September 19 2013 Central & Eastern Europe Part three: technology and innovation

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Central & Eastern Europe | Introduction Central & Eastern Europe | Introduction CONTENTS Growth will depend on invention and imagination Innovation in IT is replacing the heavy industries of the Soviet era, but there must be a radical change of approach, starting with education, if start­ups are to last, says Jan Cienski

2 INTRODUCTION N COMMUNIST TIMES, SMOG-SPEWING Jan Cienski on the prospects for innovation heavy industries were the driving force and technology in central and eastern Europe of central Europe’s economies. Over the ‘Many universities still produce 4 FUNDING past two decades that engine has been Money is flowing back into the region, replaced first by modern factories, many more budding journalists, but finding appropriate projects remains largely built by foreign investors, and problematic then by office parks filled with white advertising specialists and 6 POLAND collar workers. sociologists than engineers’ Gaming companies have moved to another IGrowth in the future is likely to come from level, Jan Cienski writes places such as the slightly tatty building in 8 CASE STUDIES Prague’s Smichov district, which houses Node5, a The tech scene in Prague may be more high-technology accelerator accommodating 21 subdued, but Socialbakers and OpenBrand new companies – many just a few months old. are two success stories Inside, a fashionable fixed-wheel bike leans 9 OPINION against a post, and small groups of people huddle Zygmunt Grajkowski details the many around computer terminals. “Czechs are known attractions for venture capital funds for being amazing engineers and developers,” 10 says Lukas Hudecek, chief executive of Node5. A round-up of the technology scene Similar places are springing up across the 11 BALTIC STATES region, catering to the growing interest of Three entrepreneurs give their views young entrepreneurs in starting up their own Wired for business: – and Czech and Slovak anti-virus firms such as tech businesses.The rise of a central European Skype, which has its Eset and Avast trace their roots to the start-up culture – still a pale imitation of the head office in Tallinn, early 1990s. This was when the region’s CONTRIBUTORS more developed formation of new high-tech has a significant workforce earned very low wages compared with companies in the US and the UK – is part of a research presence in their western counterparts, and markets were Neil Buckley is the FT’s east Europe editor broader trend across the region, as central and the Czech Republic national and fragmented. Jan Cienski is the FT’s Warsaw eastern Europe starts to put more emphasis on Eyevine Janusz Filipiak, head of Comarch, a correspondent spurring innovation. Krakow-based business IT firm, recalls paying Kester Eddy is a regular FT contributor A large part of the economic growth of the programmers €150 a month. Nowadays, a Polish based in Budapest region over the past two decades has stemmed programmer can expect to earn closer to $50,000 Zygmunt Grajkowski is managing partner of from the marriage of cheap but highly qualified a year – about a third of what their counterparts Giza Polish Ventures labour with modern technology imported from in California can earn, says Adam Kicinski, chief James Nickerson is an FT researcher more advanced economies. executive of CD Projekt, a Polish games maker. The result has been the success of ventures The has eroded the advantages of such as Volkswagen’s enormous factory on the having a large national market – it does not Special reports editor Michael Skapinker outskirts of Bratislava, or the echoing 16 hectare matter if a start-up is in Tallinn or Tel Aviv, the Editor Hugo Greenhalgh Swedwood plant in northern Poland that makes global market is the same. This helps companies Lead editor Jerry Andrews furniture for Ikea shops around the world. from smaller countries, as they have less Production editor George Kyriakos As salaries across the region slowly rise expectation of prospering within smaller Sub-editor Richard Gibson towards western levels, and technology advances domestic markets, while firms from larger Picture editor Michael Crabtree rapidly – from replacing horses with tractors to countries such as Poland often try to grow Designer Steven Bird building factories – the scope for quick catch-up domestically first, which can make international Head of project delivery Rachel Harris growth is eroding. That means the countries of expansion more difficult later on. Head of strategic sales Patrick Collins the region will have to do less copying and more “The region has actually produced a good Head of B2B & World Reports Robert Grange inventing and creating of their own. number of highly successful companies that are A deep rethink of society is required, starting relevant globally,” says Marcin Hejka, managing with education. At present, CEE schools produce director for the region at Intel Capital, the a healthy number of literate and numerate venture capital arm of the US technology ON THE COVER: graduates, as seen by the region’s steady march company. “If you look at the consumer internet Golden Terraces Building, Warsaw up international education rankings. Indeed, the segment, the two largest companies are both Credit: Dreamstime latest index of education attainment produced by Russian – and Mail.ru. In terms of Pearson, the global education group that owns the software successes, we have a number of Financial Times, has Poland in 14th place, above companies that have reached or are approaching Germany and the US. The region’s technical billion-dollar valuations.” universities produce highly skilled engineers and New start-ups are counting on help from the All editorial in this special report is produced by programmers. It is this legacy, dating back to close, while the likes of Bulgaria and Romania aim to boost investments by venture capital earlier generation