E417 | Bogdan Iordache (Underline Ventures) & Jakob Stein (Creandum): Roundtable discussion on The State of Venture in Eastern Europe and more

0:00This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome everyone to this slightly belated start of today's conversation on the state of the market and venture funding in general in the part of Europe that we call Eastern Europe. Bogdan, Jacob, before we get into the beautiful report that we're building today's conversation on, I just want the two of you to give everyone a good introduction to who you are. Bogdan, being born and bred in the ecosystem, I'd love for you to start. Thank you, Andres, for doing this. So my name is Bogdan.

0:38I am a GP with Underline Ventures. I have also had the pleasure to found the HowToWeb conference 15, 16 years ago. I want to congratulate the HowToWeb team for this report and the great work that they are doing. Thanks, Bogdan. And yes, you're absolutely right. The amazing HowToWeb team keep producing important content on everything that happens in Eastern Europe. And of course, it's a marquee conference that happens every year in September, October-ish. and I can only say to anyone that's listening, if you want to find out what's happening in Europe and get a firsthand impression of Eastern Europe and the ecosystem that's there, that is the marquee event to go to.

1:25I've been there the last three, four years. Jacob, you've been there the last two years. So maybe, Jacob, let's use this chance to pivot to you, to tell us a bit about yourself, Creandum, and why you are invited on a panel today talking about the state of Eastern Europe. Yeah, thanks, Andreas. Yes, Anjaka, VP at Creandum, and of course, a regular at How to Web conference. And I think it's fantastic that we now have twice a year a firework from Eastern Europe, once with a conference in October and then in February with a report now. I think it's great. At Creandum, we do seed and series A, check size from 2 to 20 million.

2:00So traditional multi-stage fund in B2B and in B2C. and over the last 21 years I think we gradually increased our share of eastern European companies we speak to but also invest in. I think we are at a stable cadence now of two investments more or less a year that we're doing from the region and we see it increasing hence we're going on the road visiting quite some cities over the last year this year as well with how to web being of course one of the highlights of our year there. And Hans, excited to talk about the market and what we're seeing there. Just to give a precursor to it, last year at the UVC Awards, the winner of the Firm of the Year was Seedcamp.

2:46And they were partly, or at least maybe I should say to a large part because of their great success with UiPath, which of course stems from the region. And I can only say this year around, of course, we have a group of names in the Firm of the Year category that all have exposure to UiPath because UiPath has just been such a success for the European ecosystem, an incredibly important success for all of us to really recognize. And we can also see UiPath in the numbers that we're going to look into a bit. If any of you have not yet got hold of the report, you can go to the HowToWeb website and fetch the report there.

3:29But we're also going to be showing some of the core graphs from it. And I want to pull that up as the very first thing to just give us an overview of the current state of the market and ask Jacob and Bakhtin for commentary on this. I am shifting now to an image here that shows the macroeconomic and market trends, the transaction volumes from 2017 to 2024. And we have seen not only an increase in the number of deals done, but also a very significant increase in the amount of money invested, of course, starting in 2021. But maybe notably, not really at all dropping after that ominous year where everything in Europe really ballooned, everything in venture ballooned.

4:21But really in Eastern Europe, and as you can see here, it stayed high, stayed strong, which is not something we can say for the rest of Europe or the rest of European venture. So guys, tell me, what do you think when you look at this? I would like to say that I think this graphic is regarding the investment volume and number of transactions for Romania, not the entire Eastern Europe. On an Eastern European level, we did have an increase in the volume of transaction. For Romania in particular, we have seen in the last years a slight increase, a slight drop in 2022 after a fantastic 2021. And then an ongoing increase from one year to the other in terms of both volume and number of transactions.

5:16Volume is up for CEE, but what we are seeing especially is that quality of the teams that start is up. And that's, of course, something that is not on this graph for Romania or on the graph for the CEE growth. But when we look at the qualitative deals that we spent time with last year and who we competed with, with other tier one funds from all over Europe, that volume feels even more up than the total volume of transactions. When you talk about quality and improvement in quality, and we're going to show a chart showing that as well, that follow-on investments have really picked up in the region and makes up a very significant portion.

