Bulgaria rising: Can a growing startup movement reinvent the country’s economy?

Facing the uncertainty of life in post-Soviet Bulgaria, 18-year-old Vladimir Davchev moved to the United States in the late 1990s to pursue his education and dreams of working in the stock market. But after several disenchanting years, he decided to return to Sofia and pursue his entrepreneurial ambitions in the country’s capital.

There wasn’t much of a startup community in Sofia more than a decade ago, but that didn’t stop him from cofounding a company that would evolve into online food delivery startup BGmenu. To his pleasant surprise, as BGmenu took shape and grew over the next few years, so did a striving startup scene, complete with the emergence of local venture funds, incubators, coworking spaces, and a growing entrepreneurial spirit.

It was this startup community that cheered the loudest when BGmenu announced in February it had been acquired for almost $13 million by Netherlands-based Takeaway.com. Not only was it a big win for a Bulgarian startup, it was also the first exit from the portfolio of Sofia-based venture capital fund Launchub Ventures, which was founded in 2012 and had provided critical seed funding.

“There are very few investors here who understand that a business that is losing money could still have a very bright future,” Davchev said. “But now I think things are very much on the right track. There are a lot more people working in the startup ecosystem trying to launch ideas. There was nothing like this years ago when we started.”

The $13 million deal may seem like pocket change in Silicon Valley. But in this corner of Europe, the exit was seismic and provided a touch of validation that the noise being made here is more than just hype. And in its own way, the rise of this startup scene some 6,500 miles from Silicon Valley is part of the larger story of how Europe is trying to transform its economies.

From Estonia to Portugal, countless regions and countries are seeking to establish themselves as solid secondary tech hubs. The strategies vary but often include new regulations favorable to startups, an infusion of public money, and a heavy dose of state-led cheerleading. The goal is to parlay historical strengths into startup successes that will generate jobs and bring economic hope to younger generations who might otherwise be inclined to head to the U.S. or bigger European tech hubs, such as Berlin, London, and Paris.

Bulgaria’s arc has followed a similar trajectory, helped by numerous advantages, including a strong history of technical excellence, extremely low costs, and a solid outsourcing economy that has attracted big Silicon Valley names. The startup scene saw 210 companies raise $74 million in 2016, up from 20 companies and $4 million in 2012, according to the European Investment Fund. While the region still faces significant challenges, such as attracting investment and cultivating entrepreneurial experience, it’s clear that this solid beginning has provided some much-needed optimism.

“Ten years ago, the world perceived Bulgaria as a low-cost India for outsourcing coding talent at best,” said Pavel Ezekiev, who cofounded NEVEQ Capital Partners, one of Southeast Europe’s first venture capital firm, before leaving to start NEO Ventures last summer. “Five years ago, there wasn’t a startup economy, no new economy. Now we’ve actually built something.”

A hidden gem

When I first moved to Europe in 2014, Bulgaria was exactly nowhere on my list of places to visit. Out of the blue, I received an invitation to attend and moderate some sessions at a Sofia-based conference called DigitalK in the spring of 2015. The organizers would pay for my hotel if I came out for a few days. After a bit of ruminating, I figured: “Bulgaria? Sure, why not?”

It took more than six hours flying from southwestern France to Sofia to truly appreciate just how far east this country of 7.1 million people really is. With beaches on the Black Sea and borders with Turkey, Romania, and Greece, it sits at a remarkable cultural crossroads. But to say that Bulgaria is where East meets West doesn’t quite capture the setting. It’s more like where East and West have come to trample each other over and over again.

The country’s central location has drawn invaders such as the Mongols, the Ottomans, the Nazis, and the Communists, each determined to erase traces of previous invaders. The city of Sofia shows the scars of these historic tidal shifts, and it’s a testament to the Bulgarian people’s resilience that any of its architectural wonders survive to this day.

Walking around Sofia the first time took me past the stunning reminders of this cultural stew, including the sky-blue Bulgarian Orthodox St. Alexander Nevsky Cathedral, as well as ornate mosques and synagogues. There were several digs underway to uncover other architectural landmarks that had been buried or paved over by various occupiers.

In a nod to its new Western-facing orientation and ambitions, there was also a small monument in a park with a quote from President Ronald Reagan. A few months after my second visit to Sofia and Digitalk in June 2017, the city unveiled a statue of Reagan — whom many here credit with the fall of Communism and the Soviet Union — near an alley that was previously named after him.

Yet it was less-obvious landmarks that revealed some of the country’s more modern potential. As I strolled through the city center, I passed several Cuban stores selling rum and cigars. It seemed like such a random global connection: Bulgaria and Cuba?