of successful local companies, the FT. Our advertisers have no influence over, or communist times, that inculcated Victor Kislyi lag far behind. funds and to direct EU money, especially from but the US and UK culture of wealthy founders prior sight of, the articles or online material. with the skills to Wargaming, one of the How the money gets spent on R&D differs. The the EU’s Jeremie programme, towards start-ups. offering advice and investments to a new world’s most successful online gaming companies. private sector may dominate in western Europe “This attracts a lot of criticism, sometimes for generation of entrepreneurs has yet to take root “In many ways I am a child of the Soviet but, in CEE, governments take the lead, which good reasons,” says Barnabas Malnay, director of in Prague and Warsaw. education system,” he says from the often means funds are used less efficiently. Part Mobility and Multimedia Cluster, a non-profit “That American fashion of meeting and talking headquarters of his company in Minsk. Last year, of that is the legacy of past foreign investment, Budapest events organiser. “There are a lot of Eduard Kucera with young people with ideas hasn’t really taken it reported €218m in revenues from a game in where companies built factories in Hungary, very strict regulations as to how to spend that Avast Software, off here,” says Pawel Marchewka, founder and which players take part in online tank battles. Poland and Slovakia, but tended to keep money, but it has made the whole concept of chief executive of . Many universities, however, still produce many lucrative and highly skilled research jobs in their [venture capital] famous here, and [fuelled] a Czech Republic “I had thought about it, but I’m busy with the more budding journalists, advertising specialists home countries. huge wave of enthusiasm among young people to development of our company. I haven’t seen any and sociologists than engineers. “We’re having a That is slowly changing. Global tech companies become entrepreneurs.” Entrepreneurs in the really innovative ideas come to me, and I haven’t problem with finding the right people,” says such as Google and Samsung have built up While more cash is available than before, a field of information really gone to incubators.” Artur Wiza, spokesman for Asseco, a Polish IT substantial research facilities in Poland. Skype, growing problem is the actual creativity of the technology often hit Local start-ups often find that while they have company that is one of Europe’s largest business the Microsoft-owned internet phone service start-ups themselves. Many of the incubators a wall when they the technical skills to create the product, their software providers. “If universities could train developed in Estonia, has a significant research opening across the region are filled with teams of have to deal with , design and sales abilities are lacking, More on FT.com more IT specialists, we’d hire them all.” presence in the Czech Republic. young programmers working on local versions of bureaucracy. which is pushing some entrepreneurs to look for ’s Skolkovo Local universities have been reluctant to adopt As local companies grow, they are increasing popular social networking sites such as Groupon, Accountancy, audit talent in the UK and the US. the more entrepreneurial model common in the R&D spending. The bulk of research is being the daily deals company, , the social and law services The path from scrappy incubator to profitable Innovation Center US. Central European professors still focus on done by industrial companies such as Pesa, the network, and yet more smartphone apps rather are expensive, and fast-growing business is long and tricky. continues to attract publishing and staying within academia rather Polish train maker, which recently won a €1.2bn than coming up with original concepts. which is discouraging Those who succeed, however, could provide the than co-operating with business or looking to contract to supply locomotives to Germany. The “There are a lot of start-ups in the Czech and can make it foundations for central and eastern Europe’s new start­ups, writes found companies based on their own inventions. Czech Republic has chosen nanotechnology, Republic, but they are not coming up with useful difficult for budding transition from a region reliant on cheap labour Finance remains a problem. Most of the CEE while Slovakia has an incentive to focus on the ideas. They are trying to copy US projects,” says entrepreneurs to to one in which creativity and innovation Isabel Gorst countries spend significantly less on research and car industry thanks to the auto plants that Pavel Zima, general director of Seznam, the finance their will drive closer economic alignment with www.ft.com/central­ development than the EU average of 2 per cent dominate its economy. leading internet portal in the Czech Republic. nascent business. western Europe. of gross domestic product. The Czech Republic So far, IT receives a much smaller piece of Seznam and other IT companies such as Asseco Additional reporting by Neil Buckley and eastern­europe and Estonia at 1.6 per cent come reasonably overall R&D expenditure but many governments and Techland, the games maker – both in Poland Kester Eddy 4 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 5

Central & Eastern Europe | Funding Funding outstrips quality ideas Investors complain about dearth of technology projects to back, write Neil Buckley and Kester Eddy

