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INTERVIEW - SEE has good potential because of its engineering talent pool, mature startup ecosystem*

Author Tech Tour
INTERVIEW - SEE has good potential because of its engineering talent pool, mature startup ecosystem* Alexander Galitsky

Alexander Galitsky is a Co-founder & Managing Partner at Almaz Capital. He is a well-known innovator, entrepreneur and investor in USA and Europe.

Alexander was one of the Top Technical Executives for the Soviet space industry and therefore honored as the most influential person in the Russian IT and Internet industry by Forbes, best GP of 2013 by Venture Awards, EY Entrepreneur of the Year in Russia in 2013. He founded one of the first venture capital funds in Russia. Nowadays he works as a founder, investor, advisor and board member for a number of companies. Alexander has over 30 patents for numerous inventions, including parallel processing, WiFi and VPN security technologies.

He was nominated and selected for a President of the South East Europe Tech Tour 2019. This is an influential regional business event which second edition will take place in Bucharest, Romania and Sofia, Bulgaria on 28-29th of May 2019.

The Tour supports innovation and investment into the best technology companies from the Balkans and SEE region by giving tech companies a real chance to connect with active investors, industry experts and busienss leaders. The aim is fostering their connections and business projects to investment.

Q: Is emerging Europe ready for tech investors?

Europe is a very fragmented region. So many languages, so many cultures, and with that, so many challenges with venture investment. Why? Because venture companies here usually receive money from local governments or European institutions, and then they are instructed to invest in strictly locally based companies. This is a particular problem in modern global venture capital.

Opportunities need to be looked at, not just through the lens of success in the local region, but from a global perspective from the very beginning. While this is a challenge for any country in Europe, it is a particular issue in the eastern part of the continent.

This is especially relevant for B2B startups. Any local entrepreneur offering B2B services who thinks that he or she can prove themselves in just their home market (usually small) and achieve great success, should think twice. Entrepreneurs need to find the largest market possible globally and embrace it. With that greatest potential could be achieved and dreams get fulfilled. For B2C entrepreneurs, things are different. Here, the market is local. Any B2C enterprise needs to focus on the social habits of their respective local markets and society, which is why they need to look at the size of the local opportunity and calculate if it can deliver a viable opportunity to prove that they have made the best choice.

It is also critical to drop the European habit of focusing on profitability from day one. Rather, focus on growth instead. Businesses need to grow, grow, grow. This is the biggest difference between entrepreneurs from North America and Europe, especially those in central and eastern Europe. Entrepreneurs should not be greedy in terms of how much equity they retain in their pockets, and instead should keep the focus on growing their companies at the forefront of their mind. They should be open to the investment capital that will allow their companies to grow, since it is much better to own 10% of a billion-dollar company than 100% of a million-dollar company. The socialist legacy of Central and Eastern Europe’s past created a generation of top-level engineers, and today’s society has built upon that foundation. World class engineering schools produce large numbers of talented people ready to understand and develop  technology, and also use that knowledge to create amazing things. Yet, it’s difficult to capitalise on it when a country is small, which is why entrepreneurs must understand the need to think from a global perspective. This international perspective makes even smaller countries attractive for global companies, creating talented, globally-minded engineers who can be valuable assets for international firms.

Q: How did SEE engineering force and talent emerge?

In the past, education was focused on the digital area of computing. This educational focus and the institutions where it was taught, developed many scientists and engineers. These institutions have created large numbers of specialists in several areas, which have become very attractive to investors. One of these is artificial intelligence.

The studies carried out by Soviet engineers long ago on the Markov chain, which today we know as part of machine learning, have become widely known. Today, engineering students around the world study this discipline, a discipline central to computer science curriculum in central and eastern European countries. If you look at areas such as ICOs and blockchain, you will see a large contribution from central and Eastern European engineers, and Vitalik Buterin, the developer of Ethereum is but one significant example of this.

The Internet of Things (IoT), which is moving towards its next wave of growth, has bred a number of start-ups in countries like Romania and Bulgaria. Large numbers of skilled engineers are also getting involved in edge computing. The number of exits we see in the marketplace is testament to the skills of central and Eastern European engineers. We have seen companies with Hungarian engineers creating amazing video analytics tools being sold to Verizon. UiPath from Romania recently became a unicorn by creating the most cutting-edge, high-tech automated business process software. It is success stories like these which make the emerging Europe region very interesting for any investor or customer looking for the most dynamic applications. This is precisely what people are looking for right now as they try to find talent and great ideas, and emerging Europe is ready for them.

