The Ecosystem: building a bridge across the start-up investment gap in central and eastern Europe

Venture capital for start-ups is in short supply across Europe, with central and eastern Europe particularly hard hit. A recent study found that investment in start-ups in Widening countries fell by 57% between 2022 and 2023, against a 45% drop across the continent as a whole

Attempts are in hand to address this problem, with a project just beginning under the aegis of the European Institute of Innovation and Technology (EIT) Health community aiming to share strategies that have proved effective in getting the attention of investors and persuading them to open their wallets.

The Healthy Investment Central Eastern Europe (HICEE) project brings together business acceleration service providers and investor networks from Hungary, Poland, Slovakia, and Slovenia, along with innovation hubs in Belgium and the Netherlands.

“Research indicates that the investment gap in central and eastern Europe is due to a lack of critical mass in both projects and investors,” said Magda Krakowiak, director of the EIT Health Accelerator. “HICEE addresses this by focusing on supporting tech transfer offices, cultivating knowledge-sharing through capacity building, and by building suitable investor infrastructure for early-stage ventures.”

The programme is expected to equip at least 10 start-up support organisations, such as technology transfer offices, with new ways of approaching the challenge of attracting investment, and to prepare an additional 30 trainers who have the potential to have an impact on up to 150 innovation projects or start-up ventures each year.

Other expected outcomes include vetting 25 health start-ups for advanced investment readiness in international markets, the production of investment handbooks, and a white paper on investment policies.

The shortcomings are to be found both with the start-ups and local venture capitalists according to people on the ground. “There is a lack of knowledge, both about how to approach fundraising and about how to invest,” said Jakob Gajšek, chief executive of the Ljubljana University incubator, one of the partners in HICEE.

Meanwhile, investors outside central and eastern Europe have an enduring lack of confidence in the region. “To be brutally frank, we are still seen as the weird child of Europe,” Gajšek said. “We are not the first thought when it comes to investors seeking returns.”

These tensions are also apparent to observers outside the HICEE project. For Ana Barjasic, chief executive of Connectology and chair of the European Innovation Council board’s Widening countries working group, start-ups in the region face the same challenges when seeking investment as those from elsewhere. The difference lies in the availability and sophistication of support infrastructure.

“Other ecosystems have been doing it for much longer, are better developed and have a better infrastructure to support entrepreneurs,” Barjasic said. “But even in those well-developed ecosystems, you have entrepreneurs who are simply not investment-ready.”

Capital is less of an issue. “It’s not about the money not being there to invest, it’s about directing it to a different kind of investment,” she said. “So, the first step is for entrepreneurs to be better at reducing their own risk, so that they can be more attractive to investors.”

Investment readiness

Helping start-up founders be better prepared to seek investment is the obvious starting point. “Investment readiness is one of the key things that we do, and that the HICEE project will do,” said Gajšek.

This support stretches from how to make the first approaches, through to closing a deal, a step that inexperienced founders often fail to understand. “They are happy with a ‘maybe’ and stop talking to other investors, and only three months later realise that there was no sort of commitment on the investor’s side,” Gajšek said.

Raising the level of investment readiness is complicated by a lack of sharable experience on both sides. “A lot of the relatively successful start-ups from the region haven’t taken venture capital, so they don’t necessarily understand how it works, and quite a lot of the investors are relatively unsophisticated, so it is a combination of factors,” said Gajšek.

Early intervention in the start-up process can help, and to this end the Ljubljana University incubator runs a venture-building programme, which takes research ideas and tests their commercial potential, and then supports those that make the grade. “It helps find co-founders, figure out what the business is, get funding and then hopefully emerge as a company,” said Gajšek.

This is an area where university tech transfer can play a crucial role, working hand-in hand with incubators, although this can mean friction with the rigid hierarchies and established career paths that are still prevalent at universities in central and eastern Europe. “The whole ecosystem has improved dramatically over the past couple of years, but technology transfer offices still need to be more daring,” Gajšek said. “They need think about talking directly to younger researchers, and putting pressure on their bosses to let them commercialise.”

