Since the global financial crisis, the world’s major central banks have pumped USD >25tr into the financial system Global QE Tracker – Atlantic Council. Because of record-low interest rates the only asset classes, which have provided attractive returns in the last years, have been stocks, real estate and startups. Nowadays, Western VC funds have significant capital to invest, but according to our experience only c. 5% of them are allowed to invest locally in countries such as Poland or Romania. While especially Poland has a vivid startup scene – according to PFR, the value of VC transactions in Poland reached a record of PLN 3.6bn/EUR 798m in 2021 after PLN 2.1bn/EUR 466m one year earlier and only PLN 156m/EUR 34m in 2018 Transakcje na polskim rynku VC w 2021 (pfrventures.pl) – CEE-based startups usually have to look for money among local business angels and VC funds, which often use EU funds.
Lack of “smart money” is the main reason, why there are still not many unicorns in CEE
The main problem, which startups in CEE are facing, is that these investors usually do not have experience how to scale up businesses on international markets and have relatively small tickets of EUR <1m, which corresponds to pre-seed or seed phase of startup funding. Thus, CEE-based startups are able to finance product development, but often have problems with raising financing for the market roll-out.
While many startups choose to conduct a capital increase and list their shares in the alternative NewConnect segment instead, during the next funding round they often realize that they are in a “death trap”, meaning that most institutional investors are not allowed to invest in them as they are too small in terms of market capitalization and still do not generate revenues. We believe that all this is a major reason, why in CEE and in Poland in particular there are still almost no unicorns, which is a description of startups with a market value of at least USD 1bn.
Solution: Establishing a holding company in Western Europe
In our view, a solution may be establishing a holding company in Western Europe. This would become an owner of the local operating company, which usually benefits from still 4-5x lower salaries in CEE and EU R&D grants. In our view, the Western holding company could raise “smart money” from Western business angels or VC funds much easier. In addition, it could ultimately be listed on one of the Western European stock exchanges such as Deutsche Börse, Stockholm or Euronext. Especially the Swedish and Amsterdam stock exchanges are considered the best ones in Europe for innovative Tech and Biotech companies.
The process of establishing a holding company in Western Europe is relatively easy. For example, in Germany there are two kinds of limited companies, which require EUR 25,000 (GmbH) and EUR 1 (UG) of initial capital respectively GmbH und UG (haftungsbeschränkt) – IHK Rhein-Neckar (ihk24.de). Set up costs equal max. EUR 900 and yearly costs of accountants and tax advisors c. EUR 2,000. A Dutch BV requires at least EUR 0.01 7 Things you need to know about the Dutch BV – FIRM24 initially, with likely similar founding and yearly costs as in Germany.
We at East Value Research have gained significant experience with consulting for startups over the last years and have built a strong network of brokers, consultants and investors. We stand ready to assist CEE-based startups with the establishment of a holding company in Western Europe and fundraising.