PRAGUE/WARSAW, July 31 (Reuters) - When altFINS' private
backer pulled out of a financing deal in March due to the
coronavirus pandemic, the Slovak blockchain startup had another
option - publicly-funded venture firm Crowdberry.
After losing out on the original deal in November,
Crowdberry managed to secure better terms the second time round,
while altFINS got the money it needed.
"This was the path of least resistance and they (Crowdberry)
were a very good strategic partner," said altFINS founder
Richard Fetyko, whose company is developing an online platform
to trade digital assets.
The episode underlines how some publicly-backed venture
firms are stepping up to keep seed money flowing to infant
companies in former communist countries such as Poland, the
Czech Republic, Slovakia and Hungary as private investors
retreat from the region's nascent startup scene.
"A number of emerging companies will have no other choice
but to tap these funds because private money will be very
cautious because of the pandemic," Crowdberry partner Michal
Nespor told Reuters.
Before the pandemic, many startups in central and eastern
Europe (CEE) preferred private investors, who often offer better
valuations and links to global investors in places like Silicon
Valley for bigger funding rounds later on, company founders and
venture firms say.
But with private seed money drying up, they are increasingly
turning to publicly-funded options as they look to create the
region's next $1 billion "unicorn", following in the footsteps
of Polish online marketplace Allegro, Romanian software firm
UiPath, and new FTSE 100 member Avast.
Martin Bodocky, general partner of publicly-funded Czech
venture firm Nation 1, said companies like his offered greater
stability than private investors, with their limited partners
more likely to continue providing money during a crisis.
"Public funding offers a protection and an advantage. We
don't expect any venture capital firm to die here," he said.
Much of the money that flows into early stage CEE venture
capital funds comes from the European Investment Fund (EIF),
said Michal Kosina, the EIF's senior mandate manager responsible
for several CEE-focused investment programmes.
While the EIF finances firms across Europe, it may take
particularly high stakes in CEE funds given the overall lack of
private - especially institutional - investors there, he added.
"In times of crisis, limited partners may lower their
appetite for this asset class and in some cases may even default
on or try to renegotiate their existing commitments," he said.
"So, in this sense, the public capital in the region is good for
startups because with public sources the money remains there."
CEE countries offer a host of advantages for new businesses
including a long tradition of producing graduates strong in
maths and computer science and a low cost base that allows
entrepreneurs to do more with less as companies grow.
In 2019, CEE venture funding hit nearly 1.4 billion euros
($1.6 billion), surging from 223 million euros in 2013,
according to data from funding research firm Dealroom.co. The
region has produced 12 unicorns with a combined value of 30
billion euros and offers a promising pipeline of startups.
The amount is a fraction of the 38.8 billion euros raised in
Europe in 2019, according to Dealroom.co data. But the growth
has attracted an increasing number of global investors for later
stage deals, founders and venture firms say.
For early stage deals, though, public funds can play a key
Bence Katona, chief executive of Hungarian state-owned
investor Hiventures, told Reuters his firm had increased funding
for startups to help them weather the pandemic.
Hiventures was the most active seed investor in European
companies in 2019, directing money to 76 startups, according to
data from Crunchbase. Its investments include PanIQ Room, which
franchises escape room attractions such as MagIQ Room and The
Prison, and tech firm SignAll, which translates sign language.
"Market players won't take that risk now," Katona said. "I
am seeing they are waiting to see what will happen in the next
three months. We made more investments during this period. It
has been a busy time for us."
Michael Zalesak, co-founder of Czech-based Lighthouse
Ventures, is similarly active.
"We are getting more deal flow because angel investing has
dropped significantly," he said, noting his firm had closed six
deals valued at more than 2 million euros in total since the
Startups in Poland, the biggest CEE economy, are also
turning to state-backed funding options, such as PFR Ventures.
"Financing with involvement of public funds was more
attractive from our perspective because we could raise much more
capital," said Przemyslaw Berendt, CEO of Polish startup Talent
Alpha, which in 2019 raised $5 million.
Private investors are still doing deals.
Andrej Kiska of Prague-based Credo Ventures said his group
had closed three since March and was close to wrapping up a few
But while company founders may dream of prestige and
contacts that come with a global investor, he said local venture
capital firms currently offered the most important commodity.
"These days cash is king and this will keep deals flowing,"
($1 = 0.8522 euros)
(Reporting by Michael Kahn, Editing by MarkPotter)