N A SUMMER EVENING IN Budapest, a rooftop party is in full swing, the 50 or so people in attendance too busy networking to admire the cityscape ranged before them. “We started these barbecues to cement together Oour own network inside here,” says David Trayford, founder of thehub.hu, which offers affordable office space six floors below to cash- strapped entrepreneurial start-ups. “But soon, all sorts of people heard about them – [the start-up scene] is all about connections, after all.” One of them is Antal Karolyi, a budding “angel” investor with five investments, looking for the right kind of start-ups to fund. “I tend to surface at various networking events; you just have to be there to be in the know,” he says. Budapest, birthplace of the Rubik’s Cube, was a place of innovation even in communist times. Today, it has a “buzzing start-up scene”, says Mr Trayford. He points to companies such as IndexTools, producing software for analysing visits to websites, which was snapped up by Yahoo in 2008, and Prezi [see box], the zoom presentation system that boasts 28m users. The real problem for technology in central and eastern Europe is not lack of financing, say investors, but a shortage of top-quality projects. “There is an oversupply in funding around the globe,” says Mr Karolyi. “Unsurprisingly, investors tend to complain about the difficulties of finding good projects. More often than not they are looking at interesting products but are unhappy with the team [behind them].” Marcin Hejka, managing director for the region at Intel Capital, the venture capital arm of the US technology company, says this abundance of financing is an extraordinary turnround from 10 years ago, when “there was no such thing as early-stage funding available”. When communism collapsed, he notes, investment capital was scarce. Early venture Accommodating region: David Trayford Imre Hild, head of iCatapult, a Hungary-based capital investors in the region did so well that it is the founder of thehub.hu, which business development company, has close to $2m, soon became possible for them to raise provides office space to start­ups with the help of Jeremie funds, to help mentor substantial funds – but this had a downside. start-ups to launch on the international scene. “Everyone was looking to invest in food But he too says it is difficult to find good- processing, cement factories, telecoms, and so quality projects. “We can find decent start-ups on.” No one was willing to make small deals but we have to seek them out. They rarely come with start-ups, he says. “Basically the business knocking,” he says. “The number of start-ups is angel community didn’t exist.” Sharing concepts It is all about the presentation far lower than it could be,” considering Two trends have changed all that in the past Budapest’s population is the size of Berlin’s. five years, says Mr Hejka. So how can CEE countries stimulate One was “recycling” of capital. Early pioneers hen both candidates in last decade ago while wrestling with innovation to take advantage of funding? who, despite the funding difficulties, did manage year’s presidential ways to present and explain his Jan Muehlfeit, chairman of Microsoft Europe, to develop businesses and sell them, became Welections in South Korea work. Certainly, the idea that his says governments should encourage local angel investors – and were able to pass on began giving slick campaign “very simple” programme would be innovation by adopting technology in everything lessons to the next generation of entrepreneurs. presentations using modern developed and used by competing they do. Countries with a strong auto Second, governments started initiatives aimed software, local media took note politicians on the other side of the manufacturing industry, should take advantage at establishing early-stage funds, recognising “Unique and unconventional,” globe never entered his head. of the fact that modern cars are packed with on- their importance, he says. Often, governments wrote Joongang, the country’s most “I could never squeeze all the board computers and software to build up high- provide capital on a “matching funds” basis. popular daily. “Very hot,” said pictures and ideas into [individual] tech domestic suppliers. In Poland, the main financing agency is the business-orientated Money Today, slides. These things are related and Microsoft’s four-year-old BizSpark programme Krajowy Fundusz Kapitalowy, a government- while Mediait, a webzine, called it I needed a good storyline. I needed provides free software, support and visibility to owned fund of funds with €200m in assets from “a national sensation”. somehow to flow these things help start-ups succeed. It has 17,000 start-ups the Polish government, Switzerland and the EU. It was a sensation too for Prezi, together,” he says. involved in Europe, of which 5,000 are in CEE – It has partnered with 15 venture capital funds, the Hungarian company that His solution was to write a with the number growing by 50 per cent a year. financing them on a 50:50 basis, and so far has produced the software that allows computer programme that enabled Mr Muehlfeit says the region remains strong in used less than half its potential financing. The users to zoom, both in online and him to zoom in and out of a large technical knowhow, but “sub-skills” such as funds are still fairly small, from about 25m zlotys offline presentations. map of pictures, all located on just marketing and communications are weaker. (€6m) to 100m zlotys. Funds associated with the “To the best of our knowledge, one frame. “When I’m coaching these guys, it’s not on the KFK have undertaken 43 investments ranging this is the first time leading Dubbed “zuiprezi” – from technical side, but things like how to present, from Duckie Deck, a firm making educational political figures have used Prezi to “zoompresentation” – his talks, and how to sell products,” he says. software, to online grocery store frisco.pl. reach out to the masses in a his unique technology, began to Mr Hejka says CEE universities lag behind As 10 countries in the region have joined the campaign. For a company dedicated attract admirers. These included more mature markets in learning to turn their EU since 2004, EU funds have also become to the spread of ideas, this has Peter Halacsy, a computer scientist scientific breakthroughs into business ideas. available, in particular through the Jeremie, or made us very proud,” says David friend, who rewrote the software, “There is not enough commercialisation of Joint European Resources for Micro to Medium Hooker, Prezi’s in-house writer. making it far more user friendly. innovations happening in the scientific world” in Enterprises, initiative. The scheme enables Adam Somlai-Fischer, a KE CEE, he says. “If it started happening, it would member states to use part of their EU structural Hungarian artist-cum-computer Read more online at www.ft.com/ be a massive change.” funds to finance small and medium-sized expert, developed the software a central­eastern­europe enterprises through equity, loans or guarantees. Additional reporting by Jan Cienski 6 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 7

