As the end of the year 2022 approaches it is time for an overview of the Central and Estearn European VC and startup ecosystem. The last 12 months have been full of interesting happenings, unprecedented events, and major challenges, which greatly influenced the current state of the VC industry. With Vestbee’s quarterly reports 2022 (Q1, Q2 and Q3) detailing key aspects of VC transactions in the region on a month-by-month basis, we can now look at the broader perspective of the ecosystem and better understand the trends and challenges that will shape the region in 2023.
The macroeconomic environment of the VC industry
In recent years the economies of the CEE countries have been steadily catching up to their Western counterparts. Despite some major interferences such as the global economic crisis and the subsequent eurozone crisis, the capital markets and the VC ecosystem have been developing sustainably. Many analysts even point toward the fact that the CEE region has the potential to exceed the historical growth trajectory of Western Ecosystems by two or even three times!
As of today, it’s safe to say that even though the ecosystem is still in the early stages of development, it is maturing and offers plenty of opportunities for venture capital investors, often outperforming markets with a longer history and seemingly more developed financial infrastructure. CEE also has solid macroeconomic indications of prosperity - a high GDP growth rate (in the years 2016-2021 the growth rate of 3% has exceeded that of Western Europe) and a strong inflow of foreign investments and EU funds. Nevertheless, the level of general investments in these economies (measured by the ratio of investments to GDP) is significantly lower than in the West, which leaves plenty of room for growth and convergence to European benchmarks.
The state of the ecosystem is well illustrated by the fact that early-stage rounds still dominate in the CEE region, whilst with the maturation of the Western Europe ecosystem, more bigger and later-round investments occur. In 2021, 70% of all closed rounds in the CEE were pre-seed (whilst only 51% in Western Europe), nonetheless, it was a positive decrease from 80% registered in 2020.
A look at the VC investments as a percentage of the GDP also indicates that the VC ecosystem has a space to grow - in the CEE the number was at 0.3% of GDP and in Western Europe at 0.62% of GDP. The R&D expenditure as a part of the GDP in the CEE is also significantly lower (1.31% in 2020) than in the EU as a whole (2.32% in 2020), however apart from a noticeable dip in 2016, the CEE trajectory has been upward and steady-paced.
Even so, the CEE ecosystem is well equipped to absorb capital, attract more cross-border investments and improve deal flows of regional GPs. Venture capital is definitely an asset class that grows in importance in the region, especially in sectors such as fintech or B2B software and tech solutions.
What’s the state of the VC industry at the end of 2022?
In the region, we have a big pool of well-educated tech and management talents, as well as emerging GPs, which are often highly skilled and specialized in a particular field such as fintech or climate tech. We can also note that intra-regional collaboration is increasing whilst investment processes are becoming more standardized and focused on value creation. It’s because the competition between the CEE funds is lower, as they often need to join forces in order to propose bigger tickets, to catch up with the West. Furthermore, it is widely observed that startup founders are much more open to working with VC funds, as this way of financing is more available and affordable to entrepreneurs. It's also worth noting that regional VCs have been receiving record-high amounts of funding from public money, and the quality of regional deal flow is increasing all around.
The number of CEE unicorns is also steadily increasing, with verticals like future mobility, healthcare, and e-commerce gaining momentum and big names such as Bolt, Wise, Rohlik, DocPlanner, Vinted, UiPath, GitLab, or Pipedrive originating from the region. Additionally, analysts point out a very positive ‘flywheel effect’, according to which, successful founders invest and mentor emerging entrepreneurs, contributing to their subsequent success.
Moreover, up until recently, we have observed not only an increase in the overall funding but also in the size of particular rounds - in 2021 mega-rounds of $250 million and more accounted for 32% of the total funds raised, including €623M in Series F for UiPath, €600M in Series E for Bolt and €250M in Series F for Vinted. The second quarter of 2022 was also a highlight, as nearly 50% of total funding belonged to mega-rounds worth over €100M, raised by startups such as Rimac Group (Series D - €500M), Rohlik (Series D - €220M) and Ataccama (Venture Round - €142M). What is more, the region is gradually becoming more attractive to European investors, as funding coming from the West has greatly contributed to these high numbers.
This trend however has shifted recently, as we are facing the inevitable economic downturn in 2023, that is likely to cut down investment spendings in many areas, VC included. According to Vestbee’s report of the VC transactions in the third quarter of 2022, nowadays investors tend to choose smaller and more reliable rounds rather than mega valuation. The report also highlights the uncertainty as to in which direction the market will turn in 2023. The recession looms on the horizon, and there are also other challenges that influence investors’ sentiments such as the war in Ukraine and the pending energy crisis. On top of that, the rising inflation further worsens the sentiments on the markets as the central bank’s abilities to cut rates are greatly limited.
Moreover, there has been a drop in YoY deal value in Western Europe, and the CEE is often a delayed mirror of what is happening in the West, so a decrease in CEE valuation is likely to happen. On the other hand, it’s worth noting that these turbulences, though large, are perceived by many industry experts as transitory. As stated in the VC Funding in CEE Report 3Q 2022, many local GPs are currently raising their new funds, and the abundance of public capital in the region can cushion any rapid decreases in startup funding. It’s safe to say that in the upcoming months, a vast amount of data will be crucial in understanding what awaits in the future of the CEE ecosystem.
Which trends will shape the startup and VC ecosystem in the future? The next CEE VC Summit is coming!
The state of the VC ecosystem in Europe will be broadly discussed during the second edition of the CEE VC Summit - the biggest invitation-only event in the CEE region for fund managers, investors and other key market players, which will take place on the 28th and 29th of March. The aim of the conference is to forge and enforce cross-border collaboration between venture capitalists and create a platform to discuss the key factors and challenges shaping the VC industry.GPs from top VC funds such as Credo, Market One Capital, OTB, Movens Capital, Multiple Capital, Smok Ventures, South Central Ventures, Tera Ventures, Iron Wolf Capital, Next Road Ventures, Multiple Capital, and more, are set to attend the conference. Stay tuned for more information about the upcoming event and, in the meantime, discover how did the first edition of the CEE Summit go. Interested in joining the conference? Click here to get invited!
Sources: Vestbee, Private Equity and Venture Capital in Central and Eastern Europe by Bain, Dealroom, Crunchbase, The World Bank
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