The Differences Between Eastern and Western European Startups
As of Feb. 5, the Berlin Wall has been down longer than it was up. But, more than being a recent reminder of the ideological divide that once separated Western and Eastern Europe, it is a testament to the fact that we Europeans are now looking more to the future than to the past. And nowhere is this clearer than in entrepreneurship.
During the 1990s and the early dot-com bubble, Eastern Europe was just emerging from communism. So, our neighbors to the west had a healthy head start in terms of innovation and strong economies. But, just recently, with the help of supportive governments, we in the East have finally started to catch up, with a number of startup hubs developing in cities like Tallinn, Budapest, Prague and my own home -- Sofia.
Nevertheless, while some might start to compare us to western hubs like London, Paris or Berlin, the truth is that the historical differences between Western and Eastern Europe have been deeply etched in our DNAs -- and as a result, in the companies we are creating as well. Here are some of the most striking differences between our startups:
There is more VC activity in Western Europe.
It should come as no huge surprise: VC activity in Western Europe is much stronger than in Eastern Europe. Countries in Western Europe generally have more developed economies and a higher level of income per capita. As a result, there is more money available to entrepreneurs with a strong idea and business plan. In fact, many aspiring entrepreneurs in Eastern Europe move to western startup hubs to boost their chances at securing funding.
That's not to say, however, that an Eastern European startup is entirely out of luck when it comes to funding. Private equity activity in the region has been on the rise in recent years, but most of it is actually coming from Western investors. In 2016, the Central and Eastern European (CEE) region saw private equity investment shoot up to €1.6 billion -- a new high since 2009. However, this pales in comparison to the activity in western countries: The U.K. raised €3.2 billion, Germany raised €2 billion and France raised €2.7 billion in VC funding over the same period.
As a result, there are not many examples of Eastern European startups that secured strong VC backing early on and later went on to be successful. Usually, they either go for VCs very late in their cycle or not at all, or they just have wealthy owners. Even in my case with Transmetrics, we have received some VC money, but well over 50 percent of our funding has actually come from alternative investors like international business angels and people in the industry.
Startups are more visionary in Western Europe, more pragmatic in Eastern Europe.
In line with the fact that VC funding is more readily available in Western Europe, entrepreneurs in that region have a better opportunity of selling a vision of a product, similar to the U.S. culture, while Eastern Europeans have to sell the fully ready product. Everyone is much more conservative in terms of new products in Eastern Europe and almost no one will believe in a dream or in a product that's not quite there yet -- an underlying distrust which stems from the region's long history of dishonest business practices.
Similarly, Eastern European startups tend to be much more pragmatic and focused on specific things that bring money right now, while Western European startups tend to be more visionary and concerned with long-term strategy. Consider a few of Eastern Europe's unicorns, for example; Skype, Prezi and Avast were each created as pragmatic solutions to common problems. Western Europe's unicorns, in contrast, such as Spotify and Mindmaze, were each built to wrestle more complex issues.
Ironically, however, Eastern European IT companies are more likely to diversify later due to the region's characteristically small markets, while Western European startups are more likely to go for a very specific single opportunity in a larger market -- think HelloFresh, for example.
Eastern Europe is more entrepreneurial.
Just as our history has impacted the types of startups we create, it has also pushed us to embrace the entrepreneurial spirit with more vigor than the average Western European. Given the economic struggle that defined our past, many individuals in the East were forced to pave their own ways as entrepreneurs, as opposed to finding more available, secure corporate jobs like others in the West.
When there are fewer opportunities available, people must create their own. The economic uncertainty that defined Eastern Europe in the past has accordingly made us more entrepreneurial by nature. Similarly, one study shows that more than half of the companies on the 2009 Fortune 500 list actually started in times of recession and bear markets. Another report showed how the entrepreneurship rate in Silicon Valley actually fell below that of the country as a whole at the peak of the dot-com boom due to such secure labor market conditions.
Western European startups have smaller teams.
Moreover, secure labor market conditions generally come with higher wages for citizens of those economies. This is perhaps one reason why startup teams in Western Europe are much smaller than in Eastern Europe. In Germany, for example, the average startup team size is only 2.4 people, compared to an average of 12 across Europe as a whole.
In Bulgaria, specifically, over half of startups teams consist of more than five people. And at Transmetrics, after almost five years in the market, we currently have 22 full-time professionals. Out of these people, 18 are data scientists, software developers and business analysts -- in other words, they're very technical people that would be extremely expensive and rare to find in the western market.
However, differences in labor market culture also play a role in why Western European startups have smaller teams. In Western Europe, it's more punishing to work for a startup, as people prefer to have more defined careers and want to be really effective and efficient in their organizations. Companies in the West are also more egalitarian; from what I've seen there, even people who are not co-founders have quite large responsibilities and are able to make very important decisions within the startup. In contrast, Eastern European startups typically have a more centralized decision-making process with larger teams below them to execute the strategy.
The gender gap is smaller in Western Europe.
In my opinion, the egalitarian view of the West also translates to the workforce and how teams are structured. As such, a final difference is that there tend to be more women in positions of power in Western Europe than in Eastern Europe. A recent report from the World Economic Forum (WEF) supports this point, with Western European countries, on average, ranking higher than Eastern European countries on a measure of gender equality; the report finds Eastern Europe and Central Asia to have a remaining gender gap of 29 percent, as opposed to Western Europe's 25 percent.
Additionally, in a recent ranking of Europe's most influential women in the startup and venture capital space, an overwhelming majority of women featured come from Western European countries. However, there are always exceptions to the rule; women from Estonia and Poland also made the list, and our own CCO is a woman as well.
Moreover, the region is making moves in the right direction with organizations such as Women Startup Competition, Rising Tide Europe and CEE Women in VC celebrating and encouraging its female founders, leaders and investors. And as more countries in Eastern Europe continue to develop, one can only hope that their gender gaps will also close -- just consider the example of Slovenia, which ranked seventh in terms of gender equality in the same WEF report.
While startup hubs have started to pop up across Eastern Europe, it's important to recognize that they are a different breed than their counterparts to the west. No region is inherently better than the other, but each has its clear advantages. For entrepreneurs and investors in Europe, therefore, it is critical to take these factors into consideration when looking to move into the startup space.