Last month marked the end of Bulgaria’s first presidency of the Council of the EU, an institution that rotates among the 28 member states every six months. This placed the country, known for its roses and yoghurt, as well as the entire region under the spotlight during the first half of this year. It also gave the local innovation scene some much-needed publicity.
The most notable innovation-related events hosted in the Bulgarian capital, Sofia, last month took place over two consecutive days – TechTour Eastern Europe, which featured a session in Warsaw the previous day, and Innovative Enterprise Week Sofia 2018.
The former involved 15 local entrepreneurs showcasing their technologies to local and international investors. The latter served as a meeting point for institutional stakeholders, such as the European Investment Bank, the European Investment Fund and Bulgaria’s Ministry of Science and Education, among others. They discussed opportunities and the need for financial instruments to foster research and innovation. They also met local entrepreneurs.
Bulgaria shares common traits, in terms of innovation opportunities and challenges, with the rest of southeast Europe. One of the interactive sessions on TechTour Eastern Europe event focused on them.
The chairwoman and moderator of the session, Sasha Bezuhanova, a former long-time regional executive at electronics firm HP turned-entrepreneur and angel investor, itemised some of the common challenges in the region – a lack of scale among local startups, limited attention to innovation issues at the policy level, a huge brain drain of talented people who choose to develop technologies in western Europe or the US.
Above: L – Sasha Bezuhanova, former long-time regional executive at electronics firm HP turned-entrepreneur and angel investor, and R – Evgeny Angelov, BVCA
While the outflow of potential entrepreneurs cannot be stemmed in the context of free movement of human and financial capital across the continent, tackling the other two issues remains feasible through proper institutional engagement.
Local and regional startups are small and lack the scale to grow globally. Public funding and support for innovation have been instrumental in building the local ecosystems and could help promising enterprises grow in coming years.
There are some differences when it comes to the availability of support. The ecosystems of states like Bulgaria and Romania have benefited greatly from European funding – over €600m ($700m) of EU-provided funding for innovation has been deployed to date in Bulgaria alone.
Other countries in the region, outside EU borders, have not had access to such resources but the role of government support has been critical. For example, Dragan Pejčić, of consulting and auditing firm BDO, highlighted the role of public funds in neighbouring Serbia through the government-backed Serbian Innovation Fund, which runs a matching grant program for micro-companies and small and medium-sized enterprises (SMEs), as well as a mini-grant program for companies that have been around for less than three years.
Acquainting the audience with the situation of startups in Serbia, Pejčić identified IT as the “hottest sector”, citing the success story of Nordeus, a Serbia-based company that has developed a popular mobile game, Football Manager.
Above: Svilen Rangelov, co-founder of Bulgaria-based logistics drone developer Dronamics, presents a prototype to Jean-Eric Paquet, director-general for research and innovation at the European Commission. Picture courtesy TechTour
Even the government of North Macedonia has joined the innovation race. Clarisse Molad, a US consultant, advises Macedonia’s €90m government fund for innovation and technology development. She defines the fund as “quite pivotal” for a small country. Most of the funding available to startups is structured as grants. The main goal of the fund is to encourage the development of an innovative ecosystem.
While such financial support has spurred local startup communities and will continue to play a major role in helping companies to scale up, there are policy-level deficiencies that work against them. Umur Goekce, head of the Organisation for Economic Co-operation and Development’s southeast Europe division, cited a study conducted by his organisation that involved the preparation of an SME policy index. It found that local legislation in southeast Europe often does not differentiate between honest and dishonest company bankruptcies, thus failing to give “a second chance” to startups that could generate disruptive innovation.
Few participants at the conference spoke of any competitive advantages and opportunities the region could offer, factors that could attract much-needed private capital from western Europe, the US or Asia to aid local startups in going global.
Among the most important advantages of Bulgaria and the region as a whole is, undoubtedly, the lower cost of running a business compared with the US and western Europe. More than 30% of founders of local startups are said to be non-Bulgarian, despite the level of education attained by locals. According to the latest census data, about one in five Bulgarians has a university degree, and the country ranks third in the world by number of certified IT professionals per capita.
This talent pool has not gone unnoticed by global IT brands. HP, SAP, IBM, Microsoft, Oracle and VMWare have been outsourcing operations there. While such developments may not necessarily turn Bulgaria into a Silicon Valley for southeastern Europe, they make it fertile ground for cultivating a culture of entrepreneurship and tech innovation.
