September 24, 2020

Why VCs from the west should not be afraid of startups from the east

Higher returns on investment are just one of the advantages of this fast-paced region.

Kyiv, Ukraine. Credit: Unsplash

Venture investors often overlook eastern Europe, despite its potential and track record of success stories. While private equity investment in the central and eastern Europe (CEE) region reached €2.95bn in 2019, funding an all-time record of 464 companies, that still represents only 3.1% of the European total.

Why has venture capital been historically slow to expand into the region? Based on our experience, western VCs cite a few challenges when working with startups from eastern Europe:

  •  The lack of fund mandate — not enough quality deals fitting the investment profile;
  •  The lack of network and the knowledge of the local venture ecosystem to access the deals;
  •  The difficulty of achieving successful exits;
  •  Political and legal concerns, especially when it comes to deals outside of the EU;
  •  Higher risk to their portfolio, public image and careers, if compared to funding startups in western Europe and North America.

Hence, early-stage eastern European startups are rare guests in the portfolios of the top western VCs. Some funds insist that startups move to the west or they won’t invest, which in turn hits the investment image of the region and prevents the local startup ecosystem from maturing.


There are a few exceptions. For example, Germany’s Point Nine Capital supported eight companies from Poland, while HV Holtzbrinck Ventures and Accel Partners have backed three Russian startups each. But they’re still far more likely to invest in companies from London, Berlin or Paris.

Just 30% of the top 50 seed-stage venture funds and accelerators from western Europe (based in the UK, Germany, France, Sweden and the Netherlands) invested in startups from eastern Europe in 2019. British and German investors seem the most likely to look to eastern Europe, while Swedish, Dutch and French investors prefer to focus on local projects. 

Here are the VC firms with the most eastern European startups in their portfolios:

  • EIT InnoEnergy (The Netherlands) — 18 EE startups (9% of portfolio)
  • Point Nine Capital (Germany) — 12 startups (13%)
  • Seedcamp (UK) — 11 startups (5%)
  • Kima Ventures (France) — 10 startups (1%)
  • GFC (Germany) — 6 startups (2%)

Geographically, investors show more confidence in Poland and Estonia — startups from these countries appear in eight funds’ portfolios each. Meanwhile, companies from Latvia appear in six of these funds’ portfolios, Russian startups in five, and Croatian, Lithuanian and Slovenian companies in four each.

Rethink eastern Europe

While the current investment activity in the region is far from surging, there are clear indicators that VCs should rethink their strategies here.

  • Low entry cost. Eastern Europe traditionally requires less spend to deliver tech solutions. For example, Kiev (Ukraine) and Ljubljana (Slovenia) are named among the top three European hubs providing value for money. Consequently, with the same amount of euros, VCs get to invest into more companies and diversify the portfolio for more chances to succeed. VC firm SOSV, for example, looked at its portfolio companies and found the average pre-money valuation at seed deals for the US and Europe is $7.7m and $3.6m respectively.
With the same amount of euros VCs get to invest into more companies and diversify the portfolio for more chances to succeed.
  • Unicorns. More than 10 unicorns have emerged out of central and eastern Europe, with a combined value of €30bn, and a promising pipeline of startups across the region too. Flagship successes like TransferWise create a precedent for certain countries, reassuring investors, paving a way for other projects and, importantly, inspiring other local founders. 
  • Scalability. Some eastern Europe-rooted startups manage to succeed at a global scale, such as: 

- Miro — online whiteboard tool with $76.3m funding, boasting 7+ million users worldwide (Russia)

- Telegram — a messenger with $850m funding and 400 million users worldwide (Russia)

- Grammarly — an online writing assistant with $200m funding and 20 million users (Ukraine)

- Allset — restaurant ordering app with $16.6m funding and 3,000 partner restaurants in 18 biggest US cities (Ukraine)

- Flo Health — femtech market leader with $25.5m funding (Belarus)

- PandaDoc — document automation software with $51.1m funding, used by 20,000 companies worldwide (Belarus)

  •  Talent pool. Eastern Europe historically boasts unrivalled engineering talent. According to a recent report by Coursera, Russians, Belarussians and Ukrainians have the highest skill proficiency in technology and data science among Coursera’s 65 million learners from 60 countries.

If there is one positive learning from the coronavirus pandemic, it is the fact that great engineers can work efficiently from anywhere in the world. We expect some of the regional tech talent to rethink the craziness of Silicon Valley and the costs of living in western Europe, and to start looking into the ecosystem back home.

On the other hand, the founders do not necessarily have to move to enjoy the benefits of other locations. According to the Startup Heatmap Europe 2019, over 75% of startups in Lithuania, 71% in Estonia and Poland, and 62% in the Czech Republic have legal entities, employees or investors abroad. About 55% of European founders establish international locations within the first year of running their startup, while CEE boasts an even higher rate. 

Entering the market to access those advantages typically takes one of two paths. Governments which are interested in creating ecosystems focused on young tech companies might remove barriers of investing/doing business. Alternatively, a ‘bridge’ — a VC fund or a company with local expertise and access to the deals — can be an option. Depending on the VC priority — deepening the presence in the local market or scaling its portfolio of companies globally — each path might offer its benefits. 

Meanwhile, eastern Europe is definitely changing and becoming more open to VCs from the west. While the progress might not be linear, the ease of doing business continues to increase and now might be the right time to jump onboard.