FT SPECIAL REPORT

Central & Eastern EuropeEmerging Industries

www.ft.com/reports | @ftreportsFriday June 5 2015

Inside

Wealthy individualsbridge the funding gapA weak venture capitalindustry means chancesfor private investorsPage 2

CommentGeography and strengthin tech could put regionahead in clean energyPage 2

Exporting expertiseExperience in extractingoil and gas from shalecreates opportunitiesto share knowledgePage 2

Foreign connectionshelp restore past gloryLow costs and fluencyin languages and IT aremaking Bulgaria a topoutsourcing destinationPage 4

W ithadeepscaracrosshiseye and a sword slungon his back, Geralt ofRivia, a monster-slaying, witch-hunting

computer game hero who loomed overNew York’s Times Square from a colos-sal advertising screen last month, is thenew global face of central and easternEurope’semerging industrial future.The Witcher 3: Wild Hunt is the latest

in a series that sees Geralt rampageacross a mythicalGame of Thrones-styleworld zapping evil spirits. It has put itsPolish developer CD Projekt at the gam-ing world’s top table, and thrown a spot-light on the region’s innovative newtechnology scene.

“This is the big breakthrough for thecompany and we all feel it,” says MichałNowakowski, senior vice-president ofbusiness development at CD Projekt. “Ifthis game is the success we hope, thatputs us right up there in the global bigboys’ league, and that’s where we wantto play.”

Thecompanyhadamarketcapitalisa-tion of about 700m zloty in 2013. It wasworth 2.25bn zloty ($600m) last weekafter shipping more than 1m pre-orders

of the game, and selling hundreds ofthousands more to fans who queuedovernightatshopsaroundtheworld.

Yet for all the fanfare, Warsaw-basedCD Projekt’s global success remains anexceptionratherthantherule,ascentral

and eastern Europe strives to becomeaninnovationhotspot.

Since emerging from communist rulea quarter of a century ago, with manystates joining the EU 15 years later, theregion’s economies have swelled,

thanks mainly to low-cost manufactur-ing, exports and business reforms thatincreased productivity.

Today, countries such as Poland,Hungary and others are trying to shifttheireconomies towards innovativeand

Hungry for a piece of the actionThe region’s start-upshave exciting ideas buta lack of finance andsupport can hold themback, writesHenry Foy

creative industries in order to bridge thegap with western European states, andavoid the “middle-income trap”, whererising prosperity erodes cost competi-tiveness,causinggrowthtoplateau.

Therehavebeensuccesses.Skype, thevideo-calling program, was developedin Estonia. The Czech Republic’s AVGand Avast protect hundreds of millionsof computers from viruses. Two Slovakshave developed the world’s first com-mercialisable flyingcar.

“There is a strong entrepreneurialstreak here,” said Andrzej Sykulski,managing partner and co-founder atTrigon, one of the region’s largest bou-tique investment banks. He managedthe 2014 public offering of LiveChat, aPolish-built business-to-business andbusiness-to-consumer communicationplatform that has managed to take itsproduct toglobalmarkets.

On paper, the region appears to havethe attributes necessary for other com-panies to follow that path. Growingeconomies, rising private spending anda steady flow of tens of billions of EUfunding have resulted in strong marketdynamics to support new ideas and con-cepts. A historical focus on engineering,science and technology educationmeans there is no shortage of smart,technically minded graduates with theskills to turnideas intoreality.

Warsawhadnearly700,000employedscience and technology graduates in2012, according to Eurostat, with morethan 350,000 in Budapest and almost200,000 in Prague. In 2012, Lithuania

Continuedonpage3

Estonia sets the paceon e-governanceBaltic state isshowingthe wayaheadPage 4

Exceptional: Polish developer CD Projekt is riding high on the success of The Witcher – but many entrepreneurs struggle

2 ★ FINANCIAL TIMES Friday 5 June 2015

Central & Eastern Europe Emerging Industries

It is like a vast geological sponge soakedin oil. But squeezing the energy out ofkerogen shale, the poor relation in theshaleoilboom, isdirtyandexpensive.

Now companies in Estonia, which fordecades has relied on kerogen shale forthe bulk of its energy needs, are seekingto persuade the world they have thekeys to unlocking this energy source innew,cleanandefficientways.

Kerogen shale is more commonly, andconfusingly, known as oil shale. Suf-fused with kerogen — a precursor of oil— when mined, crushed and heated tohigh temperatures the rock releases oiland gas. Shale oil, in contrast, is oillocked inside rock that can be releasedby drilling down and injecting high-pressurewater, sandandchemicals.Theoil obtained from kerogen shale is alsoknownasshaleoil.

Estonia is unique in its reliance onkerogen shale for energy. It sits on largedeposits and is almost independent inenergy — an important considerationfor a young nation bordering oil-richRussia. Estonia uses 85 per cent of theshale it mines to generate electricty,withmostof therestproducingoil.

Hando Sutter, chief executive of EestiEnergia, Estonia’s largest power com-pany, says: “We don’t have other energyresources, no hydro, oil or gas; so eversince our people found there is a rockyou can burn, they have been innova-tive — we have been generating powerfromoil shale foralmost100years.”

