In the days following the start of the war in Ukraine, Pavel Sokolovas, the founder of Lithuanian fintech Kevin, started to receive phone calls from international investors.
“They were asking: 'are you ok? Is everything ok?'," he says. The investors, mostly from the US, were worried about his company because tiny Lithuania, cornered by the Russian enclave of Kaliningrad and Belarus, is so close to the ongoing conflict.
“They [were] thinking that it's the same as in Ukraine,” Sokolovas adds. “No, it's not the same.”
And it wasn’t: Kevin announced its $65m Series A funding in May, with VCs like international giant Accel and France’s Eurazeo participating, which was closed around the time that Russia's invasion started.
The war in Ukraine, the biggest conflict in Europe since the Second World War, has upended the operations of the buzzing Ukrainian tech scene, with the country’s infrastructure destroyed and many entrepreneurs fleeing or joining the army. It's also overshadowed markets in the countries that border Ukraine and Russia — Poland, Hungary and the Baltics — which some worry may be targeted by the Kremlin next.
Yet, despite this enormous geopolitical challenge — combined with the inflation surging across Europe and general slowdown of VC activity — investment in the whole CEE region has been increasing and has already surpassed last year’s numbers.
For years, central and eastern Europe has been a pool of skilled (and often cheap) IT talent. But the lack of international VC capital or links with foreign partners plus an underdeveloped local ecosystem made the region lag behind western countries.
The last two years have seen a surge of investment into the region. While experts have predicted that the economic slowdown in western Europe will soon reach the region, the war could have already stopped the growth — but so far it hasn’t.
The value of overall investment in startups from CEE was higher in the first half of this year than in the period in 2021, growing from $1.4bn to $3.2bn, according to Dealroom.
The interest of non-domestic investors in the region was also the highest in history: US VCs invested $1.1bn (compared to $319m last year in the same period), while European VCs from outside of the region have invested another $1.1bn (compared to $508m in 2021).
Since the start of the war, Hungarian cybersecurity startup SEON received a $94m Series B from Silicon Valley IVP VC, Czech online grocer Rohlik raised €220m in a Series D round led by Sofina, a Belgium-based investment company, while Novator Ventures, General Catalyst and Burda Principal Investment backed another cybersecurity company, Lithuania's Nord Security, with $100m.
While the total number of transactions fell, American VCs participated in more deals than a year ago (62 compared to 54).
Luca Bocchio, a partner at Accel and Kevin’s lead investor, says that the war didn’t add any “red light".
“We have taken a position of not changing our risk appetite,” he says. “We had the pleasure to work in Lithuania and the other Baltic countries… First and foremost, the quality of the talent is amazing there. We feel that those ecosystems are very prolific, and generally I’m an optimist when it comes to what can come next after this terrible war.”
Undeterred by the war, some investors point to the region as their new target. Demium, a Spain-born international talent investor, in June launched a separate central Europe fund of €9m, with an ambition to close it at €70m.
The war “affected our plan, not our commitment,” says Monte Davis, Demium’s CEO. Davis was fundraising in Warsaw in the week the war started. “All the meetings were going amazing. On Thursday, the invasion took place. And I sat there and said: ‘I can't go to the market and raise money for a central European fund… It's insane.’”
The firm had to make adjustments to its plans, including accelerating the opening of its Prague hub to counter the operations of the Kiev hub. It also helped members of its programmes relocate from Ukraine and created special schemes for Ukrainian entrepreneurs.
“People get worried when these [attacks] take place, but the reality is the opportunities to invest continue and often even improve,” he says. “You know that concept: when everyone is afraid, be greedy; when everybody's greedy, be afraid.”
Kevin’s Sokolovas suspects investors might now carry out more extensive due diligence — but haven’t got cold feet. “They won’t stop investing, but they are looking a little bit deeper into companies,” he says.
The story of resilience
One thing that attracts VCs to the region is that its startups, especially those from Ukraine, have shown their mettle.
“It's a really hard time for Ukrainian startups but founders and teams keep working, demonstrate resilience, strive to scale up and become better,” says Ira Supruniuk from TechUkraine, an organisation that supports the country’s startups.
The data about investment in Ukraine is too patchy to clearly see how the war has impacted VC activity there. But many of the country’s startups continue to grow, and two of them — airSlate and Unstoppable Domain — have even become new unicorns. VCs are keeping an eye on the country regardless of the conflict.
Cem Sertoglu, a partner at the Earlybird’s Digital East Fund, said that he was planning a trip to Kyiv in late January. “We regarded the Russian military buildup on the border as regular geopolitical manoeuvring, rather than the precursor to an invasion,” he says. “Afterwards, I found myself wondering what other political risks we overlook.”
But what struck Sertoglu in the following months was how well Ukrainian entrepreneurs operate in extreme conditions. “The resilience of the Ukrainian tech industry was mind-blowing,” he says.
He adds that he had expected the productivity of Earlybird’s two portfolio companies with teams in Ukraine to, understandably, decrease during the war — but they've continued to deliver without much disruption.
“This is a testament to the quality and the work ethic of the talent in the region,” he says, stressing that the firm is as “keen as ever” on central and eastern European startups.
Davis from Demium agrees. He says the Ukrainian founder of one of his portfolio startups called him saying the team continues to work on the product, but they’re not very helpful because of the bad internet connection. “I was thinking: that's your problem? Your problem is your internet connection? I mean, they're bombing your city,” he says.
“It's just the story of human resilience,” he adds. “It's extraordinary.”