Investing and scaling in Romania and beyond - CO-INVESTIN webinar | E295

32:09Of course, there are some reasons to flip at some point, but it's not a necessity for us to invest. Yeah, it's not a necessity for us either, but if you look into the successful companies, most of them are domiciled in the US, either from the get-go or after they raised their A's. I think even in more mature ecosystems where there has been multiple unicorns every year, like France, for example, where you had Algolia, Wildeco, and then Tata Eco, et cetera, I think even France is discussing that, whether the companies are supposed to be domiciled in the US or not, and they're going through that transition.

32:42I think an ecosystem should mature further to start discussing that and then making peace with more of a local domiciliation. But I don't think any of the CE ecosystems are there yet. I think it's much more healthier to do it in the US, just from a downstream capital perspective, even until the IPO and after that. i'm curious actually i have a question for for jacob uh you know comparing sort of uh ce versus uk do you guys um when you're looking at a company uh in the ce like do you put a price discount uh in terms of pricing like or do you see the prices similar sorry just curious on on the on on the pricing difference um so so i would say we see a price difference in general but we don't see a price difference in the round we do because the rounds we do following the the power law are so competitive that uh that uh the prices just just get to a similar level i would say compared to to a to a germany and or or to i don't know maybe maybe a france so i i think when when founders come in, their initial valuation they're asking for is on average a bit lower.

33:57But over the course of the fundraise, it's never the valuation the entrepreneur wants, but it's the valuation that allows you to win the deal that is the one you're paying. And there I see much less of a difference compared to a London-based startup.

34:14Enes, Bogdan, I'd love to hear the rest of your take on this, because I think that there's difference here between both the stage that you come in and then also the types of investments that you do?

34:30When it comes to pricing, I think pre-seed deals, at least some of them are underpriced. And definitely we see that we have an incredibly small number of overpriced deals in 2020, 2021, 2022. So, I mean, the backslash of that period has been significantly lower in Romania, probably the same in the broader CE region. am I right in saying bad deals are cheaper good deals are more or less the same yeah and at A, B stage they sort of equalize so maybe there is a bit of arbitrage if you do precede seed but not that much yeah but I have a question to the folks on the call doing pre-seed. It's my feeling that we're seeing less funding rounds where the pre-seed investor already got an overarching share of the company and where you have to restructure cap tables and where things are messy from the get-go.

35:49Would you say that is correct and would you say it is because of the maturity of the ecosystem or is it just my feel? oh well i would probably agree with that yeah i mean we're we're still seeing i mean there's uh there's different strategies locally right i mean i think also goes to there's not like one type of startup what we for example see is like in czech republic specifically there's like a couple companies that have pretty messy cap tables with like one investor still owning you know 30 40 like quite a quite a meaningful amount of the cap table but very often i'm you know of course it is not you know it's super tough to obviously scale with that uh and and to get more funding with if you have a cap table like that but often it's also companies that perhaps weren't meant to raise that much capital right it's a lot of like local plays like we talk about like the local winner in you know e-commerce platform in the czech republic of course the the investor from the local investor's perspective, they will want to, because they understand that the upside is capped, right, just given the market size, they will want to get a meaningful share.

37:02So, but yeah, definitely for companies that are, that from the, get, from the sort of day zero or day one, you know, they want to sort of, they go into it with the vision we're building, a global venture were going sort of for the home run the investors that beg them understand what the game is so definitely I would say smaller and smaller number of companies with messy cap tables that want to sort of go into the global game I would agree absolutely with that And I think at least for Romania, although we are looking also right now towards countries surrounding Romania, but in Romania, historically, at the beginning, we encountered lots of such situations.

37:56And then it was the mission of educating the market of many actors, including ourselves, including Bogdan, including Tech Angels, including, I don't know, Accelerator, and many, many other actors, many other investors. And we see it smaller and smaller. What happened though in 2023, there were some bridge rounds here and there that might have that effect. And the effect of those we're gonna see 2024, 2025, right? So I guess we are not out of the woods with such situations. And the question is who has participated into those and usually are actually very good investors. and it would be a challenge to see how to deal with that and if we go back to the old paradigm of you know this is the ratio this kind of round and this is the ratio this kind of round because until now we worked with this in mind with this setup for preceded should the cap table should look a healthy cap table should look like that right and then on the seed round it looked like that and And then on series A it should look like that.