Notably, Bulgaria fares better than European counterparts in its engagement of women in the technology sector. During the conference, Bezuhanova noted that a significant percentage of IT professionals in Bulgaria are female. This has the potential to make Bulgaria and its startups more attractive to international venturing funds whose thesis includes supporting female-led innovation.
The Bulgarian tech scene
Many technology developers from countries in the region pitched to investors at the East Europe TechTour event, including Ukraine-based agtech crop protection drones developer Kray Protection, Serbia-based online real estate agency Cityexpert, Serbia-based electric car developer Aqos Technologies and Slovenia-based energy services value chain solutions provider Resalta.
Other technologies developed by Bulgaria-based startups spanned various sectors and applications – drones for search and rescue (FragaX) or logistics and shipping (Dronamics), cloud-based app building platforms like CloudFaces, athlete performance tracking wearables (Barin Sports), smart kitchen app steamlining consumers’ shopping lists (CogZum), peer-to-peer lending platform Klear, 3D-printed prosthetics components (ProsFit Technologies), construction and energy efficiency solutions (Make Bulgaria) and even a developer of eco-friendly low-cost sustainable materials (Biomyc).
This wide range of technologies being developed in Bulgaria is impressive considering the Bulgarian innovation scene is just a few years old. It was not until 2012 that significant funding for innovation started to flow in from the EU. This budding ecosystem has already passed a nmber of milestones, including sizeable exits for venture investors. Evgeny Angelov, chairman of the Bulgarian Private Equity & Venture Capital Association (BVCA) and managing partner at PostScriptum Ventures, a local VC firm specialising in the energy sector, said: “In the past few years, our members have invested in more than 250 companies and there has been over €400m in technology company exits in Bulgaria.”
The most impressive exit of a Bulgaria-based company took place in 2014, when US-based software company Progress Software acquired application development tools company Telerik for $262.5m.
But Ivo Dimitrov, co-founder of CogZum, spoke of the challenges he faced when setting up his company. “The biggest hurdle, by far, has been putting together the core team, usually referred to as co-founders. I started looking for ambitious and experienced people, willing to take the risk of joining a new company. Unfortunately, in 2016 discouraging news of multiple startup failures turned the heads of people in Bulgaria towards safe jobs in established companies.”
Bulgarian emerging enterprises, like their European counterparts may face a shortage of growth-stage funding, but the mix of public and private funding available to entrepreneurs is expected to grow. Angelov said: “Capital for innovation and growth in Bulgaria will very likely treble over the next 24 months. At the same time the number of fund managers will double. This is excellent news for entrepreneurs and the community. Public money will obviously continue to be the decisive factor but private fundraising is becoming increasingly important.”
Public money has been instrumental. The Bulgarian Fund of Funds has deployed over €600m to date, in the form of a broad range of equity and quasi-equity instruments, including a seed and acceleration fund, a venture capital vehicle, a mezzanine fund to support growth-stage enterprises and, more recently, Bulgaria’s first technology transfer fund. The Fund of Funds is co-financed by the Bulgarian government and the EU.
Bulgaria’s VC community
Bulgarian venture capitalists set up the BVCA to raise awareness and develop the ecosystem. Angelov, a venture investor and former adviser to the Bulgarian president, said: “The association organises educational events and seminars and produces various materials. We have also begun to create standardised documents, such as term sheets, convertible note agreements, and other such documents that are tailored to local legislation, which entrepreneurs and fund managers can freely use.”
The BVCA’s promotional activities are geared towards attracting new investors, domestic and foreign, to the realm of venture capital. “The BVCA also strives to engage the Bulgarian diaspora abroad. We started an ambitious initiative – BVCA on Tour – a series of events in different cities around the world promoting entrepreneurship and investment opportunities in Bulgaria and southeast Europe.”
Angelov believes the Bulgarian innovation scene and the venture capital arena have much to offer to potential investors. “Many opportunities for co-investment exist, particularly for corporate VCs. Companies and funds have matured and are increasing partnering with leading global investors. We would encourage people who are interested to learn more about the region to get in touch with us or with our members directly and discover opportunities to collaborate.”
