From Seeds to Unicorns: A History of Startups and Investing in the Baltics and CEE

This article is written by Nikita Andersson and Lucia Cerchlan. Nikita is an investor at Hummingbird Ventures, a global early stage fund, where she covers the Baltics and CEE as part of her role. Lucia is a co-founder of Lumus Investment Collective, an all female angel syndicate dedicated to investing in CEE founded startups.





Last month Nikita and I sat down to have dinner together and ended up discussing our mutual interest in the rapidly evolving Baltics and CEE startup scene. Through our work at LUMUS Collective and Hummingbird Ventures respectively, both of us agree that founders from the region are poised to build generationally defining companies.


There can be no doubt that 2021 was a significant year: startup funding in the region was at an all time high with $1.7bn raised. Likewise, VC interest was not just driven by late-stage megarounds, but pre-series B funding had a 2.1x increase compared to 2020. On the investor side, multiple regional funds such as Credo, Speedinvest, and OTB raised their second and third funds. Meanwhile, homegrown founders turned to investing, with the likes of Honey Badger (ex-Pipedrive) and taavet+sten (ex-Skype/Wise and Teleport) raising their own funds. It’s safe to say that, following the 2021 success of UiPath, along with that of Bolt, Wise and many others, the stage has been set for a highly exciting time.


In the past 30 or so years, the ecosystem has unleashed its inherent strengths and flourished. While 2021 may have seemed like a watershed moment, we believe its roots are just as important. As we see more investors turn their attention to startups in the region, we wanted to take a moment to reflect on the history of the ecosystem and share our thoughts on why 2022 and beyond will be more exciting than ever. We’d also like to thank the fantastic investors and founders that helped us enrich this story.


💧 Seeds: The Foundations Of The Ecosystem

On December 26th 1991, the Soviet Union was officially dissolved. This meant an end to communist governments, which had been in power since the start of the Second World War. As a result, the region witnessed a profound upheaval in which political systems became democratic and economies transitioned to the free-market. During these decades, several factors laid the groundwork for the startup ecosystem as we know it today:


  • 📚 Education: school systems heavily favored “hard” computer science studies. For example, Daniel Dines, founder of UiPath, grew up wanting to be an author, only to discover that he excelled at math. At university, he skipped all but the math and computer science classes, playing bridge competitively in his spare time. In Estonia, for example, the Tiigrihüpe (Tiger Leap) program was launched in 1996 to develop and expand its computer and network infrastructure. The immediate focus was on education, and by 2001 every school in Estonia had a computer and access to the internet.

  • 🛠 A hub for R&D: with high technical talent and low costs, eastern europe became an epicenter for the offshore/nearshore development teams of large European and American corporations, such as IBM, Microsoft etc. This is a trend that continued with tech startups. In 2012, the US-based founders of DataRobot also took advantage of this and built out their entire tech team in the Ukraine from day 1. Valued at over $6.3bn in 2021, DataRobot has multiple offices in Ukraine with over 40 job openings (the Ukrainian office is the second largest office after the US by positions available).

  • 👩‍💻 Abundant technical talent: the combination of education and job markets resulted in one of the largest hubs of highly technical talent in Europe. Today, there are about one million developers in CEE, 50% of whom are concentrated in Poland, Ukraine and Romania.

  • 💸 Access to European capital: in May 2004 eight countries from CEE joined the European Union including Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. They were followed, only three years later, by Bulgaria and Romania in what marked the EU’s biggest enlargement since its founding. As a result, the region was exposed to new investors and capital from Europe.

  • 💪 Grit, hustle and ambition: despite a perceived growing access to capital, the region remained starved of venture capital for many years (it wasn’t until 2019 when VC investment hit over $1bn). Founders looking for funding had to hustle and build without the same capital access that their European counterparts had. More than this, founders had to overcome a generational hangover as a result of communism, which discouraged entrepreneurial thinking, risk-taking and ambition.


