A recent article by Sifted assed the disproportionate impact of economic downturns on venture capital (VC) investment across different regions, focusing on Central and Eastern Europe (CEE).
Some key findings showed that in CEE, startup funding fell significantly in 2023, with a 68% decrease compared to the previous year. This decline was more severe than the 38% drop seen across Europe as a whole.
The reduction in VC investment in CEE is attributed to a pullback from private VCs and decreased public funding support for startups, particularly in countries like Poland and Hungary. Delays in implementing EU-funded schemes for VCs have contributed to the slowdown in investment.
Despite expectations for a revival with the deployment of EU funds, the article suggested that significant increases in VC investment are not expected in the near term. However, there are signs of a changing landscape with an increasing number of pre-seed and seed rounds involving international investors and a shift towards more aligned regional benchmarks.
We take this opportunity to ask Aleksandar Terziyski and Yordan Zarev, partners at NV3 Fund, about their viewpoints and observations on the topic.
1. How effective are public money schemes in boosting local VC ecosystems - lessons from the Bulgarian ecosystem?
Yordan Zarev: The Bulgarian VC ecosystem is still in its early stages, despite having multiple generations of funds in the market. Continuous capital liquidity is essential for its accelerated development. Public money schemes play a crucial role in boosting the local VC ecosystem, and ongoing support is necessary to build on the existing foundation. Future efforts should focus on addressing the limitations of current public money schemes (investing in local companies, FoF mandate restrictions in investment concentration, etc) to enhance the competitiveness of local fund managers.
2. Should GPs in developing ecosystems reduce their reliance on public capital and seek alternative funding sources?
Yordan Zarev: It's a natural progression for markets to transition from relying on state programs and institutional capital to diversify their capital sources. This shift occurs as markets evolve and mature. Established and emerging fund managers have a responsibility to attract more private capital and diversify their funding sources over time. While the Bulgarian market is approaching this stage, achieving wide decentralization may still be a few cycles away.
3. Could the financing gap present an opportunity for international VCs to enter the market?
Aleksandar Terzijski: In Bulgaria, there is a notable funding gap between the seed and growth stages, even though seed-stage funds are still active. The VC ecosystem in Southeastern Europe is predominantly focused on pre-seed and seed funds. However, more post-seed funds are emerging in the region as a natural progression, which is also expected to happen in Bulgaria in the coming years. International VCs are increasingly exploring opportunities in Southeastern Europe, leading to notable investment rounds, often in collaboration with local funds. This co-investment remains a common requirement for international VCs.
4. What are the specific challenges faced by early-stage startups in accessing funding in CEE regions compared to more mature markets?
Aleksandar Terzijski: Generally, economies and investment landscapes fluctuate between phases of high liquidity with cheaper money and low liquidity with higher interest rates and more restrictive monetary policies. Currently, most economies globally are experiencing the latter, making it imperative for startups to demonstrate robust growth—whether through revenue or user/client base—while carefully managing their cash burn rate.
In this lower liquidity environment, sales cycles are longer and enterprise spending tightens; thus scrutiny on cash burn is much more intense, and startups must moderate their spending more rigorously. Unlike in more mature markets where venture capital is more readily available, CEE startups encounter tighter monitoring and fewer funding opportunities. This situation necessitates a stronger focus on sustainable growth and efficient capital utilization.
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