Central & Eastern Europe | Poland

Gaming the future: CD Projekt in Poland has sold more than 5m copies of its Witcher series, based on a white­haired sword­wielding hero created by the Polish author Andrzej Sapkowski Getting into the next game Jan Cienski looks at two homegrown companies that have succeeded in becoming computer game makers

OLAND EXPORTS EVERYTHING to power the game. That engine, now in its fifth be able to start developing a second game at the from buses to apples, but the area iteration, underpins all Techland’s other games, same time. The one being worked on is where it really punches above its and is now been being licensed to rival game Cyberpunk 2077, a dystopian futuristic game weight is in computer games – makers to use in their own products. based on a popular tabletop version with a the result of several highly The first allowed for complex release aimed at 2015. original companies creating best- graphics that permitted players to, for example, As with Techland, CD Projekt continues to selling titles. CD Projekt and move through dense forests – an innovation at distribute foreign games in the Polish market, Techland are the country’s two the time. Since then, Mr Marchewka has tried to and has also built up gog.com, an internet game- Pleading games makers, and both were launched in ensure that there are either novel narrative or selling service. This differs from larger rivals a similar fashion in the early 1990s. technological elements to all the games produced such as Steam, in that it sells games without Their founders – Michal Kicinski and Marcin by his company. built-in digital-rights management copy Iwinski of CD Projekt and Pawel Marchewka at The first series of Techland’s , protection – making it less popular with Techland – played some of the early computer launched in 2009, made sales of more than 3m, publishers, but preferred by gamers. games that had begun to appear in Poland. and was unusual in that it set a shooting game However, the heads of both companies are They quickly shifted from being players to in the old west. Since then the company has caught up in building their businesses, and have distributors, looking for international game pushed hard into zombies with the not invested much time or money in helping the publishers eager to ramp up sales in Poland – franchise, which has sold more than 6m copies next round of Polish start-ups. “We don’t have a market that had become attractive after the and has earned far more than any film ever the same system here as in Silicon Valley, where newly democratic country accepted international produced by a Polish film studio. Later games founders get involved in accelerators and copyright protection, which reduced the problem have improved character controls, as well as incubators,” says Adam Kicinski, chief executive of pirated versions. ramping up the graphics and introducing new of CD Projekt and Michal’s brother. Unfortunately, the market quickly became ways of controlling the onscreen character. “What we’re working on here is so promising crowded with distributors, and only those with “Every one of our titles has something and fascinating that we don’t have the time access to top-selling games stood much chance innovative,” says Mr Marchewka. “We are and energy to get involved in start-ups.” of succeeding. That forced companies to innovate trying to use new technologies to make ourselves or die. “The games that were selling the best stand out.” were already taken by other importers. We had The privately held company now has more to content ourselves with second-league than 200 employees, and is working on more publishers,” says Mr Marchewka. “The only zombie games. solution that would allow us to sell more was to Warsaw-based CD Projekt is Techland’s rival Adam Goral produce something of our own.” for the title of top Polish computer game maker. Asseco, Poland Techland ventured into making its own games In an effort to stand out from other distributors, with , a sci-fi driving and shooting it began introducing Polish-language versions Business owners still receive game that got mixed reviews and was outdated of popular computer games in the late 1990s – little recognition, unlike in by the time it was released in 2000. There was a move that gave it the confidence in its other countries. That also the international surprise at seeing a game The first programming skills to start making its is why fostering being made in Poland. own games. entrepreneurship must “Initially, the reception was negative,” says Mr series of Unlike Techland, whose games cover a range of be based on Marchewka. “There had been no evidence that ‘Call of subjects, CD Projekt has focused most of its education, which not Poland was able to produce games.” energy on its Witcher series. This revolves only explains how to Undaunted, the Wroclaw-based company Juarez’ around a white-haired sword-wielding hero run a business, but continued making games, and eventually created by the Polish fantasy author Andrzej also contributes to developed Chrome, a first-person shooter in 2003. sold more Sapkowski, and has sold more than 5m copies. the positive image of It is set in the far future, and – crucially – led to Although the company’s main project is the businesspeople. the company developing its own software engine than 3m next Witcher game, it has grown large enough to 8 † FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 † 9