Now Eesti Energia — Enefit outsideEstonia — is taking the first stepstowards exporting the technology it hasrefined for decades. It expects to get thego-aheadthisyear fromthegovernmentof Jordan to build a 540MW power sta-tion based on rock containing marinemicro-organisms deposited 65m yearsago. Jordan imports most of its energy,making its oil shale deposits a poten-tiallyvaluableresource.

“This is the first major export — theinvestment is very big. I hope it is the

first of many,” says Alar Konist, a seniorresearcher at Tallinn University ofTechnology.

There are oil shale deposits in morethan 30 countries, with resources inplace of about 5,000bn barrels of oil —more than estimated known reserves ofoil recoverable by conventional meth-ods. Mining has taken place in the US,China, Russia, Jordan, Brazil, Moroccoand Estonia — in descending order ofresource availability, according to theInternational Energy Agency — thoughEstoniahasseenthemostactivity.

In 2011 Eesti Energia bought a largeoil shale deposit in the US state of Utah,which the company believes contains2.6bn barrels of recoverable oil. The UShas 80 per cent of the world’s oil shale.The IEA estimates that an oil price of atleast $60 per barrel is required to makecommercial exploitation of kerogenshale foroilproductionprofitable.

But there are strong environmentalobjections to kerogen shale, which pro-duces high carbon dioxide emissionswhen used to generate power. Estonia’sper capita emissions are higher thanRussia’s and twice those of Italy orUkraine, thoughstill lowerthantheUS.

Keith Burnard, head of the EnergySupply Technology Unit at the IEA says:“Experience has shown that exploita-tion of oil shale, whether for oil produc-tion, power generation or industrial use,isenergy-intensiveandCO2-intensive.

“In Estonia, one might argue its use ispositive for energy security and eco-nomic development — but it is certainlynotpositive for theenvironment.”

Estonia’s total CO2 emissions haveremainedroughlystableoverthepast20years, although oil shale output hasclimbed, as the process of extractingenergy has become more efficient. Now,Estonia says that further increases inefficiencywill reduceenergy-relatedCO2

emissionstohalf the2007levelby2020.Eesti Energia has been piloting a new

generation of shale oil power plants, thefirst of which is planned to be commis-sioned at design capacity this year, withmore than double efficiency comparedwith older plants. “Through cogenera-tion of oil, gas and power all at once, wecan halve our CO2 emissions,” says MrSutter.

French multinational Alstom is build-ing a combined oil shale and biomasspower plant for Eesti Energia in Narva,

near the Russian border, designed tomeet future stringent EU emissions tar-gets. The €640m plant is the largestenergy investment since Estonian inde-pendence. Its use of biofuels in place ofsome of the oil shale can lower theplant’s CO2 emissions to levels similar tothose of modern natural gas power sta-tions, thecompanysays.

Largeamountsofashremainafter theoil separation process, but instead ofbeing dumped it can be used in thecement industry, according to Dr Kon-ist. “It is one of the key things when wetalk about developing this technology,”he says, arguing that calculations of CO2

emissions from oil shale do not take thisintoaccount.

Estonian company VKG is also devel-oping a sideline in extracting phenolsand other commercial chemicals fromthe shale oil or waste water used in oldertechnologies,DrKonistadds.

In collaboration with Finland’s Outo-tec, Eesti Energia is testing differentkinds of oil shale around the world, toadjust its technologyto localconditions.

“We are preparing for export,” MrSutter says. “We are introducing oilshale totheworld.”

Estonia sees a bright future for its power industryEnergy

New plants will reduce CO2emissions from kerogenshale, and there are plans toexport the technology,writes David Crouch

Cutting edge:Eesti Energia’soil shaleprocessing plantin NarvaBloomberg

At the end of 2014, Silicon Valley’s Progress SoftwareCorporation acquired the Bulgarian software start-up Telerikfor $262.5m, a huge amount for the EU’s poorest country.Two months later, Bulgaria’s large Varna coal power plantowned by the Czech energy company CEZ closed because itcould not comply with EU environmental standards andremain competitive. These events highlight a battle ofgenerations in southeast Europe.

The region, which can be defined as including up to 18countries, from Turkey to Italy, has 220m people and covers2m sq km. Most of the states are entangled in a tug of warbetween past and future. The struggle stretches from theinterpretation of history to industrial policies.

The old guard is pulling back. Governments dream ofre-industrialisation, generally understood as the revival ofinefficient Communist-era industries. Most countries cling tothe idea of becoming regional energy centres. Whether thatmeans building more power plants than the neighbours orhosting more pipelines, the dream survives government andregime changes, wars, EU entries and the turn of a century.

The dream is catalysed by Moscow’s strategies to sellnuclear power plants and to penetrate the EU’s gas marketthrough southeast Europe in order to suppress alternativegas projects that could squeeze Russia’s market position.

Centuries of struggle to create national identities are nothelping either. To have an independent energy supply isoften seen as strategic priority.

Meanwhile, the clean energy sector is growing fast. Withplenty of sunshine, good wind conditions and abundanthydro resources, southeast Europe has great renewableenergy potential. Romania has the largest onshore windpower plant in Europe and in 2012, Bulgaria installedmore solar power per capita than any other country inthe world. Both have already reached their EU 2020renewables targets. Albania is one of the two Europeancountries with almost 100 per cent renewable electricity;the other is Norway.

