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  1. Tech
7 December, 2021

How did Central and eastern Europe become a tech hotbed?

Central and eastern Europe is churning out tech talent at an impressive rate, but how has it risen to such heights in the space of 30 years?

By Ruth Strachan

Central and eastern European (CEE) countries have in recent years been garnering reputations as hotbeds of technological innovation housing vast resources of talent. This stands in contrast with the region’s reputation only a few decades ago, when under communist rule these countries were considered to be way behind their Western counterparts when it came to all things tech. This new, high-tech chapter in the development of CEE countries has been pricking up the ears of swathes of investors.

These tech advancements have largely taken place within the past 30 years, since the fall of the Berlin Wall, but how did this facilitate a tech boom? What factors saw the socio and economic groundwork done that paved the way for this growth in the CEE’s technological sectors? What opportunities has this brought for investors and what obstacles are still to be overcome? Which CEE countries are leading the charge and which are playing catch-up?

Investment Monitor investigates why the CEE region is still the one to watch when it comes to the global technology sector – particularly for software, information and communication technology (ICT) and data development sub-sectors – and delves deeper into the psyche of the CEE region, examining why it is a region that no investor can ignore.

The entrepreneur gene and the CEE tech sector

From the Baltic to the Adriatic seas, the CEE region is a tapestry of complex, and often dark, histories with unique political landscapes scattered between its countries. Each has its own story and formula, but between all CEE countries there is a shared understanding and experience when it comes to the lasting impact of Soviet rule between the end of the Second World War and the independences gained throughout the 1990s.

Marek Bańczyk, CEO at research company CityGlobe, says: “One of the few things the post-Soviet bloc countries have in common is their ‘post-Sovietness’; meaning that in all countries of the region, the societies had to deal with systems of repression and institutionalised irrationality.”

This ‘post-Sovietness’ is at its core a shared appreciation and understanding of the value of what it is to be free to live a life of your choosing. Natalia Mileszyk, director of digital and technology at CEC Group – a public affairs agency and network based in central Europe – highlights that this centralised, strict control extended to all aspects of life in Soviet-ruled countries, including business. She adds that creativity and innovation were considered too “untraditional” for communist countries and were often restricted.

This is a point backed up by Bańczyk, who says: “The communist regimes were bureaucratic behemoths deliberately designed to block, subdue and immobilise free entrepreneurship and any non-standard visions.”

Many believe this suppression of entrepreneurial activity – as with many other activities – ingrained into CEE residents a flair for ‘thinking outside the box’.

This embedded gene of entrepreneurship is something Borys Musielak, founder of Smok Ventures, a US and Polish venture capital fund, has seen plenty of evidence of. “We always had to figure things out on our own; no one was supporting us,” he says. “There wasn’t much social structure, there wasn’t free money. People had to figure out how to live under suppression. I think that is how the entrepreneurship gene was created.”

Bańczyk expands on this, saying: “[Soviet suppression] created a counter reaction and implanted a mindset of constantly looking for non-standard solutions, simply because no standard solutions were allowed by the system.”

Many believe this ‘entrepreneur gene’ is present in the current working generation in the CEE, despite many of these workers being born and raised after the fall of the Iron Curtain.

Although the current generation of tech, ICT and software engineers did not grow up directly under Soviet rule, it it is benefitting from an environment where creative problem solving was considered a key survival skill. It is this agile mindset that has laid the foundations for the CEE to thrive in the technological age.

The CEE’s tech report card

So in what ways is the CEE region experiencing a tech boom? After an initial surge in economic activity in the 1990s, growth has been steady, particularly since 2010.

Poland is widely recognised as the CEE's tech star, and it has seen ICT exports rocket, surpassing developed tech markets such as Japan in the process. Bańczyk highlights that Poland has not only leapfrogged much larger developing economies, such as Indonesia and Brazil, it has also "outperformed export-oriented high-tech contenders such as Sweden in total value of exports".

This success in exports is even more remarkable when the number of ICT workers in the CEE region is taken into account compared with other parts of Europe. It had fewer ICT workers in 2020 than western and northern Europe had in 2011. As the CEE region has only been active in the tech sector for 30 years, such 'catch-up gaps' are likely to occur, but this relative freshness also brings with it advantages.

Mileszyk believes that the CEE region benefits from having fewer legacy problems when compared with western Europe. "It is easier to start with very innovative solutions from the very beginning," she says.

This is an advantage that Poland and many countries in the wider CEE region have grasped – they have the room to expand, and they can do so with agility.

Countries that have never faced suppression within their tech sectors, or indeed general efforts at entrepreneurship, have been developing at a steady pace for years. This means that they are typically committed to long-term plans tied into their digital transformation goals, all of which are run on legacy systems that are often out of date. A CEE company can launch with the latest innovations and advanced technology at its heart, bypassing these restrictions.

Alexander Morari, founder of ITKeyMedia – a media company covering start-ups based in the CEE region – is another adherent to this late-starter advantage. “If you are not first into the [tech] space, and the CEE obviously is not, then you have to create an advantage," he says. "There are dinosaurs in the industry who are powerful but dependent on their old legacy toolboxes and software. So, if CEE companies come along and identify the same problem but use more sophisticated and accessible tools, this helps these companies to not only catch up to these leaders but to outpace them.”

Hunger and urgency in the CEE

Alongside this agility, many state that the aforementioned ‘entrepreneurial gene’ adds a hunger and sense of urgency to scaling up the tech industry in the CEE, qualities that are lacking in more developed markets.

