Startups in Warsaw, Krakow, Prague, Budapest, Bratislava, Tallinn, Riga, or Vilnius don’t attract as much capital as the ones located in the top hubs in Europe — London, Amsterdam, or Berlin — but these Eastern European tech hubs are on the rise, and early stage investment in the region has surged from $10 million to $283 million in just five years.
This growth should accelerate even further, since new accelerators, coworking spaces, meetups, mentoring opportunities, and reliable VC companies are acting as catalysts.
There are almost 30,000 startups operating in Eastern Europe. Most of them target the global market and develop their products in English, and many seek most of their revenues from Western European and US customers.
They also tend to specialize in specific sectors. Krakow is a hub for beacon solutions, Prague cybersecurity, while Warsaw is doing a lot in marketing automation.
What they lack most is funding. Only three unicorns (companies with a valuation exceeding $1 billion) were born in the entire region, according to CB Insights data. Those three brands — Skype, Avast, and Transferwise — are known worldwide, but are seldom thought of as being Eastern European.
According to KPMG’s Venture Pulse Q3 2016 report, VC investment in Europe has grown from $5.7 billion in 2012 to $14.1 billion in 2015 and $8.7 billion in the first three quarters of 2016. Data I collected using the Mattermark.com database shows that VC investment has grown thirtyfold over the last few years, from $9.5 million in 2011 to $283 million in 2016.
And while the Western European hubs — London, Amsterdam, Stockholm, Berlin — attract the most money and attention, the Eastern European ecosystems try to keep pace with fewer resources, according to Tomasz Swieboda from Warsaw-based Inovo VC fund.
Startups are a huge chance for small Eastern European economies. Their relative importance for the countries’ GPD is much higher than in the US, the UK, or Germany. That is why governments are willing to support tech hubs by building infrastructure, or simply creating public VC funds.
Of the top 50 European tech hubs, according to The European Digital City Index, 12 Eastern European cities rank as having the best ecosystems for startups.
And 10 Eastern European cities rank as having the best European ecosystems for scaleups:
Let’s take a closer look at each one of them. For readers not familiar with the diversified Eastern European geography, I have divided it to three subregions: Baltic States, Visegrad Group, and Southern.
The Baltic States — European tech motor at the border with Russia
Three small countries Estonia, Latvia, and Lithuania are a unique place for new business. Their combined area is smaller than North Dakota, with a joint population of 6 million. However they have been home to one of the most active tech hubs in Europe. The three countries rank in the top 21 for entrepreneurship in World Bank’s “Doing Business 2017” report. Strong entrepreneurial culture, low taxes, great infrastructure, and business friendly law and policies are the main advantages they offer.
Tallinn. Tallinn is the top startup ecosystem in Eastern Europe. The capital of Estonia was home to two unicorns: Skype and, more recently, rising fintech star Transferwise. However, the most successful scaleups in the region tend to migrate to bigger hubs. Skype moved its headquarters to Stockholm and TransferWise to London, which attracts most of the European fintech companies. However the company kept its office of 400 people in Estonia, and the founders are strongly involved with the country and its startup scene.
This is a common pattern. GrabCAD, which provides online collaboration tools for CAD files used in 3D printing is known as a company from Massachusetts. It was actually founded in Tallinn before being acquired by Stratasys for $100 million. Still GrabCAD’s product is being developed mostly in Estonia. Pipedrive, a SaaS CRM provider that has already raised $31.2 million, decided to move its HQ to New York while keeping large part of its operations in Tallinn.
“When local companies scale up, they tend to move their business divisions to where their most important customers are, be it Northern California, New York, or London. However, the product team usually stays here, where the talent is,” according to Wiktor Schmidt, founder of Netguru (where I work), a Poland-based software consulting, design, and development company.
Some notable scaleups that still operate out of Tallinn include Skeleton Technologies, a company providing graphene-based ultracapacitors and energy storage, with $26.9 million in funding; AdCash, an ad-serving platform that has raised $21.5 million; and Lingvist, a language learning software, which has pulled in $9.04 million in four rounds.