Timeline of the founding of unicorns in CEE
Timeline of the founding of unicorns in CEE

🌱 Roots: How Investment Got Started

Unlike in western Europe, venture investing developed against the backdrop of a dramatic shift away from state-control. Thus, its foundation came from an unlikely place: real-estate. In the aftermath of the USSR, the official housing markets were virtually non-existent owing to state ownership. However, with privatization in full swing, the restitution of housing stock created one of the first investment opportunities. As the first post-privatisation millionaires started to appear in the early 2000s, they started to look for new enterprises and vehicles to put their money into. This, coupled with the decimation of the real-estate market in 2008, made startups all the more attractive investment opportunities.


While the first investors had not made their money through tech, they were crucial in helping create the first local tech success stories. In Poland, for example, local investors backed companies such as Allegro, WP, Onet or Interia, Pracuj.pl, Niania, which laid the foundations for the next generation of startups. These first successful founders became tech investors and, in turn, helped to create the first globally successful Polish startups like Booksy, Docplanner, Brainly and others. This cycle of reinvestment spurred the creation of regional funds, where founders also became LPs. Around 2009–10, the region’s first funds were born including Credo (based in Czech Republic), Neulogy Ventures (Slovakia), Innovation Nest and Market One Capital (Poland), and Day One Capital (Hungary).


Early success stories also cemented CEE as a hub for technical talent. The Ukrainian and Belurussain talent pools, for instance, were enriched not only by the US tech giants that directly outsourced their R&D, but also by home-grown companies taking advantage of this market in the early 2000s. For example, US/Belorussian EPAM and Ukrainian Softserve became hugely successful consultancies while also training a new generation of talent. Similarly, Romania’s UiPath had its roots in a software outsourcing company, DeskOver, founded by Daniel Dines in 2005.


In the Baltics, the ecosystem was triggered differently. Despite being one of Estonia’s great success stories, Skype’s founders were not natives and instead sought their founding tech team in Tallinn. InvestInEstonia writes


‘That’s not something we’re trying to hide though. In fact, it makes us even more proud. Estonia successfully attracted these foreign founders and gave them the springboard they needed to build a global company. They could have gone anywhere, but it was smart minds here in Estonia — like Ahti Heinla, Priit Kasesalu, Jaan Tallinn, and Toivo Annus — who turned their vision into reality.’

Founded in 2003, the company continues to have a phenomenal impact on the Estonian ecosystem, with ex-Skypers spawning the creation of two unicorns, Wise and Bolt and touching much of the tech scene in Tallinn.


 

🪴 Shoots: A Unique Evolution Story

Throughout our conversations with founders and investors in the region, one of the biggest themes has been the shocking lack of access to capital. Despite the fact that the 2010s saw more capital poured into CEE and the Baltics, interest in the region was slow. Poland-based Borys Musielak, founding partner at SMOK Ventures, remembers making national headlines when he first raised $200k for his startup Filmaster in 2011. According to Romania-based Marius Istrate, former CEO of SkillValue and ex-Chief People Officer at UiPath,


‘before 2017 [he] would hear lots of arguments about why this and that couldn’t be done in the region: [among them] the lack of funding, regulatory pressures, perceived lack of talent and the EU’s unwillingness to fund risky tech startups’.

So, how did this lack of access to funding shape the ecosystem?

  • 💰 Capital efficient founders: in the 2010s, most founders in the region expected to bootstrap until Series A. Doing more with less was critical as it was near impossible to raise early stage money locally and investors outside CEE were seldom interested in backing companies with little traction. It also encouraged the kind of hustle and grit that makes exceptional founders and companies. Even today, the region (excluding Estonia) receives x10 less funding per capita than Western Europe.

  • 😇 VC / Angel ecosystem with growing-pains: as tech-investing was uncommon, the venture scene took time to mature. Dragos Nicolaescu, one of the first active angels in Romania, recalls that initially there were only a handful of angels and it was common for them to seek exclusive access to deals or demand majority ownership. Likewise, when raising Credo’s first fund in 2009, Jan Habermann remembers needing to explain how a company could be valued a few million without revenue. As a result, early stage valuations in the region have created phenomenal upsides for investors backing companies at pre-seed and seed stage.

…and what changed?

  • 👊 Powerful network effects: the first global successes trained future founders in the ecosystem, with several being alumni from pioneering companies. While this can be seen across the region, nowhere has this been more powerful than in Estonia.