39:09So whenever we entered, not only as game-minded, but any responsible investor, whenever we entered, we're looking for that and prepping the company already for the following round, right? But now there are situations when very good companies were in the needed bridge rounds. And these will have effects on the cap table in 2025, probably. So it would be interesting how we will all deal with this, right? Yeah, absolutely. I'd love to go because we have two significant parts that I want us to make it to cover. One is the journey of startups and going from small to big and the challenges that are specific to building in Romania and in the CEE.

40:06I'd love to really kick the question up to any one of you and say what are you seeing that one might call native or specific to building in the CEE as a challenge?

40:26I think that global from day one comes with its own long-term benefits and short-term compromises in a sense where you're trying to not go for lower-hanging fruits in terms of first customers or design partners. You're trying to look for more mature tech markets where you would get those design partners so that these customers wouldn't push you towards mediocrity but rather uplift you. But that's not the lower-hanging fruit, of course, and then you have to go for that as a founder. and that also ties to the ties to turning into a multiple office structure early on in your journey compared to the more mature markets.

40:56You would see German SaaS companies become multi-office once their series B whereas our founders try to do it while they pre-seed while they're a five people team. They have to move to London, New York SF wherever and then that has its own short term challenges and compromises from a cultural and product building standpoint but obviously if they can go past that phase it has its own benefits in the long run as well.

41:22Any other? I mean, I would add, I would expand a bit on a topic that Dan mentioned initially. We have a strong engineering culture, and I think many, many of the startups that, especially the successful startups of the last 10, 20 years, they have either an engineering or a math background. and this is also sort of raises questions on the long term i mean at least in my head uh you know uh because this most of these founders that we are investing in they haven't got the experience of managing a large company a large group and maybe they even haven't been part of a company that has had this type of you know challenges or like structure and in these cases the founders themselves they need to they need to walk a growth a growth path along with the company and because the founder that we invested precede who can manage a you 10 people team will be different than the founder that you uh invest when they are at series b or c and they have to manage hundreds of people and they need to go through their own journey of of growing and and building themselves into this future ceo uh that they need to become in order to make that company successful so this is this is a very i i think this is more of a particular thing to to see even to to western europe where many of the founders that we invest in they already been part of some big product organization and maybe the transition is is simple for them

43:20i would like to build on that if you'll allow me on what bogdan just said um the transition would be simpler but we're still lacking capital so for me the main challenge is having being an investor at inception rounds as a pre-seed investor. You know, as a business angel, you realize at some point what the size of your portfolio needs to be. And you realize that in order to achieve that size and to pre-seed or invest at inception round in that many companies, you need to know a certain number of founders, X, right? That you need to map mentally and understand and see if you can make them evolve.

43:54And oftentimes the challenge is, and I believe not just in Romania, but across the region, is just the availability of funds. pure and simple. Of course, the local players are going to do the best that they can, all of them, and they are paying as much attention as we are as business angels to these inception rounds, of course, but it's still not enough. I mean, more capital would seed more companies, which statistically would yield on the long term better results. We're We're simply not there yet. So we don't, you know, to Bogdan's point, we don't know for sure right now that founders who can build a pre-seed seed company can take it to series B and C and D.

44:40On the other hand, we haven't seeded enough to know, to validate that assumption. Out of the four or five that I really had on my mental map for starting to invest, One of them has already achieved Series A and is building towards the next stage of the company. And I think others would try their hand at it, given the opportunity. But will they be given the opportunity? I'm just one person. Bogdan is also a solo GP. Don has his team and maybe they can bundle their work together. So do Carolina and Ennis. But I'm wondering out loud here. I personally believe that more capital would also do the job.

45:29I think the timing of funds in their life and 2023 was not optimal and it was felt in the market. So the number of new rounds, if I read correctly one of the studies that appeared and it was actually done by the colleagues of Bogdan, by Alex and the HowToWeb team, was this, that the number of new rounds dropped by 40 % in 2023. And if you look at it, it's correlated with the fact that we are just a few funds local in Romania. And the first rounds usually happen with the local funds involvement. So if one of us is in year six, like it actually happened in 2023, it was the case of Germinder. If only one of us out of five funds in the market was not able to invest in one year, it had a huge impact on this in the entire ecosystem.

