Startups in Warsaw, Krakow, Prague, Budapest, Bratislava, Tallinn, Riga, or Vilnius don’t attract as much capital as the ones located in the top hubs in Europe — London, Amsterdam, or Berlin — but these Eastern European tech hubs are on the rise, and early stage investment in the region has surged from $10 million to $283 million in just five years.
This growth should accelerate even further, since new accelerators, coworking spaces, meetups, mentoring opportunities, and reliable VC companies are acting as catalysts.
There are almost 30,000 startups operating in Eastern Europe. Most of them target the global market and develop their products in English, and many seek most of their revenues from Western European and US customers.
They also tend to specialize in specific sectors. Krakow is a hub for beacon solutions, Prague cybersecurity, while Warsaw is doing a lot in marketing automation.
What they lack most is funding. Only three unicorns (companies with a valuation exceeding $1 billion) were born in the entire region, according to CB Insights data. Those three brands — Skype, Avast, and Transferwise — are known worldwide, but are seldom thought of as being Eastern European.
According to KPMG’s Venture Pulse Q3 2016 report, VC investment in Europe has grown from $5.7 billion in 2012 to $14.1 billion in 2015 and $8.7 billion in the first three quarters of 2016. Data I collected using the Mattermark.com database shows that VC investment has grown thirtyfold over the last few years, from $9.5 million in 2011 to $283 million in 2016.
And while the Western European hubs — London, Amsterdam, Stockholm, Berlin — attract the most money and attention, the Eastern European ecosystems try to keep pace with fewer resources, according to Tomasz Swieboda from Warsaw-based Inovo VC fund.
Startups are a huge chance for small Eastern European economies. Their relative importance for the countries’ GPD is much higher than in the US, the UK, or Germany. That is why governments are willing to support tech hubs by building infrastructure, or simply creating public VC funds.
Of the top 50 European tech hubs, according to The European Digital City Index, 12 Eastern European cities rank as having the best ecosystems for startups.
And 10 Eastern European cities rank as having the best European ecosystems for scaleups:
Let’s take a closer look at each one of them. For readers not familiar with the diversified Eastern European geography, I have divided it to three subregions: Baltic States, Visegrad Group, and Southern.
The Baltic States — European tech motor at the border with Russia
Three small countries Estonia, Latvia, and Lithuania are a unique place for new business. Their combined area is smaller than North Dakota, with a joint population of 6 million. However they have been home to one of the most active tech hubs in Europe. The three countries rank in the top 21 for entrepreneurship in World Bank’s “Doing Business 2017” report. Strong entrepreneurial culture, low taxes, great infrastructure, and business friendly law and policies are the main advantages they offer.
Tallin. Tallinn is the top startup ecosystem in Eastern Europe. The capital of Estonia was home to two unicorns: Skype and, more recently, rising fintech star Transferwise. However, the most successful scaleups in the region tend to migrate to bigger hubs. Skype moved to Stockholm and TransferWise to London, which attracts most of the European fintech companies.
This is a common pattern. GrabCad, which provides online collaboration tools for CAD files used in 3D printing is known as a company from Massachusetts. It was actually founded in Tallinn before being acquired by Stratasys for $10 million. Pipedrive, a SaaS CRM provider that has already raised $14 million, decided to move to New York from Tallinn.
“When local companies scale up, they tend to move their business divisions to where their most important customers are. Be it Northern California, New York or London. However the product team usually stays here, where the talent is,” according to Wiktor Schmidt, founder of Netguru (where I work), a Poland-based software consulting, design, and development company.
YPlan, a curated guide to local events, raised €33.1 million ($35.2 million) and opened offices in London, as did Trafi, praised as the world’s most accurate public transport app, which raised €6.55 million ($7 million). Some notable scaleups that still operate out of Tallinn include Skeleton Technologies, a company providing graphene-based ultracapacitors and energy-storage, with $33.5 million funding, AdCash, an ad-serving platform that has raised $23.65 million, and Lingvist, a language learning software, which has pulled in $9.4 million in four rounds.
Bootstrapped projects are also thriving. Toogl is a great example. Started in Tallinn, the simple time tracking app surpassed a million users last year. Estonia’s e-residency program allows the company to hire staff all over the world. Sentab, which provides video-calling solutions for seniors, is another example. The company has offices in Tallin, England, and California.
Vilnus. The capital of Lithuania has introduced a series of startup-friendly policies recently, such as a “startup visa” program that allows founders from outside the EU to open businesses in the country.
The ecosystem is home to successful scaleups such as Vinted, a fashion marketplace app provider, which has raised €56.97 million ($60.6 million).
Riga. Latvia’s capital, Riga, is the youngest ecosystem among the Baltic State capitals. Its biggest success stories include Ask.fm, a Q&A social network with over 150 million users that was acquired by Ask.com, contact management application CoBook, which was acquired in 2014 by FullContact, and science based nano-technology company Naco Technologies, which was acquired by automotive and industrial supplier Schaeffler Group in 2015.
Noteworthy Riga-based scale-ups include software company Infogr.am (which has raised €2.5 million ($2.34 million), action sports videography drone AirDog, the most successful Latvian crowdfunded project to date, which raised €6.1 million ($6.5 million), distributed document-oriented database-as-a-service vendor Clusterpoint , which raised €2.3 million ($2.5 million), and fintech company CreamFinance (€6.8/$7.2 million).
Visegrad Group — the region with the highest growth potential
Four Central European countries — Poland, Czech Republic, Hungary, and Slovakia — make up the Visegrad Group. They are linked closely culturally and economically and have a population exceeding 64 million with robust economies. This region is home to several tech hubs with great potential. Cities like Budapest, Warsaw, Prague, Bratislava, and Krakow are big markets with good access to clients and investors and are the most attractive for scaleups.
One of the key competitive advantage of this region is its talent pool. Polish, Czech, and Hungarian developers rank fifth in 10 out of 15 domains in the HackerRank programming challenges. Tech talent is more abundant in Poland than in the UK or the US. The world’s biggest business and tech centers suffer from significant brain-drain, which pushes up the cost of software development and impedes its quality. But in Poznań, a university town, where the company I work for, Netguru, is headquartered, engineers are not sucked up by big corporations right after graduating.
In Poland, 39 percent of 25- to 34-year-olds…