But at the first edition of Digitalk, a Bulgarian engineer reminded me that under the Comecon system each Soviet bloc country had an economic focus. Bulgaria, in addition to agriculture, specialized in electronics and information technology. Basically, Bulgaria was the Soviet bloc’s IT shop. This engineer had grown up in Cuba because his parents were dispatched there to work on the country’s infrastructure.

That IT concentration, plus a long history of mathematical strength, served the country well after the USSR imploded and Bulgaria slipped out of the Soviet bloc and shook off its Communist government in 1990. By the time it joined the European Union in 2007, those skills had made it fertile outsourcing ground for U.S. tech giants like Cisco Systems, Hewlett-Packard, VMWare, Microsoft, Oracle, and IBM.

As of 2015, the first year I attended Digitalk, Bulgaria had one of the highest broadband adoption rates in the world. And Stack Overflow data indicated that Bulgarian developers had some of the strongest reputations in the world.

As far as raw material for building a startup scene, Bulgaria had plenty of hidden gems.

“We have strong technical skills, which is our competitive advantage,” said local entrepreneur Stoyan Angelov. “Now we need to grow our business skills.”

Startup dreams

The scene of hundreds of young people gathered on the terrace of a downtown bar on a breezy spring evening could have been unfolding in just about any tech hub around the world. But on this Friday night in Sofia, Memento Bar Rakovska was buzzing with good entrepreneurial vibrations as young founders sipped cocktails, exchanged business cards, and pitched each other in the kind of setting that subtly erases the line between work and social life. White balloons bearing the name of one sponsor, Obecto, bobbed hopefully around the edges of the gathering, while other sponsor tables offered piles of brochures.

This was the latest weekly gathering of the city’s biggest tech meetup, Silicon Drinkabout Sofia, an event started by Angelov in 2013 to build a sense of community among the city’s tech players. “It was so difficult a few years ago, when you didn’t see other people doing the same thing,” he said. “You think you’re some kind of crazy person.”

Angelov grew up in a small Bulgarian town but moved to Sofia 12 years ago to start an import-expert business with a U.S. partner. The experience creating the technology behind the business led him to more technical startups. Since then, his own frenzied entrepreneurial path has reflected the expansion of Sofia’s tech scene. He cofounded one of Bulgaria’s first accelerators, cofounded a local event production company, organized several entrepreneurial side projects, and co-owns a couple of local bars. Oh, and he’s hooked into the region’s budding blockchain community,  serving as community manager for LockChain, a travel booking service that just held an initial coin offering (ICO).

The company has about 10 employees now and is determined to remain in Bulgaria as it prepares to expand into international markets. “We choose to be based in Bulgaria,” he said. “Our crypto project advisor is the former Bulgarian president. We spent the last 10 years building a stable foundation. Now is the time to grow that foundation.”

If Angelov has been at the center of the local tech ecosystem, he’s also a bit of an outlier in that his whole career has been in Bulgaria. Much more typical are stories of Bulgarians who have spent significant time abroad, perhaps even grown up outside the country, and have more recently decided to return or invest in the country. For instance, venture capitalist Ezekiev worked at Microsoft in the late 1990s in Redmond, Washington, before returning to Southeast Europe.

Valentina Milanova is currently living in London, where she is working as a startup scout for the Founders Factory accelerator program. She’s worn multiple hats in the Sofia tech scene, including writing about tech for a local newspaper and helping organize the Digitalk conference, while holding down several other jobs. And if that’s not enough, she’s building her own startup on the side. Called Anne’s Day (in reference to Anne Frank), the company is running clinical trials back in Bulgaria on a hemp-based tampon she developed.

Milanova got some seed funding and corporate backing, but doing the clinical trials in Bulgaria is extremely cheap, she noted. She’s hoping they’ll be done later this year, at which point she’ll focus more on her own company. But as she travels back and forth, she continues to be struck by just how different things seem from when she was a teenager just a few years ago.

“When I ask my younger brother what he wants to be, he says, ‘I want to be an entrepreneur’,” Milanova said. “All of my friends want to be entrepreneurs. It’s the new hip thing. But it’s also attractive because it’s a way for people to build their own life.”

Boyan Benev was away from the country even longer. Born in Bulgaria, he moved with his parents to the U.K. just as Bulgaria’s Communist era was ending in 1990. After finishing university more than a decade ago, he began investing in Bulgarian property, a move that led to more frequent visits and left him increasingly intrigued by his homeland. By 2012, he had joined local data analytics startup MammothDB as chief marketing officer before founding his own startup, SHYN in 2016.