46:29Now, on the other hand, I don't want to do marketing or anything, but on the other hand, 2024 looks a bit better. We already did the first closing of the second fund. Probably early game will do some time their first closing in I don't know how many months from now. so in theory should be money in the market again in 2024 to do certain rounds so that will address the topic that marius mentioned still the quality of the teams is not something that we can address at this size of the ecosystem unless we are actively taking this into the discussion if the teams in which we are investing and then we see we figured out it is to say that the very early stage startups the teams are like two and a half men people that are mostly technical by the way we then it drives also the gender discussion if you want to drive that discussion because most of the technical people are males and there you go so you basically need to to have these discussions earlier with the teams and make them aware that they need to go to market type of person.

47:47Otherwise you won't make it and the maturity of these guys it's probably a process just like Bogdan and Marius mentioned it's a process some of them will be able to take it and make it happen some of them know the way they go internationally it's also influencing this so it's one thing to go operationally and find customers especially in enterprise if their customers are in enterprise if they're in the if they are opening an office in london it's a very different story than opening a office in new york the time difference can be a killer for forming a senior leadership team it's just simply like that you need to be closer on your time zone to the team that is actually technical, the founding, product strategy, product marketing.

48:43You need to be closer to that at the first step and then you can go more comfortably towards the US. Now if your customers are SMEs or even SOHO in a B2B setup, well, that's a different story and you can go easily to the US. That's what we observed from our portfolio. So getting a team more mature, it's also about how you advise them to do the international expansion, right?

49:19So I actually, I mean, like just sort of to expand on this topic and to maybe be a little controversial but i don't really agree with uh with the statements that there's not enough capital i think there's enough capital um at the seed stages there's quite a lot of local capital for the volume of companies that we're seeing and i would say that the best teams uh and the best ideas mostly you know in in 99 of the cases find uh early stage capital um and in the later stages is definitely it gets more competitive and i mean i think it's really about the quality right like not every startup you know and you know and it might sound ruthless but it is uh it's the industry right like not every uh seed stage company deserves to raise series a or is meant to raise series a right like and that's that's in that's in every country and as as jacob said to his point of my question it's you know he doesn't distinguish uh between the company their benchmark exactly the same right is it it whether the company's from london or whether the company's from prague and the road there to you know dan's and bogdan's point like it's it's definitely a little bit harder right because the the founding teams will go through more obstacles like potentially even like personal challenges having to move somewhere you know you can't sell your you know potentially you don't have the network in the in in the us you know to sell to your first customer so easily you don't have the friends from the university to tell your your first license to but you know it's harder but like you still kind of it's it's it's the name of the game right like and i i i have to say that in our portfolio the best companies don't struggle to raise um and they're getting preempted they're getting preempted by great funds and and so i i think it's really about just um yeah it's it's it's about sort of facing the fact that we're we're measured at the same level as everywhere else were put against the same benchmarks and and you know the argument of sort of blaming it on not enough capital is I don't like it so much oh please allow me to counter then Carolina so nobody I was not challenging this for the growth stage and I was not in any way putting blame on anybody I'm just saying something that's absolutely real I started if you remember by saying there are 230 ,000 people working in ITNC in Romania.

51:47A big question for somebody like myself who's acting as a business angel is how do we incentivize as many people as possible to start something, to try out something, to come to us business angels with their vision, their idea, their plan, so that potentially we can turn it into something great. What I can tell you is that at business angel level, so really inception and precede level, sometimes we have a difficult time convincing senior folks would have a chance of building a good team to start something out because when they ask around what the capital available is for an enterprise like that, they feel too constrained.

52:26They feel like they couldn't operate under those conditions. And the capital is what it is. As you said, it's supposed to be financed locally at the pre-seed stage, at the inception stage. There's no expectation for or little expectation for that to be funded internationally. It's not that. It's just very little here locally. Even with the contribution of the funds going into Fund 2 right now, the ones who are still active, it's still very little. This is a large country. It's 16.5 million people in total. There's a pool of people to choose from. Realistically, there is a pool of people to choose from.