The IT sector is also booming. Management consultancyAT Kearney’s 2014 Global Services Location Index ranksBulgaria as the best outsourcing destination in Europe andninth in the world. A recent analysis of Stack Overflow, apopular coders’ online community, placed Bulgaria in aleading position with the highest average reputation amongtop users in the world. Croatia is in fifth position. Romaniaand Bulgaria regularly feature in the top 10 countries withthe fastest internet speeds.

Clean energy and IT gowell together. The future ofenergy will be depend onintelligent systems — fromsmart meters to complexdemand management andregional power markets.Italy was the first country toinstall smart meters inalmost all households.Austria is the first Europeanstate to launch a smartmeter solution linking theenergy and telecoms sectors.The two old EU members play a significant role in a regionwhere they are successful investors.

However, there is a big difference between energy and IT.While IT is predominantly entrepreneurial and independentof the state, energy is dependent on politics, regulation andregional co-operation. None of these work in favour of theentrepreneurial potential of the Balkans. The Energy Unionprocess might help. The European Commission recognisedsoutheast Europe as a region with high energy efficiency andrenewables potential that needs urgent action. It alsobranded it as vulnerable and started a drive to make theenergy sector more transparent.

Until recently, southeast Europe was treated primarily as agas corridor — a simplistic view that ignores the vulnerabilityof the region and its economic and renewable energypotential. The region can position itself as a champion ofclean energy and new technology, boosting the economy andsecurity while making a significant contribution to Europeancompetitiveness and climate goals.

If the Balkan countries step back from their old dreams ofenergy supremacy and act with more transparency andentrepreneurial spirit, they could leapfrog into the future ofinterconnected, clean and efficient energy use.

Julian Popov is a former Bulgarianminister of the environment.

Southeast Europecan lead thewayin clean energy

Theregioncanposition itself as achampionof cleanenergyandnewtechnologywhilecontributing toclimategoals

A dam Sawicki is betweenjobs, but is not too worriedabout his pension; he hashis investments in start-ups.

A successful executive who hasworked across business and finance, MrSawicki has stakes in a number of Polishstart-ups, part of a trend of informalinvestors backing the region’s creativeyoung talent. He says he has investedabout€500,000inthepastthreeyears.

“It started because we saw a lack of astructured way to fund these ideas,”saysMrSawicki,whohasbackedat leasta dozen start-ups and is currentlyinvested in five companies through a

business incubator and three via directinvestments. “It’s fun to see peoplegrowing. You don’t always do it forfinancial reasons. If the companies aresuccessful, then you benefit. But it’s nicetogiveback,aswell.”

Across central and eastern Europe, anabsence of a mature and well-spreadventure capital industry, low researchand development spends and oftenbureaucratic or inefficient governmentfinancing initiatives mean start-upshave struggled to find the initial capitaltogetoff theground.

But into this void have steppedwealthy individuals and private inves-tors, who are backing their country’sentrepreneurs and innovators, andhelping bridge the gap between a brightideaandaviablebusiness.

Mr Sawicki says: “There is a good sup-ply of people who want to put moneyinto things and help. It’s not dumbmoney — we are also giving advice andaccess toour internationalnetworks.”

Central and eastern Europe’s growing

markets have attracted investors inmedium and large businesses. But thestart-up scene lacks the financial prod-ucts found in the US or western Europefor early-stage investments in develop-ingbusinesses.

Paweł Lakomy, director of SyntaxisCapital, a mezzanine fund focused oncentral and eastern Europe, says: “Theearly funding is coming from high-net-worth individuals and those that havesold out of businesses. They want todeploy capital, but they also want toassist with development, and they natu-rally have a different risk profile fromtraditional investors.”

Mr Lakomy’s fund typically providesfinancing to mature or well-developedcompanies planning a big investment.But long before that stage, start-ups canoften struggle to find that first €50,000togetgoing.

The region lags well behind the EUaverage in terms of R&D spending —typically a useful source of funds forentrepreneurs, either directly or from

the cash that trickles down throughinnovationsupplychains.

While EU initiatives such asHorizon 2020, which provides grants tostart-ups across the continent, havehelped many initiatives in central andeastern Europe, a lack of an innovationculture across the region means thatlocalgovernmentsupport is limited.

Daniel Boniecki, technology practiceleader for central Europe at McKinsey,the management consultancy, says theregion’s public sector needs to be amuch more effective investor and sup-porter of start-ups in order for innova-tionreally totakeoff.

“We are lacking efficient or effectivechannelling of finance to commercialis-able ideas,” he says. “We need to bemore focused and specific about whatresearch and development money isspenton.”

In Poland, spending on R&D in 2013was €90 per capita, compared with theEUaverageofmorethan€520.

Private investors such as Mr Sawicki

and others — who typically invest insmall groups that pool their capital andspread it across multiple companies —are offering an alternative. But manystart-ups looking for substantial capitalstill turn to the world’s biggest entrepre-neurhubs.

“There are interesting ideas here,developed to a certain stage,” says

Maciej Zak, chief executive andco-founder of Dirlango, a start-upincubator.

“But,” he adds, “then there is a need togo across the ocean for a funding round,maybe with a financial stopover in Ber-lin or London. International fundingcanaddazerotoyourvaluation.”

That may be changing, as financiers

consider filling in the venture capitalgap. Andrzej Sykulski, founder andmanaging partner of Trigon, the largestboutique investment bank in centralandeasternEurope, is interested.