Like many expats who have returned, Benev feels a fierce loyalty and pride, thanks to the progress he sees around him. “If we have 10 companies that are successful in Sofia, that will inspire the next generation coming up,” he said. “It’s very unlikely you’re going to have a kid in a small village get inspired by someone in Berlin.”

The opportunity for locals to connect to the entrepreneurial culture seems to grow by the day. There are expanding entrepreneurship programs, startup events, pitch contests, meetups, all the standard stuff one expects to find in a healthy ecosystem — plus coworking spaces, incubators, and accelerators.

And beyond just laying groundwork, some recent exits have offered examples of success stories that can be shared with fresh-faced founders to convince them that Bulgarians can compete. There was the 2015 sale of software development startup Telerik to U.S. Progress for $265 million. Last summer, Bulgarian travel startup Vayant was bought for $35 million. And mobile image software provider MM Solution was acquired last year by a Chinese company for $37 million.

Tenko Nikolov, CEO of web host SiteGround, cofounded the Bulgarian company in 2004, and it has now grown to 800 employees. He’s used that success to become one of the country’s most influential angel investors. Nikolov said each of these exits is making it a bit easier for the next startups coming along by erasing any stigma that might exist for a company based in such a remote region.

“It’s not a problem anymore when you reach out to people from Bulgaria,” he said. “Western companies or Asian companies, it doesn’t matter where they’re from. They not suspicious about Bulgaria anymore because there are so many companies coming from Bulgaria.”

A tech hub is born

A few weeks before Andrus Ansip formally announced plans to unite Europe’s fractured digital markets, the European Commission’s vice president for the Digital Single Market made a side trip to Sofia. His arrival in April 2015 for a keynote address at the Bulgarian Association of Technologies annual meeting that was intended to promote the coming DSM. But he also gave a little pep talk to a country that had been an EU member for less than a decade.

Ansip ticked off a list of the country’s strong points: programming talent, broadband adoption, and an economically important tech economy. He also noted that the EU was pumping $130 million into the government’s IT plans to give reform efforts a boost.

“Bulgaria has a great tradition of IT-led public-sector reform champions,” he said.

That kind of political and financial support has been critical to Bulgaria’s startup story. But it’s more complicated than just the EU shoveling money at one of its youngest members. It is a more intricate relationship that was the brainchild of Evgeny Angelov, who in 2016 founded the Bulgarian Venture Capital Association and now serves as its chair.

Angelov had gotten an MBA at Harvard University and worked in London in finance for almost nine years before deciding he missed Bulgaria. Not long after his return, he was recruited to join the government as Deputy Minister of the Economy in 2009. As part of the strategy to reinvent the country’s economy, Angelov wanted to catalyze Bulgarian startups. The European Union was investing almost $1.5 billion in Bulgaria via a program called Joint European Resources for Micro to Medium Enterprises, or “JEREMIE.” Angelov convinced the Bulgarian government and EU to take about a quarter of that money and use it to back startups.

While some of this represented direct grants to small businesses, Angelov wanted to move away from that system toward a venture capital investment model. So a slice of that money, about $150 million, was put into a separate pot, along with some money from the Bulgarian government to be managed by the European Investment Fund. Officials from the EIF then selected four local venture funds to receive part of that money, with the stipulation they must also raise outside private investment.

“From the beginning, what I really wanted to do was inject commonsense and a market-based approach with this fund,” Angelov said. “We started thinking that this would be a less interfering way for the government to help companies.”

Eleven, a $15 million startup accelerator and seed fund, was one of the first recipients. So was Launchub, which started with a $12 million pre-seed fund in 2012 and invested in 62 startups before announcing a second fund of $23 million in 2016. While the investments generally tend to be under $1 million, that money goes a long way in Bulgaria. Launchub partner Stephane Gantchev, who spent almost a decade working in France before returning to Bulgaria in 2009, said the fund continues to focus locally but also has some latitude to look outside the country at the diaspora.

“We’ll opportunistically seek things outside the region,” said Gantchev, one the organizers of the Digitalk conference. “We like those kinds of founders who live abroad and work abroad. They have a good sense of the international markets and can be important connections for people back here.”

In the summer of 2017, Launchub participated in a $1.1 million seed round of funding for London-based Heresy, a digital analytics startup that includes two Bulgarian cofounders. CEO Dimitar Stanimiroff grew up near the Black Sea but left years ago. Still, he remains connected to the network of Bulgarians abroad, whose numbers are significant. The National Statistical Institute and the Economics Institute with the Bulgarian Academy of Science have estimated that there are more Bulgarians working abroad than in their home country. And about 55 percent of the people who emigrate every year are between the ages of 20 and 29.

“I was blown away by how many Bulgarians were at the Google Campus in London,” Stanimiroff said.