5:57And we'll dive into what that might mean as its own topic. But when we relate that to quality, what are you seeing, both of you, in terms of the improvement in quality? How do you see that? No, I mean, for us, it's the follow on bucket is really the bucket where we normally play and where there is already some money invested into these companies. And we see that local funds and local angels and such as Bogdan as well, they are fantastically coaching the teams on the relevant KPIs that then allow them to successfully raise the next round, not from strategic capital or public capital, but really tier one, tier two VCs from the US, from all over Europe.

6:43And that normally has the biggest uplift in their valuation. It has the biggest uplift in chances that they become a breakout success. And that is because we believe the sophistication of the first check investors that come into these companies has improved significantly over the last years, thanks to the work of funds such as Underline. Thank you very much for that, Jacob. So like for me, out of the entire report, the volume of transactions for follow on rounds, beats, or mostly, you know, from A rounds to B and C rounds is the most important finding and the most important takeaway from the report.

7:25because Eastern Europe is on a national, you know, on a country by country basis. It's not a super deep market. Like one year, you may have some super interesting deals coming out of Slovenia, next year from Romania, next year from Poland, next year from Turkey or Bulgaria. These things switch, they move on from time to time. But overall, as a larger geography, we see Eastern Europe raising substantial capital for follow-on rounds. So that means that while there is a lot of zigzagging in the first check category, then at the follow on stage, the CSA and post stage, some of these businesses, they do, you know, systematically, they become relevant, sizable, they raise significant capital and they become top players, which I think is the most important element of all the findings in the report.

8:29To bring everyone to speak up to speed when we talk about the growth of follow-on investments, and I'm showing at the same time to those that are watching this, a chart that shows that a split in the total volume by investment type. And we have Series C making up 30.7%. If I jump from the series C over to the series B, then series B is 15.7%. And series A is 16.3%. And then we have seed with 16.3%. And pre-seed being very, very small. And we'll talk about the pre-seed. But I'd love to ask you, when you and then total volume, I can't remember it just now, but total volume in the later stages is obviously a very, very significant part.

9:16That means we're looking at upwards of, I think, 700 million in total, which is a baffling amount compared to the rest of it. Sorry, 700 deals. So I want to ask you, when you think about this split between the follow-ons and the seed and the pre-seeds, what do you think it's an expression of? If you compare it to other years, I think there is less retail capital invested in the region at first check. there is sort of a stable pool of early stage capital invested by the regional funds. And then basically the best deals from the last five years, they are now scaling, raising A's, B's, C's and becoming significant businesses.

10:13Yeah, I just found the number I was looking for just before. Late stage investments, there was A to C accounted for 63 % of the total investment, which is 2.4 billion euros in total. And that, of course, is a very significant part. Jacob, what is your reflection before I ask another question? Pre-seed is always a little bit of a funny category. Some pre-seed deals never get announced. Some pre-seed rounds are, in fact, angel rounds. Some founders just don't like the term pre-seed and just call it a seed round, although it's the first money in. So we would not differentiate too much here between pre-seed and seed.

10:51We see a stable market for early stage funding rounds, which is great. That means there are a lot of deals that we can compete for. And we see that there's a healthy follow on market where if you're a winner in your category, then you will find subsequent capital pushing you towards a scaling motion. And I think what we've seen here in the splits of the majority being Series C and Series B tickets, that's funds doubling down on winners. but it's important to say that these are not regional winners in Eastern Europe, but these are winners in Europe. And if we look at, for example, 11 Labs, these are global winners.

11:31So that's just super important that we should not look at what those companies are building at local solutions or regional solutions. At least we are not doing that at Triangle. We got a question from Panus. He asked a question that I know, Bogdan, is very much top of mind for you. We've spoken about it a couple of times. He asks, have you managed to decipher what is really Eastern Europe versus posturing as UK, US based? And here, of course, we're talking about the issue slash the problem, both from a society level, but definitely also from a data gathering level, that a lot of the most promising, the best startups that come out of Eastern Europe are oftentimes domiciled either in the UK or in the US, just because of the dynamics.