Bootstrapped projects are also thriving. Toggl is a great example. Started in Tallinn, the simple time-tracking app surpassed a million users last year. And the recently-launched Estonian Startup Visa allows the company to hire staff from all over the world. Sentab, which provides video-calling solutions for seniors, is another example. The company has offices in Tallinn, England, and California.
Vilnius. The capital of Lithuania has introduced a series of startup-friendly policies recently, such as a “startup visa” program that allows founders from outside the EU to open businesses in the country.
YPlan, a curated guide to local events, raised €33.1 million ($35.2 million) and opened offices in London, as did Trafi, praised as the world’s most accurate public transport app, which raised €6.55 million ($7 million).
The ecosystem is home to successful scaleups such as Vinted, a fashion marketplace app provider, which has raised €56.97 million ($60.6 million).
Riga. Latvia’s capital, Riga, is the youngest ecosystem among the Baltic State capitals. Its biggest success stories include Ask.fm, a Q&A social network with over 150 million users that was acquired by Ask.com, contact management application CoBook, which was acquired in 2014 by FullContact, and science based nano-technology company Naco Technologies, which was acquired by automotive and industrial supplier Schaeffler Group in 2015.
Noteworthy Riga-based scale-ups include software company Infogr.am (which has raised €2.5 million ($2.34 million), action sports videography drone AirDog, the most successful Latvian crowdfunded project to date, which raised €6.1 million ($6.5 million), distributed document-oriented database-as-a-service vendor Clusterpoint , which raised €2.3 million ($2.5 million), and fintech company CreamFinance (€6.8/$7.2 million).
Visegrad Group — the region with the highest growth potential
Four Central European countries — Poland, Czech Republic, Hungary, and Slovakia — make up the Visegrad Group. They are linked closely culturally and economically and have a population exceeding 64 million with robust economies. This region is home to several tech hubs with great potential. Cities like Budapest, Warsaw, Prague, Bratislava, and Krakow are big markets with good access to clients and investors and are the most attractive for scaleups.
One of the key competitive advantage of this region is its talent pool. Polish, Czech, and Hungarian developers rank fifth in 10 out of 15 domains in the HackerRank programming challenges. Tech talent is more abundant in Poland than in the UK or the US. The world’s biggest business and tech centers suffer from significant brain-drain, which pushes up the cost of software development and impedes its quality. But in Poznań, a university town, where the company I work for, Netguru, is headquartered, engineers are not sucked up by big corporations right after graduating.
In Poland, 39 percent of 25- to 34-year-olds have university degrees or equivalent. They also tend to have a command of English. What’s more, the local talent pool is supported by foreign talent arriving from Russia and Ukraine.
Budapest. Budapest is ranked as the top Eastern European ecosystem for scaleups due to the city’s availability of capital. The tech infrastructure is exceptional. However English skills are said to be a little bit lower here than in other top Eastern European hubs.
Several Budapest startups have succeeded globally. Ustream, which providing video conferencing solutions, was acquired at the beginning of 2016 by IBM for $130 million. Remote connectivity tool LogMeIn went public on the NASDAQ in 2009. Prezi, a cloud based presentation platform, is another well-known company from Budapest. It has raised over $72 million in four rounds of funding.
NNG a developer of iGO navigation was founded in Budapest in 2004 and now employs over 900 staff in 12 offices all around the world. In 2016, the Hungarian government and NNG inked a strategic cooperation agreement to keep the company’s headquarters in the country. Almotive, a developer of AI software for self-driving cars, has picked up $10 million in funding. AeroGlass, which makes augmented reality navigation for aircraft pilots, is also based in Budapest, as is neuromarketing platform Synetiq. Antavo, a Budapest-born loyalty marketing software firm has moved its headquarters to London.
Prague. The Czech capital is a modern city with great digital infrastructure and close connections to Berlin. It is home to the oldest unicorn, Avast Software, a security software company founded back in 1988. It provides one of the most popular anti-virus solutions and has made a smooth transition to the mobile market. Its cybersecurity competence has since spread throughout the city. Mobile application security provider TeskaLabs is growing fast, and has moved its headquarters to London.