“We are thinking about VC. The spaceis underdeveloped here,” he says.“There are a lot of opportunities . . . Ifwewere lookingatourownVC,wecouldbe thinking of a couple of million zloty[$500,000]per investment.”

According to research by Deloitte, aprofessional services firm, interest inthe start-ups is gradually increasingwithin the well-established privateequity industry in central and easternEurope.

Mark Jung, private equity leader atDeloitte Poland, says: “A lot of funds arebecoming more creative . . . lookingto build a market leader instead of buy-ing one.

“There is a trend that smaller compa-nies at the development stage areattracting investment . . . There is a lit-tlemore interest inthespace.”

Lone rangers ride to the rescue of entrepreneursVenture capital Somewealthy investors arebacking young talentwhen other funding isscarce, writesHenry Foy

Emi Gal’s admirers describe him asRomania’s Mark Zuckerberg, but the30-year-old serial technology entrepre-neurdemurswhenaskedifhewelcomesthe description. “I find it a bit exagger-ated,” he says. “I haven’t been nearly assuccessfulasZuck—yet.”

Mr Gal started his first business — asoftware development company — as ateenager in his bedroom in Bucharest’ssuburbs and soon gained a taste forinnovation; he is now on his third techcompany.

“The only job I ever had was as a webdeveloper for a few months — I realisedpretty quickly it wasn’t what I wanted,so I set up my own company at 18. Inever really questioned whether Ishoulddoitornot,”hesays.

Mr Gal is founder and chief executiveof Brainient, which supplies a tool thatallows broadcasters and producers toadd interactive content to video clips.He says the company has helped clientsincrease advertising revenue 30 percentbymakingsmarteradverts.

Clients range from small content pro-ducers to UK-wide broadcasters, such asITV,Channel5andSky.

Mr Gal’s story is emblematic of Roma-nia’s growing reputation as a low-costlocation with a large pool of skilled soft-waredevelopersandengineers.

The country’s universities and techni-cal schools produce more than 10,000engineers a year, says Mr Gal. Thisreserve of talent has attracted compa-nies such as Microsoft, Adobe and Ora-cle tothecountry.

But making the leap from bedroomstart-up to global tech company is noteasily achieved in Romania. Observersnote that a lack of capital, uncertain reg-ulatory conditions and an aversion torisk have forced innovators such as MrGal into leaving their homeland todeveloptheircompanies.

Now based in London, Mr Gal pointsto a mixed inheritance from Romania’s

communist past. “I believe we can turnRomania into an eastern European techhub, because we have tremendous tech-nical talent,” he says. “The engineeringschools from communist times are stillof an excellent standard. But we need more capital and we need to tackle thiscultural reluctancetotakerisks.”

Romania’s government has takensteps to support entrepreneurs whowant to build and maintain start-ups inthe country, rather than merely work-ing for one of several large multina-tional techcompaniesbasedthere.

Bucharest, Timisoara and Cluj-Napoca have been identified as priorityzones for technology business by theauthorities. There have been some sig-nificant successes, not least the sale in2014 of LiveRail, a video advertisingtechnology company, to Facebook foranundisclosedsum.

Two of LiveRail’s three founders areRomanian and the company’s firstdevelopment team was based in Cluj-Napoca. LiveRail’s success and a gov-ernment-backed scheme to create atech cluster have sparked ambitioustalk of transforming the city into a“RomanianSiliconValley”.

But the full story of LiveRail, whichmoved its development team to Lon-don shortly after it was acquired byFacebook, offers a more sober pictureof the challenges Romanian tech com-panies face in maintaining links withtheir home country while pursuingbroader ambitions.

Mr Gal says: “Tech talent is one ofRomania’s best assets but the authori-ties have a ton of other problems theyare dealing with. They need to do moreto encourage start-ups and persuadethemtostaythere.”

He would like to see the authoritiesrecognise limitations, including a ven-ture capital shortage and infrastructuregaps. A focus on Bucharest, with itsinternational transport links, and thecreation of regulatory certainty, wouldhelp Romania move up a gear in tech innovation,hesays.

“Investors are acknowledging thecountry is getting better from a policyand talent perspective,” he adds. “Thatshould build momentum and makeinvestors less reluctant.

“The more success we have, the eas-ier it will be for the next batch of com-panies to find funding.”

‘I believe we can turn Romania into a tech hub’Technology

Emi Gal, the country’sanswer to Mark Zuckerbergsays it must overcomecultural reluctance to takerisks, writes Andrew Byrne

OPINION

JulianPopov

Mind the gap:Maciej Zak saysgood ideas areoften not matchedby developmentfunding in Poland

Emblematic:Emi Gal’s successhighlights hiscountry’s growingreputation as atechnology location

‘We don’thave otherenergyresources.We havegeneratedpower fromoil shale for100 years’

Friday 5 June 2015 ★ FINANCIAL TIMES 3

Central & Eastern Europe Emerging Industries

produced 23 science and technologygraduates per 1,000 inhabitants aged20-29,thehighestnumberintheEU.

But two factors necessary to buildthriving innovation and entrepreneur-ial clusters are holding the sector back.Financing, especially for early-stageinvestmentrounds,canbetoughtofind,stifling growth at a business’s nascentstages. Also, a developed and reliablenetwork of resources and infrastructureis yet to emerge, meaning that start-upscanfeel isolatedandunsupported.

