Eastern Europe became a hot-bed for tech start-ups. This is how it did it

You know your nation is making it as a tech innovation hub when Silicon Valley companies buy your home-grown startups for a hefty price tag.

So it was in January when Fitbit, the US-based fitness tracker maker, acquired Vector – a smartwatch maker founded in 2013 that launched its products two years later – for $15 million.

In Berlin, Paris and London, such news would barely make journalists break a sweat, but when the country in question was Romania, people sat up and took notice.

Started in Bucharest, Vector used local talent to design and make its smartwatches, then opened a London office – a tactic that increases central and eastern European companies’ visibility (and credibility).

Mike Butcher, TechCrunch’s editor-at-large, said: “Unfortunately, getting a call from someone whose HQ is in Bulgaria doesn’t necessarily inspire confidence, but if you get a call from someone in London offering a [tech] solution, you will never know.”

Regional centres that made it into the latest European Digital City Index for start-ups include Tallinn (at number 18 in the top 60), Budapest (33), Prague (37), Warsaw (38) and Bratislava (41).

Other global brands that were developed in the region include Skype and TransferWise (in Estonia), and Avast (based in the Czech Republic).

A common feature of these companies is that they develop smart features that bigger firms want. In Vector’s case, this included clever designs and a 30-day battery life. Butcher puts this down to what he called a “slight culture of innovation”. These countries, he said, “haven’t got lots of assets to burn, so they build things efficiently”.

A digital revolution

The former Soviet Union satellites have realized they have the potential to leap to the next level: economies driven by knowledge-based businesses instead of agriculture, mining and heavy industry.

Butcher said “the post-Soviet education system, which hasn’t changed much” still focuses on “maths, sciences and engineering and churns out all these engineers”. As Computer Weekly reported in 2014: “Poland distinguishes itself in the sheer number of IT graduates, whose numbers amount to 40,000 a year.”

Drawn by this talent-pool, private equity and venture capital investments into companies in central and eastern Europe reached almost €1.6 billion (US$1.8 billion) in 2016 — the highest amount since 2009 — according to data from Invest Europe.

Investment capital last year was mostly focused on Poland, the Czech Republic, Lithuania, Romania and Hungary, according to the Central and Eastern European Private Equity Statistics 2016 report, published in August. Consumer goods and services was the most targeted sector, attracting 23% of the investment value, but information and communication technology was a close second with 22%.

One thing that has constrained investing in the region is the high number of state-owned entities, but the creation of new, more nimble business models has opened up opportunities for entrepreneurs to start companies and build products outside traditional oligarchies. This in turn has attracted those willing to invest in the region.

Governments, such as Hungary and Poland, have actively supported the growth of start-ups by setting up special economic zones, which give investors tax breaks and other benefits. They have also invested in infrastructure needed to support technology. As Butcher said, many of these countries have internet speeds that would be the envy of the US and the rest of Europe.

Poland, meanwhile, last year announced plans to turn its universities into innovation hubs, in much the same way UK universities have, to create and spin out new companies and inventions.

Risks in the ecosystem

Despite this, there are signs of risks building up. One is the potential downside of educating highly-skilled workers: many of the region’s multilingual graduates will seek higher-paying careers in Western Europe and the US.

Others risks are unrest in the region, exemplified by the continuing conflict between Russia and Ukraine, and governments that sometimes demand higher taxes from foreign entities, which may deter investors.

Furthermore, some of the same locations that did well in the European Digital City map for start-ups do less well when it comes to raising funds for scaling up, perhaps pointing to a lack of marketing, promotion and sales skills.

The flipside can be seen by the big companies moving into the region. Google, for example, opened a campus in Warsaw in 2014, which it saw as a way to develop a rallying point for entrepreneurs and tech talent in the wider region.

That same year, Google launched the New Europe 100, a yearly ranking of central and eastern Europe’s brightest talent, as well as those individuals or businesses trying to change the region’s societies, politics and business environments through innovation, entrepreneurialism and fresh approaches to existing problems.

The latest list of innovators is being announced in November. Last year’s nominees ranged from Slovakia’s flying car company AeroMobil to a mobile phone app that helps migrants arriving in Europe on the route through the Balkans.