53:01There are people who are experienced in enterprise because they've worked for banks and for insurance companies in their IT departments. We can look into those places and pull great founders out of there. We don't have sufficient... But is it our job to convince... Sorry about that, Andreas. But is it our job to convince people into starting something? I think that has to come from the team, right? And if that's the concern, I mean, we have a fund. You guys have a fund. The Tech Angels have capital. So, you know, I mean, that that concern might be in some cases valid, but I don't know, I just can't really reconcile that.

53:46Like, I just don't think that, you know, if it's not an easy sort of road to go on. Right. As an entrepreneur. I mean, it is a lifestyle choice. I mean, it's not an easy one. And I think it's a massive it's a massive decision. and I wouldn't want to talk someone into it unless they're really, really convinced they want to do it. And then if they want to do it, then there's a real discussion to have about raising capital, right? And the capital is there, in my opinion. But of course, is it as abundant as in other markets? Potentially not. I mean, I don't have the statistics, but in my opinion, it's good enough to support the quality of talent that we have.

54:29but it's about the decision to make to want to embark on this journey I want to second Carolina and just say look away you don't need to raise more funds for Romania we're okay we can invest our funds the competition landscape it's totally fine it's not a problem we're fine actually we have a bit more capital than needed So, you know, just don't put a lot of effort into sourcing from Romania. We'll let you know. No, I think the discussion is one of principle and philosophy, the one that we saw between Carolina and Marius. So I'd love to, before we close this, make it to just touch on diversity, because I think that this is one of the things that I, at least in Denmark and in the ecosystems that I go, sometimes hear that we all agree that we have a big problem in tech with the lack of diversity.

55:40And then many would say when we then talk about the Eastern European countries that the issue is probably a little bit bigger in these countries. I'd love to ask the panel here, and I'm saying this in a way that I will get the reaction that Bakhtan just showed with his face, but while on mute. So, Bakhtan, now please come back on that statement. I mean, I can give you some very hard numbers and it will be done. So first of all, when I was like 20 something years ago, when I was a student at the computer science department here, we had around, I think, 11 ladies in 150 students at computer science.

56:26You can't really ask for 50-50 splits in any engineering position in senior roles because there are just not enough people who have gone through these studies a while back. But nowadays, if you go to the computer science university, you'll see that the split is more like 40-60 or 45-55. And overall, Romania and Bulgaria are the leaders in Europe regarding the number of female engineers. If I'm not, I'm somewhere around 23-24%. And also in Romania in particular, men are heavily discriminated in all marketing, HR and non-engineering jobs in many of these companies. You know, this is a joke, like, don't look bad at me.

57:30We have a significant number of female operators into the sales, marketing, or non-engineering position. So I would not say we have a bad split. I would actually violently oppose that if needed. I will add some data to what Bogdan just mentioned. Gender pay gap in Romania is the smallest in the European Union, was in 2022, and apparently in 2023, if the preliminary data is correct, will be reversed, meaning that on average women earn more than men in Romania. It was 3.6 % in 2022 compared to an European average of 12.5, if I am reading the EU monitor correctly. now in terms of representation just in the in the in the tech world obviously there's more to be done to to stimulate people i would say also romania people from disadvantaged backgrounds people people from rural areas who have a tough time getting to high school and then having their studies financed i would look at that overall for me it's not a question of women and and men you know studies are still not paid in romania for for the most part if you manage to pass the graduation exam, but it's hard to pass that graduation exam if you're not well prepared.

58:50So I think that's an area of focus. And believe me, just having more representatives of the ethnic minorities, maybe some of the refugees, you know, into Romania, start engineering or non-engineering, starting to contribute some endeavors would mean as much in terms of diversity. I hope the ladies will forgive me, but that's simply the truth. It's not a question of just women and men. I think we need more diverse thinking in Romania overall, not in terms of background from all points of view, not just gender. And for the gender pay gap, there was a moment, I believe Dan and Bogdan remembered this fondly and dearly also, there was a moment when out of the top 10 companies, I think eight were led by women in Romania.

59:38I'm talking about the major companies in Romania, in energy, in telecommunications, in banking and so on and so forth. And I tried to do a quick search right now, but I couldn't find the exact stat. It's still a significant number. I can tell you that. Yeah, look, Anders, if I can have two points here. One, it's from our portfolio. It's just statistics and it's not just for you to understand our background when we're going to say the second point. The first, so this is in our portfolio of two sub funds, Accelerator and SID, and 23%, 24 % of the startups in our portfolio have diversity at founders level, which is kind of double from the average in EU, which is 12.