Paweł Tomczuk, an entrepreneurnow helping Polish companies to growabroad, is exploring ways to match suc-cessful expatriates with entrepreneursback in central and eastern Europe whocould learnfromtheirexpertise.

“There are great ideas and conceptshere, but the support infrastructurethat people take for granted in placeslike Silicon Valley is lacking,” he says.“But often there are people out therewho have the experience and desire tohelpdevelopnewbusinesses.”

For others, those limitations meanthat start-ups can be impatient, and failtodeveloptheirbusinesses.

“We are 20 years behind somewherelike Israel,” says Łukasz Wejchert,founder of Dirlango, a start-up incuba-tor. “There isa little toomuchhope.Peo-plewanteverythingtohappensofast.”

Mr Sykulski at Trigon agrees: “Youhave many whizz kids with great ideas.

Continued frompage1

But there are many great ideas aroundtheworld.Youneedtohavetraction.

“If you go to these start-up fairs, theysay: ‘We have a great idea. We have nocustomers. We think we are worth 10mzloty’ . . . I just say: ‘Thank you for yourtime.Don’tcallme.’”

Funding is a commonly cited obstaclefor small businesses. The lack of amature venture capital industry doesnot help, while limited research anddevelopment means less money is avail-able for innovation.

Central and eastern European EUstates spent an average of 1.2 per cent ofGDP on R&D in 2013, according to themost recent figures from Eurostat. Thatcompares with an EU average of 2 percent, and spending in countries such asGermanyandAustriaof2.8percent.

Small businesses can also feel ham-pered by bureaucratic requirementsand regulations that linger as a hang-over fromcommunism.

Efforts are under way to address someof these issues. Pledges have been madeto increase R&D spending, and the new€315bn fund for development projectsbeing championed by Jean-ClaudeJuncker,presidentoftheEuropeanCom-mission,shouldalsohelpinnovators.

In February the Visegrad Group ofPoland, Hungary, Slovakia and theCzech Republic agreed to establish theVisegrad Patent Institute, a one-stop-shop for innovators. Initiatives such asthe Deloitte Fast 50 and the New Europe100 have provided platforms to pro-mote entrepreneurs and allow them tomakeconnections.

Intra-regional competition is alsoforcing governments to make thingseasier for their innovators. Lithuania,envious of neighbouring Estonia’s newbusinesses, plans to borrow Tallinn’sapproach and investing heavily to sup-portdigitaldevelopers.

“Accelerators and investmenthelp local talent take their ideas tothe next stage, by supplying themwith assets, industry knowledge andcontacts around the world,” says DonGrantham, president for central andeastern Europe at Microsoft, which issupporting Lithuanian business start-ups such as IT ForYou, a music playerapplication.

Innovatorsare hungryfor a piece ofthe action

Research & development spendingGross domestic expenditure on R&Das a % of GDP, 2013

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FT graphic. Sources: Eurostat: Erste Group Research. *Croatia, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia

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Investment, research and high-technology industries

‘[We lack] the infrastructurepeople take for granted inplaces like SiliconValley’

I n the old Jablkowski Brothersbuilding in central Warsaw, a gra-cious early modernist departmentstore now transformed into a con-ference venue, six start-ups com-

pete for a week of free mentoring andnetworking inBordeaux.

The professionally delivered pitchesand diverse interests of the audiencepaint a picture of a vibrant anddynamic start-up scene in Poland’s cap-ital. But the fact that the April confer-ence has been organised by a Frenchstart-up accelerator, 33entrepreneurs,which has come here all the way fromBordeaux, speaks of the hurdles thatremain to be overcome.

Poland, the EU’s sixth-largest econ-omy, is riding a GDP growth wave drivenmainly by low-cost manufacturing,exports and better use of its capacity.But policy makers keen to ensure thecountry does not fall into a middle-income trap, as salaries rise and erodeits competitiveness, are desperate tonurture a budding innovation and tech-nologyculture.

The organisers of the start-up compe-tition have visited San Francisco, Berlinand Jerusalem in search of projects.This year, they decided to add Warsaw,their first destination in central andeastern Europe.

“The Polish start-up scene is evolvingfast,” says Vincent Pétré, pre-accelera-tion manager at 33entrepreneurs and amember of the judging panel at the con-ference. The judges hear pitches fromentrepreneurswhooffersuchthingsasaphone application that matches foodwith wine, or a “crowdflying” servicethat connects people who want to travelby plane to the same destination. Thewinner (see box) stands a chance ofreceiving an investment of €2,500 for1percentofequity.

“I thinkthePolishecosystemfor inno-vation is a slow, bottom-up process,”says Eliza Kruczkowska, head of theStartup Poland foundation, createdrecently to represent entrepreneurs

and build awareness among politicians,academics and other businesses. “Weshould not expect it will immediatelybecomeasecondSiliconValley.”

Poles certainly display an entrepre-neurial streak. Tired of working forsomebody else, young people say in sur-veys that theyprefer touse their skills tostart their own projects. According to astudy by Gfk, the research group, 77 percent of young Poles believe that they canlearn entrepreneurship and 56 per centthat they are capable of running theirownbusiness.

Poland is also noted for its deep poolsof technology and IT talent. Its pro-grammers often win international ITcompetitions. One of their recent suc-cesses was at last year’s Hello WorldOpen coding championships in Hel-sinki, where a Polish team beat morethan 2,000 teams of programmers from92 countries.

