startingthingsup.com – Thinking of going international? For startup entrepreneurs, the European Union-based ones in particular, Eastern Europe is one of the most popular directions. But what country should they choose?
This article examines the current European business conditions. It also aims to assess the threats and opportunities that the Bloomberg’s three Eastern European Best for Business countries provide to the entrepreneurs. The conclusions are based on the data provided by ESM, GEM, and WEF, as well as (of course) Bloomberg (European Edition).
Other sources were quoted as needed.
Time To Go International
In 2015, European startups raised — on average — 2.5 million Euros in external capital. More than half of them were operating on international markets. 8 out of 10 of the remaining half were planning further internationalization in the next 12 months [ESM 2015 REPORT, pg 7]. As of 2016, their earnings have risen up to 2 billion Euros. 77.7% were operating on international markets or planning further internationalization [ESM 2016 REPORT, pgs 6 to 7].
More than 90% have rated their current business situation as good or satisfying [ESM 2016 REPORT, pg 7].
Interestingly: 47.0% of those planning further internationalization intend to expand to other European countries [ESM 2016 REPORT, pg 33].
The meaning behind these statistics is simple:
Some more numbers. 2015 saw 7.6% of startup founders coming from EU countries other than the location of their startup [ESM 2015 REPORT, pg 7]. 2016 saw the share increase by 8.6 percentage points to 16.2%. “79.6% of male founders formed their startup in their country of residence”, the European Startup Monitor 2016 report states, “This is only the case for 75.8% of the female founders”. Meanwhile: The share of non-EU founders has grown from 4.3% to 4.8%. “The percentage of female founders from non-EU countries (5.5%) is slightly higher than the percentage of male founders from non-EU countries (4.6%)” [ESM 2016 REPORT, pg 42].
“The highest share of non-EU founders was found in Poland (33.3%)” [ESM 2016 REPORT, pg 42].
The pros of well-prepared-well-executed internationalization seem obvious. The reasons to go international — both strategic and financial — are there. The question Should I go international? is no more. The question is: Where to?
For the EU entrepreneurs the answer is simple:
Eastern Europe is the place.
Place To Go International
Eastern Europe is the place indeed. That being said: Some locations are preferable to the others. Some countries can prove to be better.
There is a number of factors that are worth taking into consideration before expanding. The things to consider are numerous and varied. Depending on the profile of their startup, entrepreneurs might find themselves looking into things as far from each other as workforce costs and road infrastructure, not to mention various costs, taxes included. Some of these factors matter more, others — less. Some are important. Others are trivial. The general rule is that the more things we take into account, the better our chances of succeeding. Besides that, there are no rules, there are only pros and cons, differences, threats, and opportunities.
The most attractive Eastern European directions for expansion are Poland and the Czech Republic, with Poland named Bloomberg’s Best for Business in East Europe, Czech Republic its close peer. What makes Poland stand out among the other Eastern European countries is — Bloomberg’s Piotr Skolimowski reports — its fast-expanding consumer market and fast-improving infrastructure (this includes roads and bridges). The same goes for the Czech Republic. The difference between the two is — the conclusion can be drawn — that the later has suffered much more economic damage due to the global financial crisis of 2008 and the following recession.
The third Bloomberg’s Eastern European Best for Business is Hungary. Whether or not it is as good as Poland and the Czech Republic remains questionable. There are reasons to doubt it (some of them — political). That being said: Hungarian regulators are doing a lot to strengthen the bonds between the government and the entrepreneurs. Numerous tax breaks and low workforce/workspace costs do a lot to make up for political problems. Still: It might be better to start there — rather than to expand there.
Funding vs. Expenses in Hungary
The big Eastern European number three on the Bloomberg’s Best for Business list is a little bit different. Let us take a look at it.
In 2016, 20% of Hungarian entrepreneurs have financed their startups with their own savings [ESM 2015 REPORT, pg 78]. 29.3% have claimed to have enough resources and thus have not planned to refer to the other — external — sources of capital within the next 12 months. The remaining 70.7% were going for various amounts it [ESM 2016 REPORT, pg 81].
This is where the things are getting interesting.
Only 34.4% of those planning to refer to external capital were going for small to medium amounts of it. The remaining 65.6% had more ambitious plans: 27.6% had planned to raise up to 250.000 Euros within the next 12 months, 6.9% — up to 500.000, 17.2% — up to 1 million. 10.3% had planned to raise up to 2 million. 7.1% — up to 5 million. [ESM 2016 REPORT, pg 82]. These plans can be seen as the response to the new state-funded capital programs that are to open in the second half of the decade the total value of which is 550 million Euros [ESM 2016 REPORT, pg 8]. Compared to the rest of the Europe — that is a lot. That is much more than a lot.
“The relationship between Hungary’s regulators and the startup world is strengthening”, Design Terminal’s Gergely Böszörményi Nagy writes for the European Startup Monitor 2016 report. “With results such as a new angel tax break and a Digital Welfare Program. Regulation tailored to the aims of Industry 4.0 is in the making. This will allow startups to be more integrated. Initiatives, both top-down and bottom-up, are being born all over the country. In the last year, eight accelerators have launched in the countryside and three in Budapest, together with half a dozen new co-working offices” [ESM 2016 REPORT, pg 8].
It is also worth the mention that the average Hungarian annual wage is lower than the Czech one. The wage gap is larger too. The costs of renting the workspace are varied depending on the location (in the biggest cities the rent can be Western European-kind-of high). This makes the overall costs of having a startup lower.