Central & Eastern Europe | Case studies Central & Eastern Europe | Opinion Investors are desperately seeking innovation

After a f lurry of activity a few years ago, the tech scene in Zygmunt Grajkowski VCs find many attractions in the region Prague has become more subdued, writes Jan Cienski

HEN PETRA Hubacova shows up at Low costs and talent are her office early in the morning she is often the ingredients for success first person at work, and in the evenings she AN REZAB STARTED HIS FIRST is often the one to turn company in 2001 at the age of 14. Seven N CONTRAST TO MORE DEVELOPED out the lights – which is Jyears later his mobile gaming company markets such as the US, Israel or the UK, The quality and Wfine except that her business is running a start- was bankrupt and he was saddled with venture capital in the countries of central up accelerator and she would prefer seeing some $120,000 in personal debt. Europe is still in its infancy. One has only pace of the work of her clients working harder than she does. While that could be a business death Ito contrast the value of VC investments in “Being in a start-up is a bit of lifestyle right sentence in much of continental Europe, Mr Israel – $1.9bn in 2012 – with the combined value is outstanding now,” she says. “Investors tell us that they Rezab did not quit. Instead, in the same year of those in Poland, the Czech Republic, Slovakia, would like to use the money, but they just don’t that his first company went under, he got Romania and Bulgaria – which were €102m. That sort of growth potential also attracted have the projects to invest in.” together with friends to start a new business Barbara Nowakowska, director of the Polish Dariusz Pronczuk, a partner with Enterprise Ms Hubacova runs TechSquare, one of a making apps for Facebook. Private Equity and Venture Capital Association, Investors, a leading CEE private equity fund handful of accelerators and incubators that have That led to an idea. says some international venture capital funds who, together with Intel Capital, invested in the sprung up in the Czech capital in recent years. “We saw there was no measurement have noticed the region is a growing market with Czech Republic’s AVG Technologies. That grew Several years ago there was an enormous buzz around social media advertising, so we built strong potential, a culture of entrepreneurship from a local start-up into one of the world’s around new technology start-ups. Ambitious a social measuring platform,” he says. and little in the way of competition – and see largest antivirus providers, now listed on Nasdaq young entrepreneurs aimed to follow in the Now Socialbakers has 1,800 corporate this as an opportunity. with a market capitalisation of more than $1bn. footsteps of successful local companies such as customers, 230 employees and $20m in As a result, development centres now employ Venture capital investors also keep a close eye AVG and Avast Software, which are among the revenues, up from about $2m 18 months ago, thousands of programmers for companies such as on the flow of EU funds into the region. Over the world’s leading providers of antivirus software, as it helps brands measure the success of Motorola (in Krakow), Intel (in Gdansk) and past five years, the Innovative Economy and Seznam, one of the few search engines and their social media campaigns. Samsung (in Warsaw). Their decision to locate to programme has spent more than €10bn in Poland portals to challenge Google for dominance in a Mr Rezab says it was a huge advantage for central and eastern Europe was not based solely alone, which has gone on improving national market. him to start in the Czech Republic, because on the relationship of price to quality – prices qualifications, creating a network of incubators However, there is a sense that some of the fizz of the availability of skilled programmers are similar to those in India – or because of the and financing new companies’ business plans. is fading from the start-up scene. who cost significantly less than their access to well-qualified people trained at While there is no denying these programmes “We are now seeing some start-ups die, but in counterparts in the US and western Europe. European universities, but mainly because of have strengthened emerging businesses, some a way the crisis is good because it gets rid of While Czech costs are low, he notes that it their work ethic and creativity. critics are worried about ineffective allocation. It weaker companies,” says Ms Hubacova. is hard for new companies to get much help For other companies, the most important factor would be wise to look at the experience of a The Czech Republic has an established and advice from established entrepreneurs. is the safety of being in the European Union number of countries that have shown that industrial tradition and its universities continue It is also difficult for start-ups to get more rather than in a region of the world replacing venture capital investors with to pump out highly skilled engineers and serious financing after running through loans threatened by an explosion of government financing of risky designers. Many of them end up working for the from their families and political or religious conflicts. innovations has produced multinationals that dominate the Czech economy, friends. John Biggs, East Coast lacklustre results. Every but a growing number have caught the bug of But if everything does editor at Techcrunch, the government institution is starting their own business. come together, the US tech news blog, risk averse by nature, The challenge is to take that enthusiasm and possibilities are regularly visits CEE, and tends to be more to turn it into an innovative idea that, with the enormous. and points out it is a enthusiastic about help of mentors and injections of finance, can be “We have more region where one financing an turned into a viable business. talent than a lot can still