However Poland still has to fulfil its

potential. Entrepreneurs complainabout a lack of funding and insufficientco-operation between incubators, busi-ness and universities.

“Thereareonlysome70venturecapi-tal firms in the country,” says Ms Krucz-kowska. “This number is rising, butthere is a long way to go to match west-ernstart-uphubs.”

Young start-up founders say thePolish market is too small, legislationtoo complicated and commercial cus-tomers too wary of newcomers for themto develop their businesses. They wantto operate in foreign markets, especiallytheUSorUK.

Attempts are being made to smoothout those problems. This month, anaccelerator, Business Link Narodowy,will open at Warsaw’s National Stadium,providing working space for start-ups.The world’s third Google Campus, a hubfor entrepreneurs to meet and work, isalsoduetoopeninthecitythisyear.

Poland’s brightest striveto fulfil their potentialStart-ups Youngentrepreneurs seekscope for their talent inthe small homemarket,writes ZosiaWąsik

A Polish start-up that streams touristaudio guides to smartphones was therunaway winner at 33entrepreneurs’inaugural Warsaw talent competition.AudioTrip won a mentoring week inBordeaux and a shot at €250,000 ofequity funding.

The application, which lets userscreate and upload tours for others todownload, was built in Poland but itsdevelopers want it to have a wider use.

“The main problem is the size of thePolish market. Our potential clientsoften do not have enough money toco-operate with us,” says 26-year-oldMaciej Frankowicz, the start-up’s head

of business development. “We want tolaunch in the most ‘touristic’ countries.Great Britain and France would be ournatural first choices.”

AudioTrip sees its biggest market inpublic institutions such as museumsand zoos, and business-to-businesssales are currently the main source ofrevenue. So far, the company’sportfolio includes 200 guides in 20countries and more than 20,000 usershave downloaded.

The commentary for Warsaw zoo,created a month ago, has beenlistened to more than 1,000 times.ZW

Audio travel guide app is a resounding success

Winners: the Audiotrip team with 33entrepreneurs’ Vincent Pétré (right)

4 ★ FINANCIAL TIMES Friday 5 June 2015

ContributorsAndrew ByrneBudapest correspondent

David CrouchFreelance journalist based in Sweden

Henry FoyCentral Europe correspondent

Angel PetrovFreelance journalist based in Bulgaria

Julian PopovFormer Bulgarian environment minister

Zosia WąsikFreelance journalist based in Poland

Theodor TroevFreelance journalist based in Bulgaria

Jerry AndrewsCommissioning editor

Steven BirdDesigner

Andy MearsPicture editor

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Central & Eastern Europe Emerging Industries

Hungarian leaders often speak withpride of the innovations the country hasgiven the world: the ballpoint pen, theespressomachineandtheRubik’sCube.

“[Hungarians] do everything differ-ently, and always seek to find new solu-tions, leading to the birth of inventions,”prime minister Viktor Orbán told anaudience inMay.

But Budapest’s decision to seek out-side advice on its research frameworkfrom the European Commission’s newPolicy Support Facility (PSF) suggeststhis pride is tempered with a realisationthecountry isnotreaching itspotential.

Hungary isoneof thefirstcountries touse the PSF, launched in March by Car-los Moedas, EU commissioner forresearch, science and innovation. Thedecision highlights growing awarenessin central and eastern Europe of aresearch policy and institutions gap,with western countries receiving thelion’sshareofEUresearchfundingwhileothersstrugglewith limitedresources.

Bulgaria has applied for an intensivepeer review, while Hungary hasrequested a preliminary audit of its sys-tem for funding and guiding research byleading industryexperts.

“The initiative is designed to supportmember states in reforming theirnational science and innovation systemsby offering public authorities tailor-made advice by international experts ona voluntary basis,” Mr Moedas toldreportersatthelaunchinBrussels.

Hungary isa“moderateperformer” in

research and innovation according tothe commission. This puts it below theEUaverageonindicators includinginno-vations, non-European doctorate stu-dents and product innovation amongsmallandmedium-sizedcompanies.

József Palinkas, Hungary’s researchand innovation chief, asked the PSF tohelp bridge the gap between scientificresearchandthemarket.

He says: “Hungary is performingacceptably in research, but the transferfrom applied research is not as it shouldbe . . . My first hope is for advice onwhat tochangeandhowtoensurebettertech transfer from research into indus-tryandservices.”

Mr Palinkas says the three independ-ent experts, who have been meetingscientists, researchers and industry rep-resentatives since May, should alsoadvise him on how to design a competi-tive and transparent research fundingsystem, based on lessons from the UKandtheNetherlands.Thegroupwillalsoprovide advice on how to reduce the gapbetween basic research, appliedresearchandinnovation.

Hungary’s institutes are well placed toconnectwith industry; there isasizeablecar sector with companies such as Mer-cedes, Audi and Skoda. Local pharma-ceutical company Gedeon Richter alsoworks closely with the country’sresearchinstitutestodevelopdrugs.

Researchers face challenges however.The government has cut research fund-ing since 2009. Spending on researchand higher education fell from 0.46 percent of output in 2007 to 0.41 per cent in2013,belowtheEUaverage.

Gettingexpertadviceonhowtospendeffectively is crucial for the policy sup-port team;MrPalinkashopes itwillhelphim win support for reforms fromresearchersandgovernment.

