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Venture Capital in Hungary, Romania, Bulgaria: Small but Growing

Due to having smaller economies than the US or eurozone, venture capital markets in Bulgaria, Romania, and Hungary are often overlooked by investors outside of the region, but some angel investors see them as fertile ground for seed investments.

Pierre-Antoine Dusoulier, CEO of IBanFirst, a regional financial services provider, told EURACTIV what makes them different from regions in the West is “immaturity.”

He added that the stages of venture investment, starting with seed capital and rising up through Series A, B, and C, are formulaic and usually very standardised in Western markets.

“However, in Eastern Europe, it’s different,” Dusoulier said, adding, “there’s little education for founders about that. In terms of invested funds, they are typically less sophisticated than the funds you can find in Europe.”

In addition to being small, these economies are fractured. Bulgaria, Romania, and Hungary each have a different currency, language, status within the Schengen, and relationship to the euro.

“So, the addressable market is smaller,” Dusoulier said. He added, “which is why companies here have more difficulties becoming bigger if they don’t move out of their own market very quickly.”

According to some investors, this fractured nature also gives those in the region unique opportunities.

The “backbone” of these economies are small companies, many in need of capital. In turn, few angel investors are operating in the region, so those specialising in Southeast Europe have little competition.

One of them is Ivailo Gospodinov, managing partner at BlackPeak Capital. While he agreed that operating in the region comes with difficulties, he told EURACTIV that “building a portfolio shouldn’t be the biggest challenge.”

“There are companies in all of these countries that are pushing forward with their business models.”

Data on private equity in Central and Eastern Europe released last week by the investors’ association InvestEurope shows that venture capital investment in the region reached an all-time high in 2022, with information and communication technology accounting for 79%.

At a recent event in Bucharest, investors highlighted ICT, specifically cybersecurity, as a sector where regional companies could compete with those in the international market.

Julia Sohajda, a founding partner at Vespucci Partners, invests with this exact strategy, ramping up regional “unicorns” into global players.

“We invest in deep tech start-ups in the region that actually have a competitive advantage with technology in the large international markets,” Sohajda said.

“Because one thing that can actually be the strength of this region is that there are very fragmented markets in very small countries. So when you’re taking technology to a different market, you can actually jump to large international markets, and that’s what we bet on.”

Like many worldwide, the economies of Bulgaria, Romania, and Hungary are attempting to recover from both the aftershocks of the pandemic and the impact of the war in Ukraine.

On the whole, however, it seems that venture capitalists in the region are hardy and have learned how to continue investing when markets get colder.

“The world today is defined by volatility,” Elvin Guri, CEO of Invenio Partners, said. “In these times, the only thing that one can do is be very disciplined in their approach.”

Guri highlighted the inability of banks and other stakeholders to accurately judge which crises will negatively affect any one market, saying that they will sometimes “be optimistic and pessimistic, almost at the same time”.

This part of Central and Eastern Europe sometimes carries the stigma of corruption and weak regulatory and judicial systems, which can chill outside investment.

Bad rankings in Transparency International’s Corruption Perception Index still show quite a bleak picture. Romania ranks 63rd, while Bulgaria and Hungary are in places 72 and 77, respectively.

Nevertheless, venture capital investment continues to grow yearly in Central and Eastern Europe. Hungary alone attracted venture investment in 2022 of €89 million, according to data from InvestEurope.

While these numbers look tiny from the US or Western European perspective, where such sums can change hands in an investment round of a single promising startup, it’s still an improvement that demonstrates these “immature” markets are becoming more similar to countries like Poland and the Czech Republic.

To aid this transformation, investors proscribe more regulation, more modern commercial policy, and more executive direction from national governments.

“Probably in the next three to four years, there’s going to be a tremendous change in the region,” said BlackPeak’s Gospodinov. At that point, he believes, outside investors will change how they compare the region to Western Europe.

Source: Euractiv