find entrepreneur who That is the route taken by Vit Horky, whose of countries that interesting can fill out a form Connected: tech company Brand Embassy has built a customer are bigger than technology correctly than entrepreneurs are care platform that uses algorithms to monitor us,” Mr Rezab companies priced qualify a talented springing up across social media and allows companies to identify says. several times inventor who is the region, dissatisfied customers and quickly address their JC lower than in no good with particularly in concerns. The company has 25 employees, up more developed paperwork. Start­up Warsaw (right) from six last year, and says revenues have been nation: markets. The right path growing at about 50 per cent a month this year. Jan Rezab Because of their seems to be to Mr Horky is looking for an additional €3m in lower operating use public funds financing after an initial injection of €400,000. costs, such to lower risk at But, although Mr Horky’s business has companies can the early stages of launched and is growing quickly, he sees a by successful entrepreneurs who return their accomplish a great technology dearth of aggressive companies following in his time and money to build up new generations of Balancing act Technical skills abound but marketing ability is in short supply deal more development, and footsteps. “The start-up scene in the Czech businesses. That has been difficult to do in the development than leave investment Republic is going through a cycle,” he says. Czech Republic. similar companies in decisions to private- “There was a lot of passion two years ago, but Leaning against a bar in his downtown Prague TORING FILES IN THE CLOUD HAS financing from a successful entrepreneur. the US. And the quality sector professionals. now it is in a more grown-up stage.” accelerator, Node5, Lukas Hudecek, a bearded 31- become commonplace, but Mirek Burkon “Most of the people called angel investors and pace of work done by The challenge for One issue is that a lot of nascent tech year-old, says he has had a hard time attracting Shad an idea that would make storage here actually made their money working in local programmers in areas entrepreneurs is to change companies tend quickly to copy ideas developed older entrepreneurs as mentors. more valuable by allowing companies to save corporations and they really don’t have any such as mobile applications or from the current model of selling in the US and western Europe, instead of “There are a couple of guys who have become and share not just text, but images and advice to give,” he says. game graphics is outstanding. knowledge as a service and begin thinking up truly original solutions of their own. successful and they have become celebrities, but information associated with brands. So he went to London, where the angels VC investors also find that CEE has a large creating start-ups on the basis of their “When Groupon was successful, we didn’t have they haven’t done anything in the way of Mr Burkon’s OpenBrand allows a company and the money were more available, but enough internal market for a technology intellectual capital. But before the owners of 15 copies, we had something like 85,” laughs supporting new start-ups,” he says. to store not just the graphic image but all the where the costs of running a business were company to be able to try out its concept and these can turn their initial development costs Ondrej Bartos, who runs a venture capital fund, However, he is not giving up on his details of a brand, such as colours and card significantly higher. He also saw that his technology on the local market before expanding into share sales, they need financing in the form Credo Ventures, looking for promising start-ups. accelerator, and is certain that the programming stock used in business cards, in a single place. project was not mature enough to attract elsewhere, thanks to the EU’s open borders. That of venture capital. Mr Bartos still has money to invest – his fund and technical skills of young Czechs, when So far, customers are responding serious investors, so he retreated to Prague, was the path taken by Asseco Poland, which It is also crucial for start-ups to grow and stay of €18m has only invested about 40 per cent of married to better marketing ideas as well as enthusiastically. Mr Burkon says that his while still keeping an eye on London. started as a small software company before in the region, as that expansion will be of value its assets – and there is not much competition finance, will see entrepreneurs create some truly company, which has five employees, now “When it comes to technical skill, Prague growing into the country’s market leader and to stock buyers. from rival investors, but the challenge has been groundbreaking companies. stores thousands of files and is looking for its has great engineers. Everything costs one- becoming one of Europe’s top 10 IT integrators. Although such a company may change owners finding interesting projects. first serious financing of £250,000. third here of what it does there.” he says. in the form of foreign capital investors, it is “We are constantly analysing opportunities, OpenBrand was founded in late 2011 and “But while the Czech are great technical hugely important that it stay in CEE together but we haven’t invested much in the past year,” ‘When Groupon was from the beginning it has switched its focus people there is a problem with finding skilled with its founders, and not emigrate when it is he says. “That’s not because of a lack of funds between the Czech Republic and the UK. marketing people here.” still at the ideas stage to look for better but because of the quality of the projects we’re successful, we didn’t Starting the business in Prague, Mr Burkon The goal now is to find a balance between Start­ups need to grow and stay financing conditions in other countries. seeing. Are there interesting start-ups? Yes. Are found he was underwhelmed with the venture the engineering talent in the Czech Republic, there a lot of them? No.” have 15 copies, we had capital funds that approached him and and the finance and marketing skills of the in the region, as that expansion Zygmunt Grajkowski is the managing partner The start-up ecosystem in more developed dismayed by the difficulty in finding angel UK to build the business. JC of Giza Polish Ventures, a Polish-Israeli economies also relies on a virtuous cycle created something like 85’ will be of value to stock buyers investment fund 10 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013 11