Although the group’s recommenda-tions are not mandatory, adopting bestpractice is vital for countries seekinginvestment from Horizon 2020, the EU’s€80bnresearchandinvestmentfund.

“The process is also about convincingthe research community and govern-ment how we can make a competitiveresearch funding system work inde-pendently and transparently,” says MrPalinkas. “You can always ask for moreresources but it helps when you canshow the system is working effectivelyandtransparentlyandproducesresults.”

Analysts caution that while expertstrategies and advice are useful, manyEuropean countries would need toinvest in new administrative structurestoputstrategy intopractice.

MiroslavBeblavy,headof the jobsandskills unit at the Centre for EuropeanPolicy Studies, a Brussels think-tank,says: “You can pay the best consultantsto write the best analysis, but if thenational bodies don’t have the capacityto absorb and dispense funding effec-tively, then you have the problem of sys-tems that are low in funding, badly runandpoliticised.”

He adds: “Central and eastern Euro-pean countries need to catch up withwestern counterparts in managingresearchandinnovationfunding.”

The commission’s experts areexpected to provide advice on how todesignandmanagetheseprocesses.

But officials noted the expert reportwill be a voluntary document without enforcement tools. Mr Moedas hasacknowledged that winning high-levelpolitical commitment will be crucial tothe success of the review. This meansthereformprocesshasonly justbegun.

EU teams aim to help countriesrethink research and innovationPolicy

Hungary is among the firstto take advantage of expertadvice to overhaul itssystem, writes Andrew Byrne

Driving force:commissionerCarlos Moedassays a new EUscheme will helpimprove research

W hen Ivar Tallo was dueto return to Estoniaafter working abroadfor the UN, his wifeneeded a job. After two

hours sitting at their kitchen table inGeneva, they had created a graphic-de-sign company for her from scratch, withno agents, lawyers, meetings or pieces ofpaper involved.

The ease of establishing a business isjust one of the attractions of Estonia’sdigitised governance system, in whichcitizens bank, vote, park, sign contractsand pay taxes with clicks of the mouseortapsontheirmobilephonescreen.

In May, the country became thefirst in the world to offer a securedigital identity to non-Estoniansanywhere on the planet byacquiring “e-residency” status,enabling them to register a companyonline, perform e-banking transac-tions, make international payments,declare taxes online and sign docu-ments digitally.

For more than two decades,the former nations of the SovietUnion have grown accustomedto taking lessons from the westabout how to run their economies,governmentsandsocieties.Butnowthe boot is on the other foot — at leastin this small Baltic state which is puttingthe internet at the heart of commerce,governanceandpolitics.

“When the Soviet Union collapsedand we won our independence, wewanted to be like the west but we didn’tknow exactly how you do things. So wedid it our own way and it was a bit differ-ent,” says Mr Tallo, the founder of Esto-nia’s e-Governance Academy and a rov-ing ambassador for the country’s digitalexperiment.

This historical accident, which leftEstonia without any banks, meant ithad to establish new systems with newpeople and technologies, enabling thecountry to leapfrog nations with estab-lished back-office systems for financeand government.

With a stated ambition to become asrenowned for its digital services as Swit-zerland is for banking, e-governance isa foreign policy goal for the country of1.3m people.

“This is pure logic, not just someempty aspiration,” says Mr Tallo. “Gov-ernment is mostly about communica-tion, so if communication has changedthen governments will change also. It isgoing to happen anyway — it is just a

question of whether we can shape it.”Whether requesting a visa or regis-

tering for maternity leave, electronicauthentication is sufficient toauthorise any state service.Business deals and transac-tions are also concludedwith a digital signature.

Estonia’s e-residencyscheme is eye-catching

but still largely “decorative”, Mr Tallosays. Far more substantive is the interestinotherEUnationsinthewaypublicandprivate sectors in the country exchange

data and interact with each other toprovideservicesefficiently.

The system relies on a securedigital identity. An authentica-tion certificate is embedded in a

chip in each citizen’s electronic ID

card with an accompanying pinnumber, and also in their mobilephone’s SIM card, creating a unique dig-ital signature.

But technology is not enough — theremust also be a high level of trust in thesystem among its users. With electronicbanking available since 1996, Estonianshave had almost 20 years of trustingtheir money to the digital sphere, mak-ing it easier to extend it into other areas,suchastaxesandultimatelyelections.

When the country introduced inter-net voting in 2005, only 2 per cent of theelectorate opted to cast their voteonline, but at this year’s general electionitwascloser to32percent.

“By raising the level of trust in societyin general, it changes the climate ofdoing business,” says Mr Tallo. “Andthat lowers transaction costs, whichraisesGDPgrowth.”

Estonians have used their digital sig-natures 218m times since the scheme’sinception in 2002, with no seriousbreach of security so far. Indeed, the USNational Security Agency, at the centreof spying accusations since EdwardSnowden’s revelations last year, isunhappy that it cannot eavesdrop oncommunications,MrTallosays.

But with so much crucial informationin the cloud, there are inevitable con-cerns about vulnerability to cyberattack and fraud. Last year, researchersclaimed the electronic voting systemwas flawed, and the opposition CentrePartyhascampaignedagainst it.

“Yes, there have been moments whenpeople hesitated, and there have beenproblems with data protection,” says MrTallo. To strengthen confidence thatinformation is not misused, people cancheck their own data online and askwhohasaccessed itandwhy.

