2016 For Southeast Europe Startups

New Year has gone and by now most of the New Year’s resolutions that we gave to ourselves are already forgotten. So, I figured out that the danger of ruining your holidays is gone and I can write a word or two on the things that we can expect to see happening this year.

If you are building a startup in Southeast Europe 2016 will probably be great year for you. 2017 not so much…

More seed capital will be available to local companies in 2016

Three trends are emerging in the region (as in the rest of Europe):

Newly formed funds have finally raised their money, mostly from EU, and they will start investing in 2016. SpeedInvest, JT, SCV, Eleven, LauncHub and few others will start writing checks. While most of funding will be reserved for later stage companies and for follow-on rounds for companies these funds have already invested in before, there will be some money available to fresh, pre-seed and seed rounds.

Accelerators are definitely becoming the big thing in Europe. European accelerators/incubators were able to collect more capital for investments, mostly institutional (governments and EU) and corporate, and will need to deploy it in 2016. In US the popularity of accelerators is rapidly declining, except for the few ones that are able to demonstrate actual returns, up to the point where being a part of accelerator is perceived as a very negative thing by follow-on investors. So, we can expect to see some of them actively looking into other parts of the world, our region included, for a fresh deal flow.

Governments are going to be more active in investing in startups. While governments are typically very slow and inert, huge amounts of money from EU funds is becoming available to regional governments and they will not miss a chance to use it. So, the governments will take EU funds and deploy it either by matching private equity rounds or simply by giving it away for free as grants. This will have a huge negative impact on the development of startup ecosystem, but will certainly make it easier for startups to raise capital.

Less capital for later stages

On the other hand, lot of things are happening that will result in less capital being available for later stage investments. It is important to note here, that the “later stage investments” in our region, actually means the seed rounds in Silicon Valley terms — rounds below or around $1M. Series A, B and later rounds have different dynamics, so it is hard to imagine that enough startups from the Southeast Europe will reach those stages in order to change the overall dynamics here. So, the later stage investors from our perspective are Micro VCs. And they are facing the hard times.

On the other hand, lot of things are happening that will result in less capital being available for later stage investments. It is important to note here, that the “later stage investments” in our region, actually means the seed rounds in Silicon Valley terms — rounds below or around $1M. Series A, B and later rounds have different dynamics, so it is hard to imagine that enough startups from the Southeast Europe will reach those stages in order to change the overall dynamics here. So, the later stage investors from our perspective are Micro VCs. And they are facing the hard times.

2014 was the record year for raising such funds. And with their typical investment term of 3 years, most of them will need to start raising next rounds towards the end of 2016 in order to close them during 2017. And their success in raising the follow on funds will be largely impacted by the performance of current portfolio. And since many of those portfolios have been built on fear of missing a good deal (next unicorn!?), on necessity of deploying money, or simply on hype, raising a next fund will be a challenge.

This is not about the bubble

It is not that the 2016 will be the year of exploding bubble — even it does, it will take some time for the shock wave to reach our shores. But the hype of investing in early stages, unicorn hunts and spraying and praying is definitely declining. A recent survey of early stage, private investors conducted by Visible.vc, for example, clearly shows that “investors are less impressed with company quality and fear a continued tightening of capital availability… The Series A squeeze is real and follow on from seed rounds are less and less likely given the number of companies that raise angel/seed capital.” You can find full report, well worth reading here.

The Startup Valley of Death

 

2016 will likely be a good year for raising a pre-seed/seed money from regional investors. However, lack of follow on funding will strike hard many of those companies in 2017. It is a bloodbath, or Valley of Death that we are looking into two years from now. Good companies, those that are able to demonstrate healthy unit economics, will be able to raise and continue growing, but many companies that raise the initial rounds in 2016 will fold in 2017. In fact, this is something that entrepreneurs and investors in the developed markets have already predicted few years ago — here is just one piece on the topic — and it will start happening over here in the next year or two.

With more initial money becoming available in the region, and less follow on dollars from the Micro VCs the chances of regional startups walking down the valley of death will dramatically increase in the next two years.