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A new look at Central and Eastern Europe

The Central and Eastern European region is very often overlooked as an avenue for venture capital investment. With most venture capital deals struck in the US, Western Europe and South-East Asia, things look dangerously quiet on the Eastern European front. But scratch the surface, and you'll find vibrant economies swarming with activity and grand ideas, according to Villu Arak at Equitygate, who talked to some of the venture capital pioneers in Bulgaria and Estonia.

The players: Stanimira Hristova, CIO and Partner at Bulventures, a Sofia-based IT investor. Like the rest of the firm's four founding partners, she is armed with a Western education and a background from international financial institutions. Having invested in three companies so far, Bulventures is aiming to raise €5m by the end of 2001.

Tarmo Jüristo is a partner at LHV Ventures, the year-old venture capital arm of LHV, an investment bank based in Tallinn, Estonia. It is a compact collection of investment banking and corporate finance professionals, some of whom received their first battle scars in the financial markets department at Hansabank, the largest financial institution to grow out of the Baltics. With its first €5m fund almost fully invested, LHV Ventures plans to raise another €6-7m in 2001.

What do you consider your greatest strengths in adding value to young companies?

Hristova: People don't know much about venture capital in Bulgaria, thus we also have to educate entrepreneurs about VC and equity partnership. But software companies choose us not so much for the financial opportunity but marketing and sales expertise. As hands-on investors, we have it as our policy that a person responsible for a portfolio firm physically stays with the company for 1-2 months. We have invested in 3 companies so far, started small, and it seems to be the scheme that works best.

Jüristo: In no particular order: contacts (both in Estonia and internationally), helping with recruiting and growing the organisation, helping to define the strategic focus, experience and expertise in finance. Regardless of our small size and geographical region, we attempt to do basically the same thing as everybody else: find promising companies and put them on steroids.

What do start-ups in your region have that give them an advantage over their foreign/Western counterparts? What gives them a disadvantage?

Hristova: We've discovered that Bulgarian companies and software specialists can quickly develop according to the needs of the market. Their good expertise and the country's proximity to Europe also helps. On our part, we try to partner with people who have a more open mentality, knowledge of languages, an understanding of their clients needs, and respect for the client; things that westerners take for granted. The largest obstacle is related to management and sales expertise. Also, tech experts have a difficult time in selling their skills as they're shy to approach customers.

Jüristo: Among the advantages are a lower cost of labor, an environment less open to competition in the growing phase, less regulation. In Estonia, you could add very high internet and mobile phone penetration levels and high public awareness and receptiveness to related business concepts. Disadvantages include small markets, a lack of experienced managers, difficulties in obtaining comparable margins and/or reputation in foreign markets compared to Western peers. The greatest challenge is overcoming the hurdle separating a team from an organisation.

To achieve attractive ROI upon exiting from a portfolio company, it should expand internationally to achieve desired growth. What is your approach in this respect?

Jüristo: Going international is not necessarily the only way to build a successful company--you can't really scale business models which depend very heavily on persons running the business in a rather specific local environment, but it doesn't mean that you can't make money that way. That being said, in case of CV-Online and some other of our portfolio companies, going international is the obvious thing to do. In those cases we aim to utilise the existing network of contacts to the best we can. In addition, we would seek to bring in VC partners in successive financing rounds. We do encourage and try to facilitate the interaction between our portfolio firms, and in that sense CV-Online has been paving the way for others.

Hristova: Our shareholders--mostly foreign and Bulgarian private individuals, with some involved in the investment banking community--are helpful in establishing contacts for our portfolio firms. We help our investees build a good portfolio, good product development practices, and a good company structure so that they have something to offer when we go to the Western markets. We also work in the UK, but have been most aggressive in Germany, doing the sales and establishing contacts ourselves, talking to potential clients directly. In 2-3 years we hope to establish offices in the major markets.

Valuations are down and start-ups are finding it very difficult to attract funding these days. How has the freezing investment climate influenced your approach to investment?

Hristova: I don't think the cold climate has changed the way we approach investees. There are Bulgarian software companies with good potential that no one is catering to. The cooling in the IT sector affects us more in terms of fundraising for Bulventures which is natural. The strongest influence comes from outside Bulgaria where there's pressure to demonstrate that our business model makes sense, that we've invested in the right companies and that they're doing well.

Jüristo: I don't know if it has became any more difficult to attract funding to a good project. It is certainly more difficult to achieve a high valuation from day one, but this change of perception is something that will simply help us to save some time in the first round of negotiations-people come with more realistic expectations than they did before. First and foremost, the fall-off has came from the "we'll get 0.00002% of a gazillion dollar market and then go for a NASDAQ IPO" segment. You hardly see those people around these days at all. However, lower valuations and changed perception towards technology sector may indeed put off some people who would otherwise have considered growing their business more agressively.

Besides building great companies and achieving profitable exits, what do you consider your mission, your role in society?

Jüristo: Achieving profitable exits shouldn't really be a mission, it's a result that follows if you do things right. There's a great danger of sounding hollow on this, but we do want to help talented and motivated people prove that it is possible to do great things by relatively small means.

Hristova: We aim to attract skillful people and make them stay in Bulgaria. To achieve that, we can invest in them, encourage their entrepreneurship, and help develop strong companies. Bulgarian software specialists tend to leave for higher salaries abroad. We've discovered that our investments have made people stay in the country.