Startups Expose Europe’s Divisions
(Bloomberg) -- From a small warehouse complex squeezed into a blue-collar neighborhood across the Danube from Belgrade’s city center, Strawberry Energy assembles its “Smart Park Bench,” a wood and steel structure with cell-phone charging stations and Wi-fi powered by a solar panel.
It’s an innovation that’s been catching on, just not at home. The 15-person startup is registered in the U.K., where it got investment, and there are more of its high-tech benches scattered across London than the Balkans.
Thirty years after communism ended in eastern Europe, the struggles of such fledgling technology companies show how far countries and economies still have to come to meet their potential.
Success is stymied by a brain drain of highly trained workers, a lack of private domestic funding and a late start in government support to nurture science out of the laboratory and into the marketplace. The fear is that the region, which blossomed after communism largely as a factory floor for western manufacturers, is storing up an economic decline as wages catch up and workers become more expensive.
Research and development as a percentage of gross domestic product is below the European Union average in every former eastern bloc country except Slovenia. The 2019 Bloomberg Innovation Index, which ranks countries by categories including research, patent activity, higher education and productivity, puts the former communist region at the lowest in Europe along with Portugal, Greece Malta and Cyprus.
Without sufficient support, the region’s countries won’t be able to adapt fast enough to new technologies, including software development, artificial intelligence and robotics, as they revolutionize manufacturing, according to an assessment of innovation in eastern Europe published by the Economist Intelligence Unit and sponsored by Saab AB.
“They have been behind in promoting the culture of innovation to the new generation, so it’s coming later than it was in Western Europe,” said Margareta Drzeniek-Hanouz, a managing partner at the Horizon Group, a Swiss-based provider of analysis for governments and companies, and the author of the report. “Many of the companies that have ideas, that have the best potential, go where the money and skills are to help them grow the idea.”
That might not come as a surprise given the region’s relative lack of wealth. Based on GDP per capita, most parts of eastern Europe remain below the European Union average.
Governments have been more occupied with dealing with selling state assets or championing their biggest companies while the EU has primarily focused on massive upgrades to infrastructure from sewage to road networks.
For regional startups to blossom, they need good trustworthy business environment, access to technology and good markets, said Helena Schweiger, an economist at the European Bank for Reconstruction and Development. Local stock markets, for instance, are not sufficiently developed to allow sufficient and sustained financing.
It leaves many high-tech hopefuls like Strawberry looking abroad for cash to nurture ideas such as neurosurgical robots, interactive facial recognition devices and farm management software, along with the Smart Park Bench.
“There’s a problem in Serbia where you have a very small number of investors because you don’t have as much high-quality products in the region that would attract high-quality foreign investment,” said Milos Milisavljevic, Strawberry’s founder and chief executive officer.
It’s not like there haven't been some successes. Estonia is the birthplace of online video chat and phone service Skype, while Czech and Slovak engineers developed the Eset anti-virus system that catapulted the owners into billionaire status. The conundrum for governments and investors interested in the region is now to foster more of them.
State entities such as the Czech Research, Development and Innovation Council, Croatia’s Hamag-Bicro and Serbia’s Innovation Fund have been established in the past decade to help bring ideas together with financiers and to provide support and funding from national governments, the EU and private investors.
“Right now, we’re riding the first-class train in Europe while promoting ourselves as the land of historical landmarks or cheap beer,” Karel Havlicek, the head of the Czech innovation council. “Bavaria had Oktoberfest, but today Munich is the hub of the artificial intelligence. It’s the key homework for the Czech government to change that.”
Croatia’s development agency, tucked into a communist-era office park, has already helped such local alumni as Rimac Automobili, which produces and sells 1 million-euro ($1.13 million) electric race cars from a factory in the hilly Croatian countryside.
Director Mislav Jurisic acknowledges that Croatia’s efforts have been stop-start over the past years, with different ministries and departments working at different speeds and varied strategies on support.
Joining the EU helped. Beginning in 2013, a reorganization has been underway meant to streamline the process. Hamag’s 2019 budget is $95 million, while the fund in Serbia, which isn’t an EU member, has around 13 million euros available for needy startups.
“In Croatia it has always been difficult for politicians to say, ‘We support innovation’,” said Jurisic. “It’s important to understand the importance for economic growth. We now have this awareness.”
An alumnus of the agency’s support is Citus Ltd., a software developer that occupies rooms at a Zagreb “incubator,” a warren of offices occupied by high-tech startups. Though CEO Tomislav Bronzin is a self-professed IT geek, much of his work these days involves drumming up capital, mostly from abroad.
A similar melding of mind and machine is taking place across town at a state hospital, where a mechanical engineer and a neurosurgeon developed RONNA, two robots that operate as a dual-arm system that has taken the guesswork out of drilling into patients’ heads.
“With neurosurgical robotics you avoid a human possibility of making an error,” said Darko Chudy, a doctor. “A robot, with its automatic recognition of bone thickness, can drill the human skull with infinitely more precision.”
Still the potential is there, even for EU outsiders like Serbia and Ukraine. In Kiev, Horizon Capital Associates is actively funding Ukrainian IT companies, said CEO Lenna Koszarny, a Canadian Ukrainian.
“We believe in IT, we believe in innovation, we believe that what is happening over the past few years is very promising,” said Kiszarny. “Obviously we want to see more capital that is attracted to IT and innovation and we think it is a beginning of a boom.”
Strawberry has forged ahead honing its international credentials. With the help of its London investor, a Heineken family heir, and a Bulgarian angel, the company has now sold 100 benches in 20 countries and had revenue last year of as much as 500,000 euros.
For now, the company intends to keep making the benches in Belgrade, largely because of lower operating and manufacturing costs, though its sales at home are non-existent.
“If you are in the digital business, it’s not very relevant where you are,” said CEO Milisavljevic. “People who are buying your game don’t really care where you are.”
©2019 Bloomberg L.P.