Barjasic also sees technology transfer as a good point in the process to help start-ups de-risk their technologies. Part of that is making the transfer of intellectual property as smooth as possible, but universities could also be taking positive steps to help, for example by preparing technological assessments for start-ups. “This certification, from a publicly funded lab or a university, stating that the technology works under specific conditions, can help investors see that there is less risk,” she said.

One of the most effective ways an incubator or accelerator can help attract investment is by having a fund of its own. “This means you are not just an incubator ‘selling’ a start-up to an investor, you are putting money in and showing that you have confidence in the venture,” Gajšek said. “And that brings a whole other level of credibility.”

This is something Gajšek has done with RUJ VC, a venture fund set up in 2023 that is independent of the university’s incubator but aligned with its mission. This means that will look at local start-ups first, but can also invest further afield if it chooses. Its first investment was in ReCatalyst, a spin-out from the National Institute of Chemistry in Ljubljana that has developed a method for optimising the use of platinum in fuel cells.

“Ideally we want to be the first investor in, and then help the start-up fundraise,” said Gajšek. This also means that he can help set terms that are little more founder-friendly.

RUJ raised its money from local sources and is seeking additional funds. Gajšek concedes that this has been a major undertaking, but the impact has been dramatic. ”It has transformed our ability to help start-ups,” he said.

Co-investment is also an approach that Barjasic would like to see used more, with governments offering tax breaks or partnering with business angels and VCs to draw them into supporting early-stage start-ups. “There need to be clear incentives to create investor communities, and reduce the risk,” she said.

This approach could also be effective at overcoming the reluctance of international investors to prospect in the region. Presented with ample data on investment opportunities, and a local partner, the risks start to look more manageable. “You say: join my network and five times a year I’m going to send you our best start-ups; let’s co-invest, and then you won’t need to go into it alone. And because of my track record, you’re not going to lose out,” Barjasic said.

Together with incentives for cross-border investment, this would prove a useful tool in bridging the knowledge gap, and lingering biases about investing in start-ups in Widening countries.

Incubators and accelerators can also move the dial on investment in this way, if they can act as a trusted partner for VCs that might be interested in the region, but don’t have the local knowledge to select the one company in a hundred that would be a good fit.

“It’s easier for them to do that if I can say: we work with a hundred start-ups a year, and see a couple of times that number, let me send one or two your way, and then assess me on the quality of those start-ups,” Gajšek said.

This takes time, but the Ljubljana incubator has succeeded in establishing several relationships of this kind with VCs. It has also positioned itself on the international stage by winning a place in the DeepTech Alliance, a collaboration between 12 start-up support organisations associated with leading European universities and research centres.

“The Alliance has a massive network of corporates looking for start-ups,” said Gajšek. “If you come through the sieve of the Alliance, suddenly you are not a central and eastern European start-up, but a Deeptech Alliance start-up, and that completely changes the perspective of an investor or a corporate.”

Elsewhere in the Ecosystem…

• The SynergistEIC programme, set up last year to groom start-ups from the Widening countries for success in the European Innovation Council Accelerator programme, can claim its first success. Bulgarian participant Smart Farm Robotix was among the 42 successful recipients of funding announced in the latest round of Accelerator grants and equity. The other successful Widening applicants in this round were Powerful Medical from Slovakia, which has developed an artificial intelligence platform for heart diagnosis, and Delox, a University of Lisbon spin-out working on bio-decontamination.
• The EU is only half way to implementing the Start-up Nations Standard, a 2021 initiative intended to create a better legal framework for company formation and growth. According to a report from the Europe Start-up Nations Alliance, implementation in the 21 participating EU states stands at 55% across the eight policy areas covered by the standard. The most advanced countries are France and Spain, each with 87% implementation. Malta leads the Widening countries with 73%, followed by Estonia (67%) and Croatia (64%). Slovenia, Slovakia and Bulgaria lag the most, all scoring below 30%.
• Czech start-up Lakmoos, which uses artificial intelligence to create data models able to reply to surveys, has raised €300,000 in pre-seed investment from Presto Ventures. Once created for a specific company, the models can be used for quick, first-look market research before splashing out on real-life surveys. The investment will help the company expand into new sectors, such as banking, automotive, telecommunications, energy, and healthcare.