TCP Cloud a company that specializes in managed services for OpenStack, OpenContrail, and Kubernetes was acquired in September 2016 by Silicon Valley-based Mirantis for about $43 million. And B2B web API developer Apiary has raised almost $8 million and moved its headquarters to San Francisco.
SocialBakers one of the world’s largest social marketing and analytics solutions providers has raised $34 million in three rounds. Neuron SoundWare, a deep tech startup for self-teaching (which won Vodafone Foundation’s Idea of the Year in 2016), moved its headquarters to the UK.
Warsaw. The capital of Poland is the business and political center of the largest country in the region. Many corporations have their regional headquarters here, which affects the startup scene. On the one hand, it means financing is accessible, and there are plenty of clients for companies offering B2B solutions and products. On the other hand, it means the local talent pool is quite drained. Infrastructure is great, with a Google Campus recently opened — one of six in the world.
Warsaw-based rising star DocPlanner, an online healthcare platform enabling patients to book appointments with local physicians, raised two impressive rounds of $10 million and $20 million in last year and a half. The company plans to use the funding to expand globally. Brainly, a social learning network with $24.5 million in funding and over 60 million users, is planning a similar strategy.
Warsaw is also home to rising marketing SaaS stars. The first such company to go global was Brand24, with its social media monitoring tool. New ideas are following. Growbots, an outbound sales automation tool founded just two years ago, is attracting funding and has moved its business department to San Francisco.
Bratislava. Bratislava is very closely connected to Vienna, with Slovakia being the only Visegrad country that has adopted the euro currency. According to some local startup event organizers, “In Western Europe, there are often many businessmen and a shortage of developers who would do the actual job. Here in Slovakia, the startup team usually consists of three to four developers, who still believe they do not need a businessman.” It is a rising tech hub, however there are fewer scaleups here than in the other cities, be it for the lack of overall business experience or the small local market. Local initiatives, if successful, immediately go global. That was the case for Prizeo, a fundraising site for charity driven by celebrities. It was funded in Bratislava in 2012 but soon acquired by Los Angeles-based rival Chideo.
Another example, online marketplace Meet’n’learn, now operates in Germany and Austria.
Krakow. The second largest startup ecosystem in Poland, Krakow, is home to renowned universities, with Jagiellonian University being one of the oldest in continuous operation in the world. It is estimated that one in five people in Krakow is a student. There are more than 5,000 graduates from IT-related studies each year. The city’s international atmosphere helps create entrepreneurial startup ambience.
Krakow is famous for several scaleups. Estimote and Kontakt.io specialize in beacon technology and bringing Internet of things to interactive marketing, and have raised $13.8 million and $7.75 million respecively. A complex marketing automation platform SalesManago founded in 2011 has raised $6 million and is now present in over 40 markets.
Just as with Warsaw or Prague, Krakow’s has a talent drain problem. Many IT engineers opt to go to work for big corporations like IBM, Cisco, Sabre, or Comarch.
Smaller Polish tech hubs have access to great talent with less competition from big corporations. The most vibrant are Poznań and Wroclaw. Poznań is home to Allegro, an auction gigant that prevented eBay from spreading to Poland. It’s also home to the company I work for. Wroclaw also a vibrant startup scene. Its most famous scaleup is LiveChat, founded back in 2002 and later copied by the likes of Zopim and Intercom. A third good example is Gdansk, home to one of the leading wireframing and prototyping tools, UXPin, which raised $7.3 million and ultimately moved its headquarters to Mountain View, California.
Southern Central Europe — a very diversified region
This region contains some of the poorest EU countries, Romania and Bulgaria, and former Yugoslav countries that still aspire to become a part of the EU like Serbia and a small but prosperous Slovenia with strong connections to Italy. They are catching up after a devastating civil war in the 1990s. They have a much shorter tech business history than the Baltic countries or Visegrad but are growing very fast due to lower costs and available talent.
Ljubljana. The capital of Slovenia is emerging as an important startup hub. Meetups and coworking places are popping up, as are VC funds. It’s ranked very high as a mentoring place. However the town is very small, so limited access to capital and small local markets push it low in the rankings.