Central & Eastern Europe | Russia Central & Eastern Europe | Baltic states Russia’s next tech titans Russia’s technology industry is booming, with companies such as Yandex emerging as global challengers. Opposite, three Baltic entrepreneurs describe the sector’s prospects. By James Nickerson

Ecwid Ya n d ex Latvia

Ruslan Fazlyev and “At last it was possible to have a serious job in IT without However, Mr Zaytsev fears that the Soviet view of In the city of Lucerne, in in Russia as well as Ukraine, Kazakhstan and There are several Yury Zaytsev faced an leaving for Moscow,” Mr Fazlyev says. Ecwid, a spin-off capitalism lingers, and most people do central Switzerland, sits Belarus. In September 2011, it launched in Turkey, things that can be uphill struggle in 2000, company, followed. It enables an online shop to be added to not see entrepreneurs as people who “rebuild the the office of one of the where Google had no competition. This is the first done to encourage when they wanted to a website by pasting in a few lines of code. Russian economy, create jobs and drive growth”. fastest-growing internet country that Yandex has entered where Russian is entrepreneurship in set up an internet Ecwid has signed up 350,000 merchants – 40 per cent He also says that although the federal government is companies in the world, hardly spoken, so it has new communication company in their from the US, 20 per cent from Russia, and about 7 per cent concerned with the future of IT and has created with a worldwide monthly challenges to deal with. Latvia. First, government home city of Ulyanovsk, from the UK. The company has offices in the US, and the preferrential tax treatment regimes for IT start-ups, it has user audience of more than If Yandex can become the number two player in should start to reduce the situated on the Volga, service is available in 45 languages: “We’re pretty global, and introduced tax rises in other parts of the economy. 90m. Its purpose: to Turkey, it may not be long until it rolls out across bureaucratic burden on 890 km east of always expanding,” Mr Fazlyev says. James Nickerson increase sales in Europe. and western Europe, according to Bernard businesses. The focus Moscow, and the In the end, the location of the company has helped. The Yandex’s search engine Lukey, executive director of Yandex Europe. should be on small birthplace of the Ulyanovsk region has two advantages. Because of its does not operate in the west Yandex was launched on September 23 1997 – enterprises with few Guntis Šmaukstelis, revolutionary leader, connection with Lenin – whose real name was Vladimir Ilyich or in Asia, but companies eight days after the domain name for Google was employees. Second, it is Vladimir Lenin. Ulyanov – the Soviet regime decided to make it a showcase from around the world are registered, and almost a year before it was launched. Co-founder and CEO at 2012 2010 good that the government There was no city, and founded several good universities. This guarantees 4.1 using its advertising space Rapid growth has allowed Yandex to capture 62 MightyFingers infrastructure for a plentiful supply of talent from which the technology 4.7 to access the largest per cent of the Russian market. It employs 4,298 supports business companies, Mr Fazlyev companies can recruit. 2012 2010 Bernard Lukey, internet market in Europe: staff worldwide, with 15 offices in seven countries, incubators outside the capital, but it should also focus Ruslan Fazlyev, explains. “We had to Second, the local government is active in attracting 7. 1 5.3 Executive director of Russia. Large companies including the US and Taiwan. Yandex may be the on Riga, home to about half the country's population. Co-founder and CEO, Ecwid solve a lot of problems business to the region, which the World Bank ranks as first in 2011 Yandex Europe simply cannot ignore the only search engine that can provide real competition Third, there is a need to change thinking in society. that had nothing to its Ease of Doing Business in Russia survey. 4.4 Russian for Google on a global scale. Currently, failure is considered to be bad. But failure do with IT. We had to create everything from scratch. We internet In May 2011, Yandex made its debut on Nasdaq and is an integral part of all businesses. had to build our own office.” St Petersburg 2012 2010 platform any saw its share price soar. Revenues for the 2012 The two friends were students when they founded 2011 3.3 2.5 more, and financial year were up 44 per cent on 2011 to X-Cart, the world’s first ecommerce platform to use the PHP 6.0 Yandex is $947.1m. The company forecasts that revenues will Lithuania scripting language. At first, a friend helped with the coding, 2012 growing grow by 34-38 per cent for the 2013 financial year. but after five years they were employing more than 100 2010 rapidly as Yet Yandex is not complacent; it knows that it is not 2012 3.4 3.0 2011 Lithuania has been a free people, stemming the brain drain of tech talent from the city. 2010 3.3 a result. insulated from the global economy. Mr Lukey notes 15.1 11.2 Yandex that companies using US and European internet market for just over 20 years, Central currently services have had to “think about using something Internet audience 2011 which means that Federal 3.2 operates else in Russia”. entrepreunerial spirit is not in Russia’s regions District Internet services that are widely used in western yet widespread. However, it Europe and North America are not popular in Russia, has everything one needs to and while Google is present, it lags behind. (Millions of users) do business – well-educated 2012 2010 This gap may increase following the launch of the 2011 Northwestern Far Eastern Yandex Browser in 2012. people, hard-working mindset 8.2 6.9 and excellent infrastructure. 