12:21And we can talk about that a bit. But first of all, from a data integrity level, Bogdan, how have you managed to solve this in the report? There has been. There will always be an overlap between Eastern European talent and then global companies. Companies started in the UK, in the US. And I think there is no stupid, absolutely clear line. The way we have looked at the data is that we have included as Eastern European companies and Eastern European investments, the companies that have Eastern European roots and they have a significant presence in Eastern Europe. So, for example, in the case of Eleven Labs, the founders are Polish, they are based in London, they have an R &D center, or I think two now, in Poland, they have Eastern European investors at seed stage.

13:31So there are significant connections that tie them to Eastern Europe. We have other deals. A very simple example would be Databricks, right? Databricks has two of the five founders, our CEO and the CTO are of, like, they are Romanians. I mean, not even of Romanian origin. and they are Romanians who have migrated to the US. We never have included Databricks in our reports. Similar, we have OpenAI, a number of Eastern Europeans in many positions. We have never included OpenAI in our reports. I think a funny example or a good example is Zeon. We backed Zeon out of Budapest when they had the vast majority of the team.

14:27there. Then for the next round, they had one office in London. Now for the next round, they have a significant office in Austin. And of course, if you would now look at, I don't know, some databases, it would say Austin-based whatsoever. Xeon would never be in that strong position without coming out of Budapest. And they would never be in that strong of a position without maintaining core parts of R &D and their tech team in Budapest. So yes, for sure, they have high talent density, also in Austin and London. But that's for us a role model. If you go to the US too early, you give up sometimes one of your most competitive advantages, which is having access to this amazing talent pool and maintaining that part of your core DNA.

15:12I would love to double click on your point here, because a lot of people, when they think about Eastern Europe, they think about cost advantages. But this is not the thing when we're talking venture at all. We're talking about access to real talent that is very, very hard to combine other geographies. Bakhtin, maybe you shake your head violently when I said that. So I think you should be able to come in here. Yes, yes. This is super important. Like if you, you know, you need to hire a thousand people, probably you take a look at the, you know, the cost base as well. But if you need 10 extremely strong developers who are able to innovate, to create something new, to come up with fresh ideas, to solve really hard technical problems, those 10 salaries, I mean, you don't choose those people based on salaries.

16:10That is the wrong way of making the decision. We have seen this with some of the companies that we have invested in. now they are based they have their r &d based in bucrest they've been able to hire top developers from some of the big american r &d centers that we have now in bucrest so you have people coming from you know adobe google amazon etc and those people are not cheap but if you want to build top class innovation out of Bucharest, they also don't have, you know, a thousand alternatives. So, you know, in a funny way, the market for hiring top developers is much less competitive in Bucharest than if you would do this in, I don't know, San Francisco in New York.

17:03But it's not about cheap developers. It's about top developers. You just have access to top developers, which is not something that you have everywhere. And very similarly to that, there's sometimes the stereotype that if when you as a VC, you come to Eastern Europe, you get cheaper valuation or you can make better deals. That's absolutely not how our industry is functioning. The most competitive companies can dictate the price of the round. They can dictate the price of the valuation. And for us, only winners matter when it comes to returning the fund. So we are not going or we are not traveling to Eastern Europe to get a good bang for the buck on the deals we do.

17:44We go there because it's magnificent founders building global teams. And that's the reason. So I just want to be very clear on that stereotype. Yeah, I was just looking here because I was looking for a specific graph that I wanted to show as part of the discussion that I want to queue up about the pre-seed seed stages. I'm looking here at SaaS transactions and volumes in the first round. And we can see that there are 726 total rounds within this first round definition with a collective 278 million euros. Which, of course, when we go up and then look at the breakdown of that versus the number that's done for the follow-on investments, 3 ,600 million euros versus only 278.

18:34That is a significant difference. And it's also a larger difference than what you'd see in, so to say, a more developed ecosystem. And you said it earlier, Bogdan, of course, it's also because we've had such massive successes in the region that we have some outliers that really, so to say, over-index in this. However, I want to ask you and use this as the introduction to talk a bit about the very early stage market in Eastern Europe. And I want to ask you, first and foremost, where do you see the strengths? Where do you see the weaknesses? Where do you see the ecosystem trending? And where do you see that we need to be mindful and work harder, so to say, to make it an even better building ground for founders?

