As a VC fund based in Lithuania, we have a possibility to observe how impressively the startup and VC ecosystem is evolving in Central & Eastern Europe despite the outdated patch of the backward region. Its innovative approach to business, many well-developed startups and a blooming ecosystem are impressive and perceived as a good place to start bringing great opportunities for further development. So what is the case then? We aim to break the myth for good and take a brief look at the changes in the CEE region and how it evolved within the past few years, on an example of Lithuania.
Where the myth about CEE startups came from?
Over the past few years, we have noticed that even small countries such as Lithuania, have managed to leave a reasonable dent in the startup industry across the world. However, at the beginning of 2000s, the situation was much different: local startups were unable to grow in markets outside of their own country, so they had to relocate to countries with higher development potential such as the US or UK. This theory is no longer applicable, though, there is just one thing left from those times - the dying myth that startups cannot grow in their hometowns unless they move to places like London, Berlin, or Silicon Valley.
Foreign companies noticed the potential a long time ago
Today, Lithuania is often compared to the United Kingdom, Germany, or France, especially when we talk about fintech companies. This was not always the case even though ten years ago foreign companies such as the challenger bank Revolut, or the taxi operator Uber, had established a presence here.
Back in 2011 in Vilnus, we had the StartupHighway - a Baltic startup accelerator and an early seed-stage fund. At first, startups were home-grown, but later, ones from Latvia, Estonia, Italy, and other countries became more interested in working with us. The main condition for a partnership was having an established company in Lithuania, which all participants agreed to. We may say that was the first step towards strengthening the position of Lithuania on the international startup scene.
Quite a few skeptics said that as soon as the accelerator program ended, companies would close down their offices in Lithuania, and move to larger countries, but fortunately, this was not the case. All of them stayed in the country after our program ended and became quite successful - this was the sign that we were doing well and that we could compete with many of the larger countries. That moment is perceived by us as the beginning of the startup ecosystem rise in Lithuania.
Investors are looking for hidden gems, and smaller countries are full of them
“The most reputable investors from the West are not going to invest in countries such as Lithuania.” We heard this sentence many times and it was true until quite recently, but now when everything has changed we have really taken off. Estonia, a country with just 1.3 million people, has five unicorns, in Lithuania, we had our first one in 2019 but there is a huge growth potential for more.
Although most of the large startups, such as TransferGo, GetJar, and others, had to open their headquarters in London or Berlin, now investors are not so afraid of smaller countries. As a fine example from our startup portfolio, Whatagraph received a large investment from Inventure, one of the most reputable VC funds in Nordic Europe, while SumUp, a unicorn fintech from the US, acquired PaySolut, another company of ours. There is no need anymore to have a main office in another country - as demonstrated by both of these startups, they continue to grow in Lithuania. Moreover, foreign investors and companies see that local VC funds are investing in local startups that are making partnerships and attracting larger investments from better-known firms.
Many feared that as soon as investors from abroad came, most of the local startups receiving the investments would soon move to larger countries and forget their local roots - fortunately, that is not what happened. The best example is the first Lithuanian unicorn, Vinted - even though they have multiple foreign investors, their largest office is located in Lithuania. Another big success story is NanoAvionics, whose controlling stake was bought out by an American company, yet NanoAvionics’ main office remains in Lithuania, and now they are building a satellite factory in Vilnius. We have noticed that foreign companies that are based here, including Israel’s second highest-valued company, Wix, and the travel giant, Booking.com, hire Lithuanian employees, which shows that the opposite of those earlier forecasts is now happening.
It is not always the case that investors are looking for the best and most stable environment - more often than not, they are looking for big growth potential, so countries such as Lithuania, Estonia, or Poland are a sort of hidden gems. Investors seek the opportunities we offer to them, they like our regional ecosystem and the benefits provided to the companies, so they are eager to take the small risk of investing in the CEE region in exchange for that big development potential.
Central and Eastern Europe startup ecosystem is getting the respect it deserves
Even those foreigners who buy Lithuanian companies are absolutely fine with the Lithuanian setup (head offices in Vilnius, majority of employees who are Lithuanian, etc.). That confirms not only the recent acquisition of PaySolut by SumUp, but also many other exits that happened in the past. For example, when TrackDuck, a company from one of our portfolio’s entrepreneurs, was sold, they continued working in Lithuania, hiring local people and actually growing the team here, not somewhere abroad.
Leading global VC funds are now eager to invest in European startups taking as the main value their impressive growth potential. Investors come to discuss issues at board meetings, they do not ask to relocate anymore, and respect startups that have headquarters in CEE countries as much as startups based in London or San Francisco. It is not an issue anymore, and with the pandemic, borders between countries might become even more invisible due to the fact that whole investment processes and tightening investor-startup relations are happening online right now.
Success has obviously been influenced by the attention these countries are getting from the media due to increasingly attractive and beneficial laws and regulations. After all, Lithuania was ranked 11th for the ease of doing business by the World Bank, moreover, a company can be registered in one day by using e-signatures. We are 6th in the EU for the ease of paying taxes and 2nd for bachelor’s graduates in science, maths, computing, and engineering. Lithuania has proven its strong position in CEE by placing as 9th country in the ranking based on startups per capita in Europe - which is quite impressive taking into consideration the already mentioned history of this ecosystem. Those who have invested here early are seeing huge benefits, as now it transformed into one of the most reputable markets in Europe.
Investors also notice that the language barrier is basically non-existent. It is worth noting that one of the studies taken in 2011, I came across, showed that 85% of professionals aged between 20 and 34 were proficient in English, and there is no doubt that the situation has got even better in the past 10 years. Even our own fund’s documents, such as investment terms, are written only in English, and we do not even have a copy in the Lithuanian language as the public authorities accept documents in English. We have never had any issues working with funds or companies from abroad, and there is no need for translators or any special services.
“But I was born in X country” is no longer an excuse
Even before the pandemic began, we could see the invisibility of borders between countries and startups becoming more global, even when their main headquarters remained in their home countries. Nowadays, being born in a smaller country is not a viable excuse anymore. Evidence shows that it does not matter, whether you are from Lithuania, Estonia, or Poland, you can set up a startup, in your hometown or city, that might become a unicorn one day without any major obstruction - we see a lot of success stories in here and expect more of them in the near future.
Related Posts:
Trends That Shape VC Scene In 2021 (by Konrad Koncerewicz, Community Builder, Vestbee)
TOP 100 CEE Startups That Closed Funding Rounds In 2020 (by Konrad Koncerewicz, Community Builder, Vestbee)
Fast Growing Fintech Scaleups From CEE That Should Be On Your Radar (by Tomas Vysny, Investment Advisor, 365.fintech)
