Investors are pouring record amounts of money into technology start-ups in emerging Europe, including a growing number of corporations in search of a piece of the action.
A sector that was once seen as the preserve of venture capital and angel investors is now attracting the interest—and money—of corporate backers. Some do it directly, via the traditional acquisition route, and others through funds set up specifically to develop new ideas, creating a new class of investment known as corporate venture capital.
The annual combined deal value of investments in emerging Europe start-ups is nearing EUR 1bn. It is not difficult to see why. A dozen so-called unicorns—those start-ups whose value has reached USD 1bn—have their roots in the region, including Skype (Estonia), Allegro (Poland), UiPath (Romania) and Kiwi.com (the Czech Republic).
A hotbed of talent
In their wake are fast-growing firms such as travel technology company DCS of Romania, e-commerce store Alza.cz of the Czech Republic, and advertising technology company Zementa of Slovenia. They have been created by and drawn on local talent in the region with huge pools of skilled developers available in Poland, Hungary, the Czech Republic, Ukraine, Bulgaria, and Romania.
This rich heritage is being tapped by corporates whose commercial goals may be to uncover skills or innovative products that they can add to their portfolio, or to play a longer game by nurturing ideas that could ultimately have a broader benefit for their industry. Most corporates still invest in new businesses by taking a stake or absorbing them as subsidiaries, but a growing number use their financial firepower and industry expertise to set up distinct units to invest in a portfolio of new businesses.
Corporates choose to invest in young companies for a number of reasons. The structures and internal procedures that are crucial to a corporate’s success and stability may hamper research and development. Supporting a start-up gives them access to the digital natives who might have seen a gap in the market that established players have missed.
Searching for ideas and vision
According to Horea Popescu, a partner at CMS Romania, the motive for some is to find new ideas and products they can use themselves, or at least keep them away from competitors. For others, it is to provide seed capital that will support innovation and ultimately help them diversify and open up new markets. Popescu said: “The relationship between corporates and start-ups is an intricate one. Corporates can become bureaucratic and slow to innovate, so start-ups give them the ideas and vision they may lack.”
Corporates can become bureaucratic and slow to innovate, so start-ups give them the ideas and vision they may lack.
Sectors attracting domestic and international interest include fintech, IT, enterprise software, green technology and transport. Two exciting Croatian businesses have attracted the interest of corporate investors. Based in Sveta Nedelja, Rimac Automobili was founded in 2009 and is blazing a trail in the motor industry as a developer of electric supercars. In June, Germany’s Porsche increased its stake in the business, with both sides explaining that they could learn from each other through collaboration.
Gideon Brothers, with offices in Osijek and Zagreb, is developing robotics for various sectors, especially logistics, and during the year it secured a EUR 2.6m funding round led by Pentland Ventures, the investment arm of the UK company Pentland Group. It owns sports and outdoor clothing brands such as Lacoste and Berghaus, and has invested in technology that could transform its supply chains.
For entrepreneurs, the growing interest of corporates creates another potential source of financing alongside private investors and traditional venture capital. One attraction, said Marija Zrno, a partner at CMS Zagreb, was that it was not simply a financial transaction; the corporate brought experience and expertise in areas such as research and development, getting products to market, quality assurance, distribution and marketing.
She added: “It’s more than just money. Corporates can make introductions to a whole new network at home and in new countries. In return, they get to see things that might have been under their radar. Both sides benefit.”
Corporates can make introductions to a whole new network at home and in new countries.
Driven by technology
Digital technology and software companies have been in the vanguard of forming investment arms through the likes of Google Ventures, Microsoft’s M12 fund and Intel Capital. Other corporates to go down the venture capital route include Siemens with its Next47 fund, Allianz, Axa and Bosch, and Samsung Catalyst has invested in Hungary’s self-drive technology developer AIMotive. Polish online bank mBank has set up its mAccelerator.vc fund with more than EUR 50m under management and investments including HCM Deck, an employee development platform, Samito personalised marketing and Chatforce, instant messaging and chatbots.
Three years ago, Czech carmaker ŠKODA AUTO set up ŠKODA AUTO DigiLab in Prague to scan global markets for trends and technologies that can be exploited in the automotive industry. It stresses that it is not an investment fund, but is a business development platform to support the parent company in its vision to be a provider of mobility solutions. With teams in Prague, Tel Aviv and Beijing, it looks for start-ups that can improve services to customers, technology to build better cars or reduce the costs of operation.
Jan Hořický, financial manager at ŠKODA AUTO DigiLab, said it invested not just money, but expert time and intimate knowledge of its industry, adding: “Strategic investors can make a lot of sense to start-ups if there is a strategic fit. Co-operation and partnership must generate benefits to both parties to become a success.”
Superbet of Romania, an omnichannel betting and gaming company, has bought young businesses to accelerate its online operations. These include two Croatian firms: coding company Axilis and mobile app developer Score Alarm. It also bought IO Sports in the UK, which was created by two former bankers to apply their knowledge of derivatives trading to sports betting.
The managing director of Superbet Romania, Vlad Ardeleanu, said: “Our interest in start-ups relates to very specific technology that we can use in our industry. We realised we could not build this organically because it would take too long. We were buying their brain power to provide engineering and coding knowledge.
“It’s very important that these companies keep their own culture and individuality. We integrate them from a commercial and legal point of view, but otherwise they remain on their own. We can help them scale up their businesses, but we do not want to interfere with their unique DNA.”
A fast-growing company that has benefited from corporate investment is Dateio, a Czech-based fintech pioneer in card-linked marketing. It works with banks and retailers to offer customers discounts and loyalty schemes. Started in 2013, it first raised money from angel investors and venture capital, but more recent investors have included corporates.
They included the BOLT fund of telecoms group O2 Czech Republic, Air Bank, part of the PPF group, 365.fintech, part of Slovakia’s 365.bank, and the Erste Group of Austria.
Benefits for both sides
Dateio co-founder and managing director Ondrej Knot said: “One of the advantages of working with corporates is they can give access to a client base, a branch network or a digital channel. The start-up gives them a product that can be integrated into their network and this can really help with the scaling-up process. It’s important to understand what each side wants so that they can get the best from the relationship.”
Start-ups tend to flourish where there is an ecosystem that includes a strong technological university, a critical mass of technology companies to provide employment and grow skills, and funding to take them from seed capital through the subsequent stages of growth. Major international cities such as London and Berlin will remain magnets for innovative companies that cannot secure all the support they need at home.
Although not naturally associated with the start-up world, law firms have an important role to play. “Our equIP programme for start-ups initially focused on advice they required in areas such as intellectual property, but equally important is our ability to introduce them to investors in our network,” Horea Popescu said. CMS’s programme has been rolled out to emerging Europe in 2019, with Romanian Neurolabs now part of a global pool of close to 150 equIP participants. CMS also works closely with Start-Up Grind, a global initiative to support fledgling entrepreneurs and help them connect with strategic partners.
Emerging Europe has produced some of the world’s most innovative companies and its reputation as a breeding ground for talent is growing. Corporate investors have added to the range of resources on which entrepreneurs can draw and help kitchen table start-ups on their journey towards becoming potential unicorns.