19:29That is such a loaded question. I mean, I can go about this in so many ways. So let me start a bit with a bit of context around that data. Eastern Europe at the earlier stages has a lot of capital, which is provided by institutions, by governmental programs, European programs, etc. So what that means is that when you see a certain volume of transactions or capital invested, that is not only a function of the market. that is not only a function of the good deals on the market, it's also a function of the availability in a certain moment in time of all these governmental programs. Like sometimes I see this in the values from Romania, if you look at pre-teal deals, you may see some ups and downs which are based on the fact that one or two of the existing funds had an in-between year where they were raising the next fund and there were a bit delayed depending on the availability of capital from the governmental or European investors, right?

20:42And that's in Romania, but it's also in Bulgaria and Poland, etc. In the last two years, we've seen quite a few new programs popping up and not all of them were fully operational throughout 2024. I'm referring particularly to the Romanian EIF program, the Bulgarian Fund, the funds, and a few governmental programs in Poland. So I think that is the one aspect of thinking about things when you look at data. Now, what are the strong points? What are the reasons for investing overall at the early stages in Eastern Europe? Eastern Europe has, and will still have for some time now, a very strong engineering culture.

21:35I had a conversation yesterday discussing what this means. It means people that are sometimes quite blunt, that they are not really focused on telling a story and they're more focused on telling facts. that start with technology and they are looking for a problem that their technology can solve. So you have multiple aspects of this. And there is a lot of opportunity in working with these people at the early stages because they have an incredible talent for creating new technology. And these are the strong points. In the same time, these are the weak points. So you have to leverage the strong points and build something that is useful for the market and then help them gradually to overcome the weak points and turn those technical innovations into business value.

22:31I think I've been a bit meta, but yeah, I'm going to let Jacob take it from here. I think it's a function of maybe the Baltics being a bit more advanced to a certain degree. But apart from that, we still see a big lion's share of first-time founders in the region. And that's completely normal. And that's a great sign that more and more people decide to start their own businesses. But I think what is a really explosive mix is if you have technical founders that are really technically sharp, which is, by the way, also how the Silicon Valley DNA of the founder is most often looking like. And then they maybe start their second venture or they go at it again.

23:15I'm not sure, Bogdan, what's the share of serial entrepreneurs in your portfolio, but I would have a hunch that this is something that you also see more and more now coming up as a pattern. And I think that's super exciting. So I think it would be too harsh basing the initial ticket volume of 2024 on the overarching trend that we are seeing in the region. And just one small remark on the other sources of capital that there are in the market. Our stance is that we are not lacking in Eastern Europe more corporate VCs or more matching facilities from public pools or such. We believe the most capable capital allocators are the fund managers on the ground.

24:04They have the best founder relationships. They understand best to drive the relevant KPIs and metrics forward for the teams. So I would be worried if next year we have this chat again and first tickets are up and volume is up. But that is driven by corporate VCs or public funding programs. programs. I want to ask you a bit, Jacob, if you could maybe, and to restate you inside Team Grand, I'm looking a lot at Eastern Europe. So I'd love to ask you, how does a fund like you, that's well known, you see deals all across Europe, everyone wants your money. How do you approach accessing Eastern Europe?

24:48Because as we started out, you're in Berlin. No, that's a great question. And I mean, we are tweaking this. So I'm not saying that we have the best recipe for that. But what we started around two and a half years ago is that whenever there is a first check written in an Eastern European team, we want to get in front of them because we want to hear what they're building. And that served us well in understanding local market movements a bit better. And then the second puzzle piece is building super strong relationships with the funds on the ground. And we believe that is best done by going places, by going there and visiting the hubs.

25:28And that is a challenge in CEE because it's not like in Germany where you have Berlin, Munich, and then maybe you have Paris, London and such. And you throw an event and you can invite 200 founders. It's a little bit more fragmented, just as Bogdan said in the beginning. it's a little bit more in one year this market is up in the other year it's a it's a different hub that is that is booming but we believe it's worth making the trip the founders within those hubs are super well connected so just a question that you should always ask after meeting a founder is hey who is the who is your favorite founder building on a super hard problem similarly in your market That gets you from one team to another.