Of course, the situation differed among countries. Thus, Bulgaria, Romania and Western Balkan countries were particular cases. With their autonomous, autarchic approach, they didn’t take part in this regional division of labor and specialization. Nevertheless, some great technical schools were built locally.

Q: Many startup entrepreneurs in the region leave their countries. Is the grass really greener for them in Western Europe, Silicon Valley or Singapore?

In the modern tech world no one, neither a person nor a country, has exclusivity for innovation. Great tech idea may emerge in any place in the world today. It’s today’s reality and the beauty of the modern connected by internet world. To build a successful company, tech entrepreneurs need access to three essential things: capital; access to a large market; and only after this to the knowledge and skills.

Highly-skilled engineers, a pretty big pool of them, and at a reasonable price, are the biggest advantage of SEE today in comparison with other regions, especially when taking into account the shortage of skilled engineers in Silicon Valley.

SEE startups today can get seed capital (often state-backed) from local VCs, but there’s a lack of capital at further stages, like series A and B. More importantly, there is a lack of experience of local VCs in bringing companies to the global scale. Local B2B markets are usually very small, especially when new breakthrough technology is emerging and hitting the market. USA businesses are attuned to new innovations, which could increase their efficiency and profitability. In addition, USA market at the early stages of emerging technologies represents 90% or more of the global market.

Q: Why is private capital still scarce in the region?

Usually private capital comes with a certain level of historic maturity. In the early 1970s, private capital in Silicon Valley amounted to some $100 million vs $2 billion of state investment. In the end of last decade, state investments was around $4 billion and private grew to over $35 billion. And in Israel, the VC boom didn’t occur before the mid 1990s.

Maturity means such things as success stories and a developed ecosystem, which attract investors. Another requirement is a certain level of demand on the domestic market, which generates a need for innovation to support the growth of specific segments.

It may sound paradoxical, but fast macroeconomic growth — which most SEE countries have enjoyed over the past 20 years — is not really a positive factor for the development of venture capital. The faster the economy grows, the higher are returns in the traditional sectors – which tend to attract more capital.

Q: When will the SEE region produce its first unicorn? Which countries are the closest?

A unicorn is a company that achieves a valuation in excess of 1 billion dollars less than three years. Based on this statement, we need to be honest to ourselves. We will not get a massive stream of unicorns in the near future out of the SEE region. Instead, we will be able to foster many great tech companies with over a 200-300 million dollars valuation. Reason for the first statement is that most of the unicorns are B2C companies focused on the local market. It is almost an impossible mission to build a large B2C company in such a fragmented CEE region, where populations, and the resulting marketplace sizes are small. Possibly Bulgaria could be a good place for B2C unicorns, but it requires a local ecosystem and entrepreneurs willing and ready for cross-border expansion to their culturally close neighbor countries. I think that, SEE, with its engineering talent, is better positioned for the B2B deep tech market and companies in this sector need to be global from day one. But, to build a B2B unicorn is pretty challenging since any deep tech company requires much more time to prove its technology and grow.

For example, some of my colleagues are considering UiPath as a SEE unicorn. UiPath is a global software company that developed a platform for Robotic Process Automation. In March 2018, UiPath received a 153 million dollars investment from top tier VCs Accel and Kleiner Perkins Caufield&Byers, valuing the company at over 1 billion dollars. UiPath was founded in 2005 by Romanian entrepreneur, Daniel Dines. It is a lucky case, that Daniel’s technology was able to maintain its leadership for so long, since only in 2015, with the help of seed funding, UiPath started its international expansion. In 2017, the company reported 590 employees and moved its headquarters to New York to be closer to its international corporate base and rose to 700 customers from only 100 previously.

Q: It’s a great story, but is it a unicorn?

I have a different conclusion: B2B companies need to move to the global market much earlier rather than focusing on competing in the local market. At the end, I want to emphasize that SEE has good potential, not only because of its engineering talent pool, but also since the investment and startup ecosystem in the region has matured during the last decade. Take as an example our experience at
Almaz Capital. We are a global venture fund. Our mission is to bring SEE companies to the global marketplace via Silicon Valley, where our HQ is based. We have almost one thousand SEE investment candidates in our pipeline to choose from.

Furthermore, as evidence of our commitment to SEE region, we joined once again our partners of Tech Tour platform to organize and run the event South East Europe Tech Tour 2019 in Bucharest and Sofia, 28-29th of May. It is an exciting time and the SEE region is poised to take its place on the global innovation map.

*This interview is published as part of a media partnership between SeeNews and Tech Tour.