12.9 Federal Federal District JN Moscow District Paulius Insoda, While the first generation of Ural CEO of NFQ Group Lithuanian entrepreneurs Federal already has some global AlterGeo 2011 District success stories, many people still wrongly believe 7. 3 business is not their cup of tea. This can be changed services company by showing Lithuanians that doing business is easier Siberian Siberian “It is the right – except it was than they believe. It's all about the national mindset, time to be an launched in 2008, Ozon Federal Federal which requires seeing many inspiring examples in entrepreneur a year before order to change. District District in Russia,” Foursquare. There are huge and are having a positive effect – * says Anton Since then, exciting opportunities for in particular regarding piracy. Baranchuk, AlterGeo has entrepreneurs in Russia, And in Tver, where Ozon has chief executive and co-founder attracted Estonia says Maelle Gavet, chief its distribution centre, there of AlterGeo, which supplies investment from executive of Ozon have been three governors hybrid location technology a variety of Holdings. The “enormous since the company’s creation, Estonia already worldwide. While Mr sources, including population with a growing all three of whom helped to does a great job 2012 2012 Baranchuk recognises Esther Dyson and disposable income” “provide support and build 2010 2010 12.8 10.5 that Russia has Almaz Capital promoting complements the infrastructure”. 8.9 2012 2010 Southern 7.6 “additional issues of Partners in 2011. entrepreneurship. “internet savvy and Infrastructure is growing 15.7 11.7 Federal Volga bureaucracy” that can It has also been Building interactive market” that month on month, and make it a more recognised Anton Baranchuk, infrastructure from exists in Russia, and although further work is District Federal “complicated system” internationally, Chief executive, AlterGeo scratch, after which has helped spur the needed, it is now possible to District than elsewhere, he and at The growth of the 15-year-old build a successful company in gaining believes the nature of Europas it won Best Russian Start-up in January Taavet Hinrikus, Kristo Käärmann company. Russia, says Ms Gavet. “Nothing independence in 2011 2011 the fast-growing economy 2013. It is a member of the Skolkovo Innovation Maelle Gavet, Ozon.ru was one of the worth doing is ever easy,” the 1992, meant that Estonia Co-founders, TransferWise 11.1 9.4 has presented Center near Moscow, a project to build a high-tech first ecommerce French-born businesswoman says, in Chief executive, Ozon Holdings 2011 opportunities. business area that will rival Silicon Valley. wasn’t saddled with legacy companies in Russia, acknowledgment of the difficulties – 14.4 AlterGeo is Russia’s leading According to BCC Research, a leading market technology that hampered progress. Yet, the selling books online. It has expanded to create Ozon.travel, mainly the lack of a ready pool of human location-based social networking service, with more than 1.2m research company covering changes driven by government should invest more in IT education. the largest travel agency in Russia. Sopato.ru, another resources. Staff have to be to be trained on the job, they users, mostly in Russia and Ukraine. It allows electronic science and technology, the global market for Estonia needs to treble the number of people ecommerce service, and two business-to-business services cannot easily be “poached”. devices to be positioned by WiFi, WiMAX, GSM, LTE, IP location technologies of mobile devices reached who can code to meet demand and stay ahead. – O-Courier and eSolutions – are also part of the portfolio of But if a company can overcome these hurdles, notes Ms Ms Gavet believes that the market in Russia is “still in its addresses and network environment. It also helps users $25.1bn in 2011, and is expected to grow at 7.6 per the parent company, which employs some 2,100 people. It Gavet, it will create barriers to entry for others, resulting in a infancy”, and so the “priority is Russia” for the immediate The government must also ensure that there navigate in and around cities, share current location with cent a year and reach $36.3bn in 2016. Mr reported a 67 per cent increase in revenue to $492m for the competitive advantage. future. Her advice is that Russia should be viewed as a is a larger number of direct flight connections to friends, give and receive recommendations, and get discounts Baranchuk, ever ambitious to expand outside year to December 31 2012. It did not disclose profit figures. Ozon has recently expanded to Kazakhstan and Latvia, but continent on its own, and there is no reason to believe that and from Estonia. The number has declined in restaurants and other recreational and business venues. Russia, is aware of the potential benefits. The national government’s interest in the industry is recent, Ms Gavet says that there is “no plan to expand globally in to Russians will think or behave in the same way that people Its most recent product is Gvidi, an intelligent restaurant His advice to would-be entrepreneurs is that there recently, making it harder to build an international says Ms Gavet, but it has started to legislate on issues that China or the US”, and compete against the likes of Amazon. in western Europe, the US or China do. JN search engine for Apple’s iOS and Android. In short, AlterGeo is “no reason to wait” to start a business. business from Estonia. : Yandex * North Caucasian Federal District was split from Southern Federal District in Jan 2010 would be Russia’s answer to Foursquare, the social location JN 12 FINANCIAL TIMES THURSDAY SEPTEMBER 19 2013