Scaleups from Ljubljana are quick to open offices in New York or San Francisco, like Zemanta, a content suggestion engine that evolved into native advertising software and raised $8.95 million. Celtra ($10.2 million funding) offers a web-based self-service platform for creating, tracking, and optimizing rich media mobile display ads. Visionect helps companies build their own electronic paper display products and has raised $2 million in funding.
Startups here are often crowdfunded, like Koto Labs, which makes indoor sensors for healthy intelligent homes, or Chipolo a Bluetooth-based item finder for iPhone and Android platforms.
Other notable startups include Cubesensors, which produces connected devices to assess how rooms affect productivity and health, and Chipolo, which offers a crowdfunded Bluetooth-based item finder driven by a mobile app.
Sofia. Bulgaria’s main advantage is its low cost of business. The income tax rate is only 10 percent. Unfortunately, this comes with widespread corruption, but lean tech companies shouldn’t be too worried. Bulgaria has close relations with Russia, which is fostered by a common alphabet — Cyrillic script.
The cost of living is low. You can find a room to rent for 120 per month and start a business for less then $100.
The local tech specialists are skilled, but access to financing and mentoring is limited. Still, the ecosystem is growing very fast. Nine new coworking spaces have opened recently, including one supported by the government, Sofia Tech Park.
The most recognizable success stories from Sofia include mobile marketing platform Leanplum, which has offices in San Francisco and has raised $46 million, and TV projector app Flipps, which raised €4.5 million ($4.8 million) and has offices in Sofia, Silicon Valley, and New York.
Bucharest. The capital of Romania is still looking to improve. It offers low costs, a good talent pool, and some acceleration programs. But VC funding is scarce, and mentoring is not available.
Among its notable scaleups there is Avangate, which provides eCommerce solutions and raised $7.5 million before being acquired by Francisco Partners VC in 2013. Online recruitment platform eJobs and online real-estate platform Imobiliare.ro were both acquired by Ringier in 2015 and 2016 respectively.
Zagreb. The business and political center of Croatia has some advantages. The infrastructure is growing, and so is the number of new companies. Unfortunately, there are hardly any VC investors there, and bureaucratic barriers have to be removed. Still the cost of both labor and living are very low, and there are many active startup communities.
Scale-ups from Zagreb include Bellabeat Leaf, which makes a wearable and app for women. It has raised $4.5 million and was founded by a Croatian team based in Silicon Valley; cloud-based dairy herd and farm business management software Farmeron (raised $4.12 million); and high-performance, lightweight car design and engineering company Rimac Automobili (raised over $8.5 million). Rimac has been nominated the fastest electric car in the world (by Guinness World Records).
Scaleups from Zagreb are also quick to open offices in New York or San Francisco, like Zemanta, a content suggestion engine that evolved into native advertising software and raised $8.95 million. Celtra ($10.2 million funding) offers a web-based self-service platform for creating, tracking, and optimizing rich media mobile display ads. Visionect helps companies build their own electronic paper display products and has raised $2 million in funding.
The bottom line
Eastern European tech hubs have the talent, the infrastructure, the entrepreneurial spirit, and the support of local governments and authorities. They are also primed to enter global markets from the get go. Being a cultural melting pot with English as a lingua franca means Eastern European entrepreneurs are embracing the newest trends set in the world’s leading tech hubs. These are some unique advantages.
On the other hand, the region faces drawbacks mostly related to the immaturity of the area’s startup ecosystems — specifically a lack of capital. But the brands of Tallin, Budapest, Prague, and Warsaw are already recognizable among venture capitalists. Business and tech know-how is spreading throughout the cities with every new success of a local startup. This may be the perfect time to invest or start cooperating with Eastern European tech companies.
Update: Just after the publication of this guide, another Eastern European unicorn emerged: Entertainment company Outfit 7, developer of the Talking Tom and Friends game franchise, was bought by an Asian consortium for $1 billion in January 2017. The company was funded in 2009 by the wealthiest Slovenians, Iza and Samo Login, but later moved its headquarters from Ljubljana to London as it became a multinational business.
Bartek Ciszewski is a business and tech journalist living in Warsaw, Poland. He works for Poland-based software development company Netguru among other startups.