26:11But other than that, we have the same gates, the same hoops to jump through for Eastern Europe, then for Western Europe, then for the US. So we don't have any special treatments in our due diligence or how we evaluate opportunities for Eastern Europe versus the rest. Bogdan, maybe you can provide the counter perspective. So to say you are one of the most networked VCs in the Eastern European ecosystem. And I can't count the number of funds that I know are looking to you to hear your perspective on the deals in the ecosystem. So maybe you can say a bit about how you feel yourself used by your bigger Western European counterparts.

26:54I think there is definitely a continuous increase of interest from Western European and US-based funds in Eastern Europe. I think the fact that Jacob is in this call and he's flying around Eastern Europe like a busy bee all the time, that is also a testament of that. We've seen in the last years funds actively investing across Eastern Europe. What you generally look like in a Western European partner, you look for funds who have a knack for the more technical stuff, who have a bit more patience in discussing with founders, who take the time to understand the local dynamics, the cultural angle in this part of the world, which is, I mean, in some ways, it's not fully homogeneous.

27:56I think there are some differences. You know, if you look from Baltics to Greece, there are some significant cultural differences. And I think there are exciting prospects for these investors to invest that money and spend time with some amazing companies. And I think in the same time, founders can benefit a lot from having experienced, thoughtful partners working with them who have a ton of experience in building or supporting global companies being built. What can we do better, Bogdan? I want to learn. What should we do in 2025? What can we do better? I may have some ideas, but I'm going to WhatsApp you.

28:46in other words Bakken has ruthless feedback for Jacob instead I'll shift to talk about the distribution of investment volume by country and I'm pulling up this chart at the same time giving an overview of which countries the different rounds go to and you can see a very clear bifurcation of it so to say where I can see if we start with the companies that are almost purely pre-seed and seed, you have Albania, Slovenia, Bosnia, Moldova, North Macedonia, Serbia, that are all purely seed and pre-seed. And then afterwards, we get into a more mixed picture where we have more of the follow-on rounds.

29:31And that's, of course, Eastern Europe, the rest of the country, so to say, Turkey, Poland, Greece, Czech Republic, Lithuania, Estonia, Romania, Slovakia, Cyprus, Bulgaria, Hungary. and Croatia. And I want to ask you this whole overview that I just ran through here. The point that I want to make, of course, is that Eastern Europe is not just Eastern Europe. Eastern Europe is many different individual countries. Can you tell me a bit about how we all should think about each individual country? Are there, like as an example, I've done a few podcast now with Enes from E2VC. He comes from Turkey. We've spoken a lot about gaming because gaming is a huge hub in Turkey.

30:18I'd love to ask you, what is the similar trend, similar vertical strongholds in Eastern Europe that people should maybe think about? Or is there none of that? Doesn't it work like that? I mean, I can just super quickly comment that there are two markets that maybe are a bit different, and that is Turkey and Poland, because they are large already on a domestic level. And that's extremely dangerous. That's the same danger we have in Germany here, for example. We always say Germany is the worst place to start a company from a size perspective, because it's a mid-sized country. Midsize country means you can start by distributing domestically.

30:57And that is extremely dangerous. And what we normally love about Eastern European founders is that they think global from day one. Now, there are a lot of founders in Turkey and Poland who think global from day one, but those markets, the likelihood is the highest that the first five logos we see on a traction slide are all coming from the domestic markets. Am I, it's maybe a philosophical question, but do you see that this is because the businesses end up being built for national customers and thus ends up being too localized in its approach? Or is it that the founders are able to build a large enough business and also for themselves to be satisfied and happy and for the investors that came into the first rounds because of their fund models and they've been deploying very much models that allow them to bet on single country winners rather than global winners?

31:57Is that the dynamic you see in these countries? or is it more that there lacks this global mindset from day one? Yeah, I think it's both. I think it's complicated if you have a board slide that says that's our attraction in Poland. We are now thinking about expanding into neighboring countries. Now, there are some business models where that makes sense, but for most business models, it really doesn't. And if I'm talking to a founder in Slovenia, no one will ever say that's our attraction in Slovenia and whatsoever. It will always be, hey, this is the bigger region where we're distributing and this is what we are maybe doing in North America already as a share of that.