Overcoming Challenges in the Central and Eastern European Startup Ecosystem
The Central and Eastern European (CEE) region is not only huge geographically, but also rich in a variety of different cultures. Depending on which definition you prefer, there are give or take 18 countries in the CEE region, most of them with their own language. This regional diversity and underlying interconnectivity also apply to the startup ecosystem and its respective challenges.
Entrepreneurship is widely recognized as the engine of social and economic development. According to Dr. Peter Vogel, a professor at Switzerland's University of St. Gallen, an entrepreneurial ecosystem consists of a variety of components which strongly influence entrepreneurial activities. These can be classified into external, non-entrepreneur specific factors, entrepreneurship-specific environmental factors and the individual entrepreneurs.
The diversity with regards to languages can be somewhat of a hindrance in terms of regional market size. This challenge is often overcome, though, by focusing on online business, which doesn’t have to be restricted to the region.
Despite the CEE region's culturally traditional image, it is very open to innovation. Eighty percent of those in Lithuania, 71 percent in Poland and 85 percent in Serbia are willing to try new payment methods, for example.
Access to broadband internet is important, considering the ecosystem is very tech-focused. According to a study conducted by the European Union, fixed broadband coverage in Slovakia, Romania and Poland is slightly lower than the other EU countries, whereas the Baltic states actually have some of the highest coverage. For 2018, IDC predicts a growth rate of 4.7 percent and it is expected that the CEE fixed broadband market will continue to develop rapidly, as the household penetration was at 43.7 percent in 2017, compared to the Western European percentage of around 72 percent, prooving that there is still a lot of potential for growth.
There are international airports with good connections to other European cities and also some non-stop intercontinental flights.
Domestic infrastructures such as roads and high-speed train connections have also greatly improved over the last decade. Although, there is still quite a bit of room to improve.
Co-working spaces have also been popping up everywhere in the region and are even expanding, due to high demand.
Quantifying innovation can get pretty controversial, as the metrics used by some indexes focus on just the number of patents registered and scientific papers published. Aspects that might paint a more accurate picture like knowledge or skill creation, on the other hand, are nearly impossible to measure reliably.
Overall, the level of innovation in the CEE region is quite varied. Estonia, for example, scored highest out of the CEE countries at rank 24 on the 2018 Global Innovation Index, with top performers like Austria, New Zealand and Iceland just above. Belarus, on the other hand, scored lowest at 86, only slightly better than the Dominican Republic, Sri Lanka and Paraguay. Most CEE countries can be found around 40, which still puts them in the top third.
As the numbers have illustrated, though, some countries have a longer way to go than others.
Government and regulations
The government in Estonia has been very welcoming of innovation and startups. For example, blockchain is used in the national health, judicial, legislative, security and commercial code systems, with plans to extend its use to other spheres such as personal medicine, cybersecurity and data embassies. Estonia and Lithuania also issue special startup visas for entrepreneurs.
In Poland, the government supports the startup community both on a local level through development agencies or regional government as well as on a national level. Since 2014, selected startups have been invited to the presidential palace every year to present their work. Last year, though, former participants of “Startups at the Palace” and other community key opinion leaders criticized the president for endangering the judicial independence, citing concerns over Poland being politically stable enough to be a home for startups in the future.
Other CEE countries are lagging behind with official support for innovation and startups, especially with regards to red tape when registering a company.
Entrepreneurship in the CEE region
Culture and education
Cultural attributes in the startup ecosystem’s context refer to the underlying beliefs and outlooks on entrepreneurship within a region.
In terms of mindset, ambition and drive, the CEE region is outperforming many other regions. For example, in terms of self-employment: Poland and the Czech Republic are leading in the field with 18 percent and 17 percent, respectively, and even Latvia and Estonia, with comparably lower percentages of 9 percent and 10 percent, respectively are more entrepreneurially minded than the United States at just 6.3 percent.
Education is important culturally in the region. Polytechnic universities are widespread. According to a Seedstars report, 1.2 million people graduate every year in the CEE region. In the OECD’s rankings, Poland, Slovenia, the Czech Republic and Latvia are all in the top 30 countries with the best scores in mathematics.
Support and networks
One could say supply has answered to the demand. All over the region, meetups, community foundations, technology parks, etc., have sprung up. In Krakow, Poland, alone, an average of two startup events took place every day last year.
Mentors and coaches, many of them expats, engage themselves in these communities and add value to early-stage startups.
Chambers of commerce, development agencies or private organisations are wide spread and support startups when it comes to exporting or international collaboration.
If you’re bootstrapping your company, starting the company in the CEE region might be the smartest decision. According to Overkill Ventures, it costs three times less for a three-person startup to operate in Latvia than in London. In Latvia, $100,000 is enough to last a startup more than 12 months, while a London-based startup would survive just five months.
Investment in CEE companies is on the rise, with startups in the region attracting a record €3.5 billion in private equity and venture capital in 2017. This constitutes a 113 percent year-on-year increase.
Historically, many investors were ex-bankers or real estate developers, using various predatory investment prctices, like taking 50 percent equity or asking for kickbacks, all while providing no useful help or support. While this can still happen in the region, the future looks much brighter.
Prominent VC funds, such as Inventure, are expanding their investment scope to the CEE region. As new funds emerge, and successful founders themselves become angel investors, more money and good advice become available and founders become wiser.
The CEE region startup ecosystem is still in a sort of "gold rush" phase and offers many opportunities for founding, investing or collaborating. Lower expenses, government support, access to talent and infrastructure are definitely attractive for entrepreneurs open to relocating and doing business from there. There are also many opportunities in international collaboration, on a B2B or investment level.