actually leverage the partner’s [local] experience.”
For firms with specific ESG and SDG goals in mind, the potential to increase jobs, improve socioeconomic conditions on a broad scale, and work closely with founders to champion those objectives is high.
There are numerous advantages for investors ready to expand operations into Central Eastern Europe. Strong founding teams and a large pool of highly skilled developers have helped create a booming start-up space, and early adopters can afford to be highly selective. Financial returns are relatively robust, buoyed by low starting valuations, and investors enjoy a high level of impact and collaboration.
The Wolves Summit team is looking forward to welcoming investors and start-ups alike at Wolves Summit on May 24-27, an opportunity to network and discuss important events shaping private equity and VC in Central Eastern Europe and beyond. Check-out the full list of speakers and investors at https://www.wolvessummit.com/agenda-2022