1:00:29And higher than US, which is, I think it's 17 or 18%. So, but we made investments only at, you know, based on meritocracy on performance, right? So this is to tell you a bit what it is actually in our portfolio. Maybe in other portfolios in Romania it's different. I don't know. I know what it is in our. Now, what we also wanted to look at at a certain moment is at what stage this is changing. because maybe that's another thing on how we measure these ratios inside an industry. When the cumulative effect of the last 30 years in technical schools, IT schools, software schools, over 30 years is that you have a dominant pipeline of talent which is at its mail, you should expect that the preceded stage the founders team will be dominantly male in time this will grow as they add a go-to-market components and I was not aware about the statistics that Bogdan shared about the marketing jobs and other type of I don't know sales jobs but the ratios are changing and we see that as well in our portfolio and maybe we should measure that as well.

1:01:56So when it is a series A, we should look at founders plus all the people that are on ESOP or all the founders and the people that are in the leadership team at minus one, right? And then, at least in our portfolio, the ratio looks like 42-44 % in terms of diversity, okay? It's obviously changing with the talent that is added to the company. So I'm trying to say maybe the measurements we are using are not perfect just because we are looking only at a very early stage moment when it's obvious there are technical background founders. It's obvious. So we should measure it at every stage. and then we can say, hey, this is evolving in a good trend or no.

1:02:55But, yeah. To be honest, I think it's a discussion that's really tough to sort of address from where we sit, right? Because it's not like we, I think as investors, we can probably do like our best job at sort of giving everyone an equal opportunity to get funded. And obviously the teams then go on and have to find their talent for the company. But I think it's sort of in CEE. And again, I don't have the numbers if we fare better or worse. But sort of culturally, I think it is a systematic problem, right? Which we're hardly going to be able to change overnight.

1:03:49But it is sort of about like, you know, it is a huge sort of lifestyle decision, right, to sort of go start a startup. And for that, we would need to have a system that allows women to, you know, get better child care, allows women to get, you know, incorporated easier sort of back into the workforce and things like that. And that's more sort of systematic problem, at least like in the Czech Republic like that. That is a that is a big problem. And I think it starts there, in my opinion. Yeah. On that note, let me close off today's panel, first of all, by thanking all of you for joining us here.

1:04:32Also, of course, to our audience listening in, thank you for doing so. So let me wrap up by just saying we totally smashed slash shattered the stigma that the diversity issue is bigger in Romania and the SEA countries than the rest of Europe. So thank you for doing so. Also, I had a couple of post-it notes here on my table, one that said strengths, which ended up leading to me having three full post-it notes written down with strengths from the panel here. And I ended up with only just two that signaled the weaknesses or challenges of the ecosystem. So we can definitely conclude that we are talking about a very strong ecosystem that's powering through.

1:05:18We're looking at things like a very global and Western scaling focus. So startups being born with a global mindset. We have very strong tech talent, which especially in the B2B space is unrivaled by almost anyone. Then we have a tech density that is incredible, especially in the IT and ICT sectors. And we've got new teams that consist purely of business teams, which is something you never saw in Romania before, which I think is an interesting and anecdotal, though anecdotal, very interesting observation. And then we have a very liquid and active pre-seed market. We don't have startups focusing on the copycat models that we have otherwise seen in many places.

1:06:08They go global from day one. We have big tech and UI path effects. So that means, of course, we have great talent from very large, very liquid companies that both spawn off great business angels, but also operators and founders. On the weakness slash challenges side, I wrote that we do have issues around go-to-market talent. We do also have some pan-European investors seeing that there might be a bit of an issue in terms of getting follow-on capital to the space. But that, as I just said, and as we also touched on, that is definitely something that we've seen be remedied over the last couple of years.

1:06:56And then, as Ennis said, we do also have a requirement oftentimes in the later stages to flip the companies out of the region, which, of course, is unfortunate for many local economic slash financial development goals. but we have that in all of Europe so that's something that for all of us is something we need to work on we had some advice for founders and investors that I will not get into but I just wanted to say to everyone here thank you so much for enlightening us and I hope to meet you all at How to Web in some 6-9 months

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