Having the flexibility to make investments in Bulgaria and abroad was critical for Angelov’s startup funding strategy. It’s important that the venture funds demonstrate they can produce returns so they can generate more money that can be plowed back into the system. Angelov said the EIF-managed fund has already received $100 million in returns out of the original $350 million that was allocated. That money, in turn, is being used for new venture funds.

Daniel Lorer (and his partners: Elina Halatcheva, Partner Georgi Mitov, Diana Stefanova) is set to announce the creation of BrightCap, which will focus on seed and early stage funding. BrightCap will receive about $25 million from the EIF fund and is close to raising an additional $5 million in private funding. Lorer had spent about a decade working for tech companies such as Mercury Interactive and Hewlett-Packard in Western Europe before returning to Bulgaria seven years ago.

He’s been serving as a startup mentor and government advisor since his return but wanted to jump more directly into venture capital to give the country’s startups a bigger boost. Though with several other VC firms on the ground and international money starting to come in, he knows BrightCap will have to compete hard for the best deals.

“I think those first funds that started did a tremendous job in terms of educating the market,” he said. “The world has become a lot flatter. So international financing has become a lot more available to startups here. That’s competition to what I want to do here, but it’s also a facilitator.”

Arriving at the destination

Scanning around Bulgaria today, it would seem that its tech scene has built an almost unstoppable momentum.

The Sofia Tech Park opened in late 2015 — bolstered by $40 million in EU funding — to facilitate exchanges between academic researchers and startups in subjects such as communication technologies, life sciences, and green tech. This month, the Bulgarian government announced a new $185 million program for startups. Bulgaria’s Mariya Gabriel was selected to be European Commissioner for Digital Economy and Society (though her tenure has received mix reviews).

And in terms of self-promotion, Angelov has been barnstorming other tech hubs and conferences pitching Bulgaria. As for convincing the international community to visit,  The Sofia Startup Expo just wrapped up, Digitalk is gearing up for its next edition in late May, and the 10th edition of the Webit Festival is expected to draw about 7,000 people to Sofia in late June.

But this frenzy makes it easy to overlook the massive challenges the country faces and the fact that the tech economy is only beginning to make a dent in some of these areas.

In the EU’s 2017 Digital Economy and Society Index, Bulgaria ranked 27th out of 28, only ahead of Romania. While the report praised Bulgaria’s broadband progress, it noted that “its low performance in digital skills, digitization of businesses, and of public services are acting as a brake to the further development of Bulgaria’s digital economy and society.”

And if more Bulgarians are flocking to entrepreneurship, many others are at risk of being left behind. The report noted that two-thirds of the country lack basic digital skills, while STEM graduates have not increased. The average Bulgarian tends to use the internet less than the overall European average, few small businesses have gotten online, and residents aren’t embracing available e-government services.

This has presented some unexpected obstacles for the founders of Enhancv, an online human resource and resume-building tool. Volen Vulkov and Dimitar Vouldjeff started the company in 2014 and have received about $250,000 in funding from Eleven. The company’s first product addresses the varying resume styles and other demands different countries and employers require.

Generally, things are going great for the startup. Enhancv has 11 employees, has been cash-flow positive over the past year, and is looking to expand into other parts of HR. Yet its biggest markets are the U.K., Germany, and the U.S., and it’s still having trouble getting Bulgarians to use the service. “For sure, we are getting our paychecks from outside of Bulgaria,” Vouldjeff said.

The cofounders also said the country’s outdated regulatory system made hiring cumbersome, particularly when dealing with things like stock options. Competition for talent is increasingly tough, especially with larger U.S. outsourcing operations offering safer havens for programmers. And for some positions, the company simply can’t find locals with the right experience, a critical concern for a company with an international focus.

“We’re really looking for experienced marketing persons,” said Vulkov. “The problem is that you can’t find people to take you to the top level.”

The country also faces the same late-stage funding gap that exists across Europe but which can be more acute in eastern and southeastern parts of the continent. That shortfall means a company like BGmenu is better off exiting early because it will be tough to find the next rounds of capital for rapid expansion.

Angelov says late-stage funding is the next piece of the puzzle to solve. For now, he’s not letting this or any of these other issues discourage him. Instead, he’s celebrating the progress the country has made and is increasingly confident that it can tackle remaining obstacles with the same attitude that has brought it this far.

“When we started this, not a single person told me it would be a success,” he said. “Everyone was telling me that we were going to crash and burn. And the reality is that none of these things has happened. It doesn’t mean there are no challenges or that we’ve arrived at our destination. But what has happened in five years has been remarkable. The whole vibe here has changed.”