FUNDS: CEE’s lack of venture capital attracts Earlybirds

By bne IntelliNews August 19, 2015

Benjamin Cunningham in Berlin -


Innovative entrepreneurs have long looked to the US, with its robust venture capital framework, as a sort of ideal startup environment. With exceptions, the European landscape has been less conducive to new technology firms and a lack of capital is a primary cause, so much so that American investors have begun to fill the gap — earlier this year Pay Pal co-founder Peter Thiel invested in two Berlin-based startups.

“There is still a big difference, and it is by several multiples,” Roland Manger, a partner with the Berlin-based Earlybird Venture Capital, says by way of comparison. “The American fund scene is now 40 years old; venture is a long-haul game, you need a generation to develop a reputation.”

If creatives have trouble tapping funds in Western Europe, the problem can be even more acute in Central and Eastern Europe (CEE). The opportunity to execute, rather than a lack of ideas themselves, looks the primary challenge. In Europe, last year’s fundraising totaled €44.6bn, according to the European Private Equity and Venture Capital Association. About 40% of that came from institutional investors from outside Europe and the total is about 10% of what was available in the US. 

Much of that money is gobbled up by hotspots like London, Berlin or the Nordic states, and the CEE region lags even further behind. Though this means underperforming national economies, it is good news for investors eying an ample supply of low-hanging startup fruit. Earlybird, for one, just closed a $150mn Digital East Fund in July as they target early stage investments in the CEE and Turkey. “If you are not discriminatory, you probably have the same sense that there is talent everywhere,” Manger says. “Mental gifts are distributed evenly across the world, but capital isn’t.”

Between desire and execution 

Indeed, a lack of access to startup money has long been cited as a hurdle to faster homegrown innovation in the CEE region. When it comes to tech startups, this is particularly concerning given the region’s historical emphasis on engineering and science education, as well as strong indications that entrepreneurial zeal is actually much greater than in Western Europe. A recent survey by the German web hosting service 1&1 Internet found that a full 70% of Poles want to own their own business. A 2013 study by the global consultancy McKinsey & Company found that 21% of CEE residents said they planned to start a business as compared with just 10% in the EU-15.

While CEE citizens may very well want to start a company, the same McKinsey survey found they are actually less likely to do so compared with their Western European counterparts; just 5% of those surveyed in the CEE ended up launching an actual business, as compared with 6% in the EU-15.

This clash between desire and execution “is not only about capital”, Manger notes, and CEE countries are notable for a general lack of emphasis on research and development. McKinsey found that CEE countries invest about 0.9% of GDP on research and development, compared with 2.1% in the EU-15 and 1.4% in the so-called BRIC countries. The study ultimately recommends “further develop[ing] industry clusters in knowledge-intensive industries and increase industry–university collaborations and support for startups.”

Still, generalizations are difficult and within the CEE region itself there is a wide array of approaches designed to cultivate new tech businesses. As is often the case, it looks to be places with the weakest startup cultures that offer the biggest potential returns.

Among the most successful state interventions, Estonia’s Arengufund used to invest directly in startups, but now partners with VCs in doing so. The government put €60mn of state money into the fund in late 2013. Poland likewise uses government money to help back new tech businesses. Though not exclusively focused on tech, the Polish Agency for Enterprise Development (PARP) spends about €1bn a year giving direct grants to businesses or financing incubator projects. Slovakia has a state VC fund, the Fund of Innovation and Technologies. 

Go southeast

Elsewhere, policy is less progressive. Though Earlybird’s Digital East Fund targets all of the CEE, thus far the investments have exclusively targeted Southeast Europe. Of the eight companies they have committed money to, four are in Turkey, one is in Bulgaria and two are in Romania. The eighth investment, though closed, has not yet been made public, but Manger confirms that it too is in Southeast Europe. This regional skew reflects that Earlybird has four Turkish partners, but also the thirst for investment from the region’s most promising firms. As Manger puts it: “[the region] was even more under-penetrated”.

Here, Manger notes a clear distinction between investing in a place like Poland versus Bulgaria. “In Poland it’s the most advanced, you actually have a lot of EU and government money going into funds,” Manger says. “In Bulgaria and Romania, there are some EU-funded activities, but they are much less. In Bulgaria you have two relatively established incubators, but the focus is on acceleration, not on venture. This makes the business more dependent on Western VCs.”

Among Earlybird’s investments are Metrekare, a Turkish real estate listing platform; Flipps, a Bulgarian mobile video app; and TJobs, a Romanian cross-border jobs site. Their Digital East Fund is comprised of “seven or eight typical institutional investors and some high net worth individuals with smaller investments,” Manger says. It will last 10 years.

“The modus operandi in Southeast Europe is different,” Manger says. “We take a long time to evaluate companies, but we started to build a pipeline and we already know some future candidates.”

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