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At a founders’ meet-up in Warsaw in early December, speak turned to how everybody felt about 2023. It was like working a marathon, mentioned one. A marathon with a end line that continuously strikes, added one other. With hurdles, chipped in a VC. On a motorcycle, added a founder.
The financial slowdown has mauled the complete European startup ecosystem: however for founders from central and japanese Europe (CEE) it feels particularly painful.
Funding drought
Thus far in 2023, startups within the area (excluding Estonia, which has at all times been an outlier) raised €1.1bn, in comparison with €2.2bn in 2022 and €1.9bn in 2021, in response to Dealroom.
“Fundraising, particularly past the Collection A stage, stays a formidable problem,” says Tomas Pacinda, companion at KAYA, a Czech VC. “The market has seen quite a few inside or flat rounds, indicating a troublesome atmosphere.”
The area has seen a number of spectacular rounds, typically led by worldwide VCs. Lithuania noticed two $100m rounds, PVcase and Nord Safety; Czechia noticed Keboola’s $32m Collection A; Romania’s FlowX.ai raised a $35m Collection A and DRUID raised a $30m Collection B; and Poland’s Vue Storefront raised a €20m Collection A.
However, basically, the founders, particularly these at early-stage startups, have been struggling to fundraise and VCs have been extraordinarily cautious in relation to spending cash.
Public cash, too, has been tougher to entry for CEE startups.
A few of the area’s governments have efficiently used EU funds (particularly the tranches coming from the EU’s post-pandemic restoration and resilience fund) to arrange public monetary autos to spice up improvements: for instance, Czechia has launched a fund of funds for AI spinouts and Romania has began a €80m fund of funds for native VCs.
However because of political disputes, this pot of cash was blocked for Hungary and Poland, the area’s largest economic system.
In Poland, the shortage of public funding for VCs has been particularly painful: the state-owned fund of funds, PFR Ventures, nonetheless hasn’t deployed a penny from the €426m price range for VCs that it promised in mid-2022 (it opened the decision for VCs within the funding in December).
One other Polish public establishment answerable for deploying funds for innovation has been embroiled in a corruption scandal, which has left dozens of founders on the point of chapter.
These points have solely widened an already large hole within the area’s funding market.
“The CEE market lacks funds and the flexibility to hold out actual operations,” says Roza Szafranek, founder and CEO of HR Hints. “So persons are simply ‘faking it’: they organise networking occasions, conferences and founders’ away days, publish new books on startups.”
In the direction of profitability
As cash has turn into scarce, founders have needed to discover methods of reducing prices and altering enterprise fashions.
“CEE startups have been inspired to emphasize efficient commercialisation of services or products and to implement lively price optimisation,” says Magda Surowiec, managing companion at Unfold VC.
“The issue of acquiring exterior financing or counting on buyer money implies that one should be proactive and, above all, able to adapt. The financial state of affairs has uncovered enterprise realities, the bar has been raised actually excessive. Solely good and the most effective initiatives received.”
Certainly, most of the area’s principal scaleups have not too long ago set profitability, reasonably than fast development, as their principal objective: Estonia’s Bolt, Poland’s Booksy and Czechia’s Rohlik amongst them. Right here, the area’s founders typically have an higher hand, as their corporations have historically been extra frugal with cash.
“A worldwide emphasis on effectivity and productiveness locations founders from CEE in a extra advantageous place, as environment friendly development is inherently a part of their DNA,” says Pacinda at KAYA. “Our area boasts the very best proportion of bootstrapped unicorns, and the true winners of this difficult macroeconomic atmosphere are but to emerge.”
Deeptech alternative?
If there’s one sector that has been shining by the macroeconomic gloom, it’s most likely been deeptech. CEE is well-known for its engineering expertise, which has been making an attempt to experience the worldwide deeptech wave.
“Deeptech startups have been more and more recognised and funded in CEE in 2023. That is because of the area’s sturdy analysis and growth capabilities in addition to a big engineering and software program growth expertise pool,” says Marcin Hejka, normal companion at OTB Ventures, the CEE deeptech VC.
This additionally consists of the spike of curiosity in defence and dual-use know-how throughout the area, fuelled by the continued battle in Ukraine, in addition to a better curiosity from private and non-private buyers.
CEE founders have additionally accomplished their greatest to embrace the AI growth. There are greater than 900 lively AI product corporations within the area, in response to a report by The Recursive.
“Corporations within the CEE area more and more adopted AI and machine studying applied sciences to reinforce their operations, customer support and product choices. This pattern is more likely to speed up, with extra companies investing in AI analysis and growth,” says Hejka.
However there may be nonetheless a restricted variety of establishments offering alternatives for schooling and analysis in deeptech and AI, the report claims, resulting in native expertise typically heading abroad. One other concern is the absence of a correct nationwide AI technique in most international locations.
That is most likely why the area hasn’t but seen many clear AI growth “winners” — with Poland’s ElevenLabs which raised a $19m Collection A spherical co-led by entrepreneurs Nat Friedman and Daniel Gross alongside Andreessen Horowitz as a notable exception.
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