  • 🤯 Shift in founder mentality: founder ambition grew, with a view to build globally. For example, Daniel Dines explains his ‘motivation wasn’t right in the beginning’ in 2005 and that it started off as wanting ‘to build minimum wealth [and] have a decent life.’ It wasn’t until he saw new startups coming out of Silicon Valley, Y Combinator and TechCrunch that ‘[he] saw that you could actually build a company out of love for technology, for the sake of doing something for the greater good’ that his thinking completely changed and he gave up the outsourcing business to work on RPA.

  • 💫 Diaspora founders came home: many of the success stories in CEE were the result of entrepreneurs returning to start their businesses locally. For example, Ivan Osmak studied and worked in the US before founding gtmhub in Bulgaria. Likewise, Hubert Palan started his career in California before building ProductBoard back home in Prague. It’s also important to note that local funds played a critical role in encouraging talented founders returning home as Michael Schuster, GP at Speedinvest noted. Local Bulgarian funds like LaunchHub and 11VC, have done a great job, writing the first checks into companies like Payhawk and gtmhub.

  • 🌎 English proficiency: since late 1990s, English has become a key language in education systems. Founders looking to raise capital and sell software internationally can now pitch in English and many CEE countries are now in the global top 20 in English proficiency, Slovenia is 9th, Poland is 13th, Romania 16th, Croatia, Serbia and Czech Republic also make the top 20.

  • 🏫 New accelerators and co-working spaces: in the 2010s, co-working spaces, accelerators, crowdfunding platforms, VC firms and angel syndicates started to pop up. These spaces and communities connected founders and operators, while enhancing knowledge-bases.


Photo from a recent visit to Lift99, a co-working space and startup hub in Tallinn, taken in February 2022

  • 🇺🇸 Interest from US growth funds: megarounds started appearing in the region in 2017, with significant interest from the US. According to dealroom, these accounted for around 55% of total funding in CEE in 2021.

  • 🦠 Remote working, accelerated by covid-19: the region benefited from the covid-19 ‘new normal’ in terms of access to international investors, who became more comfortable doing deals over Zoom. Likewise, remote working gave access to new pools of talent that meant companies didn’t have to relocate or open offices in abroad to hire sales teams.

  • 💎 Growth of local and international VCs investing in the Baltics and CEE (see a more detailed list of local investors we compiled here)



However, the biggest shift has been a generational one. Marius Istrate explains:


“I’ve spent about a third of my life as a European citizen. Those starting their bachelor’s degree studies in 2022 do not even remember a time when Romania was not a part of the EU. Those graduating this year might have some blurry recollection of pre-2007 Romania from kindergarten. Fewer and fewer people have any recollection of communist Romania. What has changed is that we are slowly but surely learning democracy and its mechanisms (including competition and free-market) and leveraging them in the same way that the French and the Germans are. I think the obstacles we are all facing as Europeans today are more important than the gaps that might exist in one sector or another between the East and the West.”


 

🌳 Growth: A Home To Some Of Europe’s Most Valuable Companies

Most valuable tech companies founded in the Baltics and CEE since 2000

Despite underfunding, startups from the Baltics and CEE have overperformed spectacularly. Even as we’ve been writing this article, three new unicorns have appeared with ProductBoard (Czech Republic), Veriff (Estonia) and Payhawk (Bulgaria) raising in the first half of 2022. In 2015 there were just 6 unicorns, this number is now at 37 (by our count). While the past couple of years have seen tremendous value created, in our view, the ecosystem is just getting started.


For every new success story, we believe a new legacy is left for founders to continue building exciting companies. When we set out to write this article, we wanted to not only spotlight the unique ecosystem but also encourage more founders to build. So to end, we paraphrased some advice for new founders we got from investors and founders in the region:

  1. Be a global company from day one.

  2. Choose a first market that is best for the idea, not the one that it’s easiest to start with. There have been too many “we’re starting in [home-market] but going global just after that”, this typically doesn’t work (with a few exceptions such as marketplaces).

  3. Give back to the local ecosystem once you become successful. Write angel checks, invest in local VC funds, make intros. That’s the only way to make the ecosystems thrive!

  4. Stay hungry, stay humble, and keep building!


If you’re an early stage founder based in the Baltics or CEE, please get in touch with us: nikita@hummingbird.vc | lucia@lumusinvestment.com


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