Hunting for Unicorns in Central Europe

For many years, post-communist Central Europe could only watch other regions of the world prospering thanks to the rapid development of the digital market. Oh, how times have changed.

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More and more small start-ups from Central Europe have been gaining global attention, with the start-up market in the region valued at EUR 186 billion, 19 times more than in 2010. Photo: Pressmaster / stock.adobe.com

The year was 2008, and Milda Mitkute was packing her things in her hometown of Kaunas, Lithuania to move to Vilnius for her studies, when she realized that she had over 100 pieces of clothes in her wardrobe – and no possibility to bring them with her. Later at a party, during a 2 am conversation with Justas Janauskas, Milda had the idea to find a way of exchanging these things with others – and Justas suggested creating a special app and webpage to help people find other people interested in buying their used items. Thus began the story of Manodrabuziai.lt.

You might be more familiar with the company’s current name: Vinted. The name change coincided with global expansion, and this once small start-up is now valued at USD 5.4 billion. After several ups and downs, the company gained huge popularity and now has 45 million users across the globe. This firm from Lithuania, a country with 3 million inhabitants, has become one of the global leaders in the market for second-hand clothing.

Not only Vinted. More and more small start-ups from Central Europe have been gaining global attention. The start-up market in this region is valued at EUR 186 billion, 19 times more than in 2010. Such companies as Bolt, Wise, Nord Security, Bitpanda, and Skype have become leaders in their segment of the market. Their example proves that the 3 Seas Initiative countries have become a hotbed of innovation and modern IT industry. Is Central Europe on the path to repeating the success of Silicon Valley?

Europe vs. US vs. Asia

According to CB Insights estimates, there were 1170 unicorns worldwide as of July 2022. Investor Aileen Lee coined the term “unicorn” in 2013 to describe a start-up that has gained a valuation of at least USD 1 billion. In that year, it was as challenging to find a successful start-up as to find a unicorn – and the belief that one-billion-start-ups would be so mythical as these fairy tale animals were very popular.

However, the situation changed very rapidly. In 2013, there were only 38 unicorns in the world. The number of such start-ups tripled in five years. And then in the next five years, it increased ten times. Among them are such firms as SpaceX, ByteDance, Revolut, and Klarna, which have a valuation of over USD 10 billion.

The start-up environment has become one of the symbols of the modern economy in the XXI century. It has also turned into one of the leading indicators that help estimate the economic development level of every country and region. Unsurprisingly, most start-ups have arisen in the United States – nearly half of 1170 unicorns have been created in America. China was a cradle for 301 firms and India for 105.

Start-ups: are Europeans conservative

European countries are lagging behind in this overview. When other regions started heavy investments in start-ups seeing it as an opportunity to increase their position in the IT market, Europe was not too much interested in this direction of development. In 2012, European expenditure in this area represented 13 percent of global funding.

The region is hungry for success – also in the field of new technology. Its inhabitants are highly competent, well educated, very creative, with an extraordinary ability to adapt to new conditions

In 2021, this figure rose to 18 percent – more, but still not enough to match the leaders of the tech world. “By nature, Europe has a less positive attitude toward innovation and entrepreneurship than America. The EU also has a very noticeably higher degree of uncertainty avoidance than the US. In this way, Europeans are more naturally conservative,” wrote Mike Bird from “Business Insider” in 2015.

Seven years later, it still looks true. Why? Investing in start-ups is perilous as in Europe, 90 percent of new companies go bankrupt. According to estimates of Euro-Phoenix from 2019, 21 percent failed in their first year of existence, and 50 percent – fell by the end of the fifth year. European investors are not too keen to look for new possibilities in this sector.

Health, you are grand

Central European countries are more flexible than Western European countries. They are also more willing to invest in the technology market. However, they had another obstacle blocking greater involvement: money.

The region is underdeveloped and poorer compared to countries from the west of the continent – a sad consequence of nearly 50 years of existence on the dark side of the Berlin Wall. That is why the shortage of money for investment in the start-up ecosystem. For many years CEE countries could only watch how other regions of the world prospered thanks to their involvement in the rapid development of the digital market.

But it has changed in recent years. According to the report “Coming of age: Central and Eastern European startups,” from October 2021, venture capital investment in tech companies increased from USD 500 million in 2016 to over USD 5 billion in 2021. The pandemic slowed this progress only slightly.

In 2020 investments decreased to USD 2 billion (from USD 2.3 billion in 2019) – only to speed up a year later. The leader of this growth is Estonia, which has the largest per capita spending on tech companies in Europe. “CEE’s particular strength lies in enterprise software, which attracts more than twice the share of venture capital funding than in the rest of Europe,” wrote the report’s authors.

Billion-dollar European startups

Foreign companies finance 90 percent of investments in the CEE tech sector – over 60 percent of them come from the United States. These venture capitalists spend mostly on software enterprises (33 percent of investments in 2021), fintech companies (18 percent), and transportation start-ups (18 percent). But soon, the leading share of these investments will go to health start-ups as this sector is on the path of rapid growth. In 2015 they accounted for only a 3 percent share of the whole cake.

According to the report from October 2021, venture capital investment in CEE start-ups increased to over USD 5 billion in 2021

In 2021 this share increased to 15 percent. The trend is clear, and the pandemic only accelerates it. If anyone wants to hunt down the new unicorn, the easiest way to do so will be in the health industry. As Jan Kochanowski, one of the most famous Polish poets, wrote: “Health, you are grand/though none understand/how splendid you taste/until you are waste.”  His lyric poetry from the XVI century – written with a goose feather – still resonates in these modern, digital times.

The authors of the report “Coming of age: Central and Eastern European Startups” estimate that Central Europe has 34 tech companies with a valuation of over USD 1 billion. They use a different methodology than CB Insights, so these two overviews are incomparable. However, this report shows the potential of 3Seas Initiative countries in the tech market.

Start-ups hungry for success

The region is hungry for success – also in the field of new technology. Its inhabitants are highly competent, well educated, very creative, with an extraordinary ability to adapt to new conditions. Thirty-one percent of CEE unicorns have been bootstrapped (created without outside investments); this ratio is 7 percent in Western Europe. The best evidence is that Central European countries are determined and well prepared to catch up with leaders of the tech world.

Developing a start-up ecosystem is a kind of competition in predicting the time. “The best way to predict the future is to invent it,” said Theodore Hook, a British composer who thought up postcards in 1840. This sentence is still very accurate in the technology field.

In the XXI century, the prize goes to those who are best at reading global trends and adapting to the new reality. Central Europe was late to join this competition. It can become an advantage for the region if it leapfrogs previous stages of development. Definitely, it is the path worth following.

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