September 22, 2022

How CEE is escaping the tech downturn — for now

The VCs keep being bullish on the region despite the economic slowdown — but the CEE startups might feel the strain anyway

Zosia Wanat

5 min read

Bolt Scooters

In central and eastern Europe (CEE), it’s hard to find signs of the tech sector downturn. 

While ecosystems in the US and in western Europe have been struggling with layoffs, lower valuations and a general slowdown in VC activity, investment in CEE has been booming. The value of VC transactions in the region in the first half of 2022 was the highest in history, and the yearly total is on the way to break its record too, according to Dealroom. 

Across the region, there have been no major layoffs or startups scaling back their operations. VCs keep announcing their new funds with the intention of doubling down their efforts in the region.

So is CEE “crisis-proof”?

Smaller bubble

Things are far from easy for the region’s economy. Countries are struggling with the EU's highest inflation (over 20% in the Baltics). Countries like Bulgaria and Slovakia, which were hugely dependent on Russian gas, are seeing their energy prices skyrocket. And don’t forget the war in Ukraine.


But these grim indicators haven’t hugely impacted regional VCs and startups yet. According to investors, that’s because local markets are smaller, transaction values have always been lower than in the West and there are few companies that have raised at such aggressive valuations as Sweden's Klarna or Germany’s Gorillas — and then seen how hard it is to justify those valuations now. 

Darek Żuk, CEO at Polish seed fund AIP Seed, says that the valuation declines mostly concern companies at Series B and beyond, which the region is still mostly lacking in. 

“At the earlier stages, there is of course some sort of correction on the market but the falls won’t be that big. And here in Poland, in the CEE, we’re at this rather early stage.”

In the first half of 2022, out of 392 transactions in the region, only one was bigger than $250m (the $628 Series F of Estonian scooter company Bolt) and eight were between $100m-250m (such as the later-stage funding for Czech startups: egrocer Rohlik, data management firm Ataccama and product management software Productboard). In 2021, it was eight and eleven respectively. The vast majority of the funding rounds concerned pre-seed and seed stage. 

Specific sectors

Traditionally, the VCs from the region are more conservative than their Western peers. And there are fewer funds in general, with less money to spend. This has taught CEE founders that they can’t fully rely on external financing and must run profitable companies instead.

Jan Habermann, partner at Czech VC Credo Ventures, says that founders from the region have a more “bootstrapping nature” than their Western counterparts. 

“Not all companies or startups in central Europe, even if they raise money, scale their expenses and operations so wildly. So they might be a bit better positioned to survive those tough times with tough fundraising than startups that really go at full scale without any backup plan.”

The crisis might not be heavily felt also because of the type of the business CEE startups usually develop — B2B solutions heavy on technology and software. 

“[B2B SaaS companies] typically start monetisation quite early, so they have more alternatives than just to raise,” Habermann adds.

Marcin Hejka, a general partner at OTB Ventures adds that deeptech in the region can actually benefit from the crisis. “What we have seen in previous market corrections is that while company valuations were going down, especially for the later-stage companies, technology adoption continued and sometimes even accelerated. It was specifically visible in B2B segment,” he says. “We expect that deeptech sector in CEE will overperform and, bearing in mind massive tech talent in CEE, will strengthen its role as one of the key drivers of economic growth in the region.”


Not so rosy 

This doesn’t mean that CEE founders won’t feel the impact of the recession at all. The investors say that while they’re not slowing down on their projects, they might carry out more extensive due diligence on new investments. 

“We're adjusting to [the new market situation]. We would be more cautious when we make an investment decision that the company has sufficient runway,” says Habermann.

“There’ll be a correction, for sure, and we can see it already,” says AIP Seed’s Żuk. “Looking at the rounds that are closing now and which aren’t closing down: we’re seeing more and more projects where investors are withdrawing or coming to us with many questions.” 

One external adviser working with CEE startups says that in the last four to six months, some of their clients have stagnated with their investment, mainly between seed and Series A. “They either postpone their investment or raise significantly less than initially expected. It seems that VCs are much more careful with their investments right now,” they say. 

“We'll see some companies, which have raised seed, doing flat rounds. They’ll be raising the next round, sort of a seed extension, so they can actually have more revenue, so they can raise the proper Series A,” adds Bogdan Iordache, general partner at Romanian Underline Ventures. 

“Probably we will see some companies that will shut down. But these won’t be any big companies, more like 10-15 people, so it’s not going to be a massive layoff."

Habermann says that the recession will come to the region but a bit later in the most developed hubs. “Everything's happening quicker and to a larger scale if you're in the Valley or London,” he adds. “There may be some sort of a slow, small time shift, and we will see those trends in the region a bit later. But I don't think they will be as recognisable as you see them in those biggest hubs.” 

Zosia Wanat

Zosia Wanat is a senior reporter at Sifted. She covers the CEE region and policy. Follow her on X and LinkedIn