There are glitches. Journalist RaimoPoom at the Eesti Päevaleht dailyexpressed his frustration on Twitter lastmonth when two browsers refused toauthorise a payment. It felt like thingsweregoingbacktothe1990s,hesaid.

But the direction of travel in Europe isclear, and Estonia is positioning itself asa trendsetter. The UK signed a memo-randum of understanding with Estoniatwo years ago to share expertise on dig-ital governance, while Brussels is look-ingcloselyatwhat itcanlearn.

“Being digital is a way of overcomingthe handicap of smallness,” says MrTallo. “It has a genuine appeal. We havefound a lot of people trying to emulateusandweareveryhappyaboutthat.”

How Estonia set the pace onthe way to digital governmentTechnology David Crouch talks to the country’s ‘ambassador’ for e-governance about pushing boundaries

The city of Plovdiv, dating back 6,000years and rich in archeological treas-ures, is regaining some of its former cul-turalandeconomicprominence.

In 2019, Bulgaria’s second-largest city,studded with Roman theatres and still apowerful economic force in the commu-nist era, will become a European Capitalof Culture. Meanwhile, its GDP is grow-ing by 12-13 per cent a year, one of thefastest rates in the country. Much of thiscan be attributed to an IT and outsourc-ing boom, supported by local authori-tiesandnationalgovernment.

Ivan Totev, the city’s mayor, says: “Mydream is to see Plovdiv’s renaissance asboth the industrial and cultural hub ofBulgaria.” Mr Totev backs initiativesfrom the private sector to develop thecity as a fast-growing outsourcing and ITdestination and says that tens of thou-sands of graduates in the next few yearswillhelpattractmanynewjobs.

Plovdiv is an example of the country’sthriving outsourcing industry, account-ing for almost 4 per cent of GDP, accord-ing to the Bulgarian Outsourcing Associ-ation (BOA). Bulgaria is the world’sninth “most preferred” outsourcing des-tination in consultancy A T Kearney’s2014GlobalServicesLocationIndex.

Fluency in languagesandtraditions insoftware development and program-ming are a draw, while macroeconomicstability and a currency pegged to theeuro add to the country’s appeal. Out-sourcing employees’ wages are low com-pared with western Europe, but allow abetterqualityof life thanmostsectors.

Investors have been attracted to thePlovdiv area in part by the Trakia Eco-nomic Zone (TEZ), a public-privatepartnership comprising six industrialzones clustered in and around the city.Companies are enticed by comprehen-sive infrastructure and fast-track proce-dures. TEZ is Bulgaria’s first such area toreceive focused state support, whichallows even small municipalities toapply for project funding from thenationalbudgetorEUprogrammes.

Investment into TEZ projects hastopped €1bn since its zones started togrow in the 1990s, with another €800mexpected inthenext10years.

“We’re conservative in these esti-mates, the interest is steadily growing,”says Plamen Panchev, TEZ managingdirector and chairman of constructiongroup Sienit Holding, which played animportantrole increatingtheTEZ

More than 100 investors, most fromEurope, have been drawn by business-

friendly legislation, lowlabourcostsandthe 10 per cent flat tax that Bulgariaoffers foreign companies. Among themare ABB, the Switzerland-headquar-tered power and automation group, andGermansupermarketgroupKaufland.

A “smart city” project to boost energyefficiency and cut industrial waste in aTEZ zone is being developed with Ger-many’sFraunhofer InstituteandChina’sHuawei. Another Chinese company,Hainan Longquanren Century Investand Development, is TEZ’s partner in aEuro-Chinese Economic DevelopmentZone aimed at attracting more Chineseinvestment by establishing a logisticshublinkingAsiaandEurope.

TEZ has employed 12,000, includingjobs for residents in poor rural areas,which initially provided more workers.However, lack of qualified employees isa problem, although there are attemptsto remedy this. Ivaylo Staribratov, whochairs the Information and Communi-cation Technologies Cluster, has pushedfor curricula at some universities andvocational secondary schools to matchbetter therequirementsof theITsector.

Othercities, suchasVelikoTarnovo innorth-central Bulgaria and Varna andBurgas on the Black Sea, are also bene-fiting fromthegrowthinoutsourcing

The foreign presence is expanding.HP, the US technology conglomerate,opened a lab in Sofia, for example. In Sofia alone, some 20,000 people areavailable to take up junior outsourcingpositions — about the same numberworking inthesectornationwide.

“The potential we have could doublethe share of outsourcing in GDP in thenext three to five years,” says StefanBumov, BOA chairman and chief execu-tive of Sofica Group — the largest Bul-garian-owned outsourcing company,boughtbyUS-basedTeleTechlastyear.

Ilia Krastev, chief executive of A DataPro, a content, data and business intelli-gence services company, adds fallingbirth rates and education as challenges“that could put a brake on sustainablegrowth”. He says Bulgaria must make iteasier to hire foreigners, stop a braindrain, attract natives who graduatedabroadandimprovequalityof life.

City hopes high-techwill restore past gloryOutsourcing

Bulgaria is becoming a leaderin the field, Theodor Troevand Angel Petrov report

Historic: Plovdiv’s ancient theatre

‘When the Soviet Unioncollapsed . . . we did notknow exactly how you dothings.We did it our wayand it was a bit different’IvarTallo

Photo:Scanpix