The Ecosystem: CEE angels open to deep-tech despite tough times

Despite the chilling effect of the economic slowdown and the war in Ukraine, angel investors in Central and Eastern Europe are upbeat about the future. And with plenty of start-ups in the pipeline, they are increasingly willing to look beyond the digital innovations that usually hold their attention.

“The business angel segment in Central and Eastern Europe is still quite young, but it is developing fast,” said Robert Ługowski, founder and managing partner at Cobin Angels, Poland’s largest professional business angel club. “More and more people are starting as angel investors, and the sector is professionalising. There is much more knowledge and good practice in the market, but there is still a lot to be done.”

“I’m extremely optimistic about the prospects, despite what we’ve seen over the past year and a half,” said Marius Istrate, chair of TechAngels Romania, which brings together around 140 angel investors. “In emerging economies, the upside is significantly higher for an angel investor, even when they don’t have a tremendous amount of money to invest in start-ups.”

The region seems to be experiencing a golden moment for angel investing, where the supply of start-ups is plentiful and competition from venture funding is low. “There is less competition from VC funds, especially in countries such as Poland where there were many investments driven by EU programmes,” said Ługowski. “There have now finished, or are ending, which gives us even more impact.”

“The quality of founders coming to us is higher and higher, so we have to say no to some very good start-ups,” said Petr Šíma, a partner at DEPO Ventures in Prague, which manages angel funds and an international network of angel investors.

Given the economic downturn, local founders are seen as a good bet. “We consider start-ups from anywhere, but we particularly like founders from the CEE, because they are used to working in difficult conditions,” Šíma said.

Yet the downturn and the shadow cast by the war in Ukraine is also making angels more careful with their investments. “In terms of pipeline, the good thing is that we continue to see roughly same number of companies that we were seeing in previous years,” said Istrate. “But in terms of total amounts invested there is a decline, and that’s in line with what we are seeing in the rest of Europe.”

There has also been a shift in focus, with a marked preference for follow-on investments. “In times like this, where there is more caution, angels tend to double-down on the start-ups that work, to give them sufficient fuel to carry on their activities,” said Istrate.

Sima has seen the same trend. “Many angels have reacted by restricting their investments to their preferred companies, to help them survive, and not in new start-ups.”

This caution may also be working on the start-up pipeline, although with founders typically working on their ideas for 12 to 18 months before they pitch to investors, that impact may not yet be showing through.

“I’m concerned that the risk aversity of people who might start companies has increased, and that they will prefer to stay in a safe job for a while,” Istrate said. “If they haven’t made that leap in the first part of this year, then we won’t see as many exciting start-ups in the second half of this year or the first part of 2024.”

A gradual shift to deep-tech

Ecosystems in the CEE region tend to have a strong emphasis on digital companies, both in terms of the start-ups that come forward and the sectors where angels are most comfortable investing.

“Most of the strong candidates that we see in Romania are companies in enterprise software, software as a service (SAAS), and business-to-business. This is where the technical founders excel,” Istrate said.

However, other sectors are showing through. “We seeing significantly more start-ups in sustainability and green tech, that deal for example with topics such as optimising businesses’ carbon footprints and individual options to participate in the circular economy,” he said.

“The pipeline is amazingly healthy,” said Nina Dremelj, president of Business Angels of Slovenia. ”It is especially strong in the energy sector, advanced materials, AI and biotech. Plenty of solutions are available, from Technology Readiness Levels 4 to 9, alongside start-ups that are already out there with healthy revenue.”

The willingness of CEE angels to invest in deep-tech varies across the region. Romania is relatively open. “Given the profile of many angels here in Romania, who are former engineers and former tech company leaders, then we do like deep tech, if the opportunity arises,” Istrate said.

But in Slovenia and Croatia the barriers are higher. “With a few exceptions, business angels in Slovenia and Croatia do not invest in deep-tech start-ups,” said Dremelj. This is because the technologies are seen as complicated and hard to manage. “Deep-tech innovations need more time to come to market, they are harder to exit and need more funding to scale, but the return on investment can be much higher than classical investments,” she said.

Much depends on the definition of deep-tech. Pharma and biotech start-ups can be challenging, requiring very specialist knowledge to assess a business case. But deep-tech as it touches software and digital health technologies is more approachable. “As we are becoming more familiar with deep tech, we are increasingly willing to go into it, but it takes time,” Šíma said.

“Deep-tech can sometimes be hard to understand, but the number of experienced angels is increasing and we see much more group investment and syndication,” said Ługowski. “If there are one or two experienced angels who believe in a start-up, and they have a good track record, then more angels follow them and join the investment, which is good when we have less VC capital available.”

And while the novelty of deep-tech start-ups may be a barrier, the longer time they need to mature is not. “In this region, classical angel investments can last 5-10 years. It’s not three years. We are used to waiting, so this should not be a problem,” said Dremelj.

“We can choose to invest in businesses that need more time, but they have to be innovative and disruptive,” Istrate said. “The fact that we can wait longer does not mean that we’re going to support poorer ideas or copy-cats. We’re looking for someone who can build a new technology, even if the timescale is longer.”

Initiatives to build the ecosystem

In Slovenia and Croatia, Dremelj hopes that a new venture fund she is leading, Vesna Venture Capital, will help stimulate local angels. “Our fund will start to push more private investors to think about deep-tech, so that we can create an ecosystem around deep-tech investment,” she said.

Backed by the European Investment Fund, Vesna Venture Capital will have €50 million fund to invest. It is expected to become operational at the beginning of 2024. “The fund will invest in very early-stage innovations, from TRL4 up, with a main focus on public and private research institutions, and creating spinouts from those projects. Beyond that, the fund will also support scale-ups and previous spinouts.”

The fund will also support company development with an entrepreneur-in-residence programme, and build bridges with industry partners who will help start-ups out with piloting opportunities, sandboxes and expertise.

Some angels are already involved in Vesna. “I hope there will be more and more brave investors, who will at least start co-investing,” Dremelj said. “There are plenty of angel investors who have their own companies, and they need to learn that investment also buys them security, because it gives them direct access to the hottest new technologies.”

Meanwhile, there is scope for further support across the CEE region. Ługowski would like to see more support for business angels through clubs, networks and international initiatives like 4Angels. “If we want to develop many more angels, we need to have more of these organisations that can support them, increase their efficiency and reduce risk. And that would accelerate the development of the whole ecosystem.”

Istrate welcomes EU efforts to support the development of CEE angels, for example through mentorship schemes, but thinks they could go further. In particular, he would like to see support for efforts already under way to build cooperation between the region’s angels.

“We would benefit from collaborating with other angel networks and syndicating together on the best opportunities,” he said. “And we would benefit if we built cases together to present start-ups to the major venture capital investors in western Europe.”

Šíma agrees. “We would like to see a more connected angel investor ecosystem,” he said. “We need to see much more co-investments and cooperation in early-stage companies.”

Angels in Romania, Bulgaria, Hungary and Slovenia are already taking the initiative on this kind of cooperation, but they would appreciate outside help. “Unfortunately, we are not collaborative by default. It’s not a reflex, it’s a muscle we are trying to train,” Istrate said.

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