Musielak says: "The market is not as crowded. I could never do in London what I have done in Poland in two years.”

Indeed, Musielak is a prime example of how rapidly tech-based start-ups and initiatives evolve in Poland. He sold his company, Filmaster, in 2015 for just over $1.12m (€1m) to US start-up Samba TV. In 2019, Musielak left the company to focus on a company he had co-founded. This company is ReaktorX, an acceleration programme that focuses on assisting early-stage start-ups.

Musielak estimates that ReaktorX has guided approximately 100 start-ups and 250 entrepreneurs through the process from conception to execution. Off the back of the success of ReaktorX, Musielak realised that a keener focus needed to be paid to raising investment, which has led him to create venture capital fund Smok Ventures.

This lightning pace of development is all the more effective when combined with the other key factor driving growth and investment in CEE tech sectors – talent.

Despite this developmental gap in ICT employment figures, the entire CEE region has seen growth in its ICT employment. Poland in particular has seen rapid growth; between 2011 and 2020, the number of people employed in Poland’s ICT employment sector has risen by approximately 199,400.

More generally, the CEE supply of software engineers exceeded one million developers in 2021. This puts the region above countries such as the UK and Germany in terms of the number of software engineers provided, and on a par with Japan.

More engineers than CEOs

The CEE’s offering of tech talent is a huge driver for growth in the region, and is essentially fertilising a start-up culture. "The whole region is very strong in engineering talent," says Musielak. "What has been lacking for quite some time is business acumen, experience in running start-ups, but that has been really changing in recent years."

In October 2021, Dealroom.co published a report stating that CEE start-ups are coming of age. The report found that CEE start-up values had multiplied by a factor of 19 between 2010 and 2021. Furthermore, venture capital investment into start-ups was on track to more than double between 2019 and 2021, from $2.6bn to $6.1bn. The report added that 34 unicorns had been born in the CEE region.

With the future of this start-up climate continuing to look promising, alongside what appears to be a strong economic recovery from Covid-19, many entrepreneurs are considering relocating to the CEE region. One of them is Dominik Andrzejczuk, the managing partner of tech-focused investment fund Atmos Ventures, who left California’s Silicon Valley for Polish capital Warsaw.

Andrzejczuk explained in a YouTube video addressing the move that while Silicon Valley struggled with the problem of "too many CEOs and not enough engineers", the opposite was true in Poland and the wider CEE region.

This idea that there are more engineers than CEOs can be reversed into a negative, however. A potential barrier to the development of the CEE tech market is its perceived lack of business experience.

This perception could be attributed to potential outdated views of eastern Europeans, according to Bańczyk. “Eastern Europe was once considered the source of cheap labour at best and a homeland of primitive and clumsy low-life tribes at worst," he says. "The perception of eastern Europe is certainly changing in circles of Western society that have some experience of its countries.” 

On this, Mileszyk says: “Having a CEO mindset, and managing in this Western, competitive and capitalistic way, is totally new [in much of the CEE region]. It is so much easier for German or English people to become CEOs because they have this legacy mindset and support that we historically lack. You can only get that by being surrounded by CEOs, [other similar] companies and business infrastructure.”

While overcoming these perceptions regarding soft skills such as management and leadership is a work in progress, the CEE has no such problems when it comes to its reputation for hard skills, such as coding and software engineering. Skilled worker numbers continue to increase not just in Poland, but also in Hungary, Romania, the Czech Republic and Bulgaria. Even CEE countries under more suppressive regimes are churning out impressive tech talent, according to Mileszyk.

“Belarus is an exceptional place for new talent," she says. "There are so many IT people coming from Belarus and [often] they are trying to migrate to escape the regime in the country. There are many of them that have skills that are highly desired in the market.”

The competition to retain this talent in a bid to attract investment is intensifying on both a regional and global scale.

Competition and governments

With talent pools that are capable of adopting advanced technology tools such as Spark and Hadoop at a fast pace, a challenge facing most CEE countries is how they can retain and utilise their impressive talent pools.

A combination of skills gaps plaguing Western countries and the Covid-induced new normal of working remotely where office jobs are concerned, tech talent is both in high demand and easier to poach.

“Many IT specialist are deciding not to work [in the CEE region] because with their skills they can get way better salaries other places in the world," says Mileszyk. "With the rise of remote working following the pandemic, talented tech workers can ultimately work anywhere they choose.”

This mobility of choosing where to live and work raises another important issue for the governments of CEE countries: how can the quality of life in a CEE country be raised in order to retain talent?

Alongside this, attracting inward investment is set to become even more competitive than it was pre-Covid. This ripples down to city level, particularly for the more developed parts of the CEE region, such as Poland.

“There has to be competitiveness in the CEE region because if you have a foreign investor (especially an American investor), their decision is going to come down to the legislative environment or the tax breaks or the sandbox solutions,” says Mileszyk.

This reliance on governments to grasp the importance of tech-based initiatives in order to remain competitive within the CEE region and beyond means forging new, and sometimes uncomfortable, alliances. “I don’t necessarily support the current Polish government, but in terms of funding there has been a lot of good work," says Musielak. "In the past few years a lot of those new funds, mine included, wouldn’t have been able to succeed without that government funding.”

Alongside funding, another key role some CEE governments play is nourishing a digital lifestyle in their countries to produce digitally literate populations.

“The Baltic countries are the ones to watch when it comes to cultivating a digitally adept society," says Morani. "Baltic governments were quicker to digitise schools and universities, without sparing any expense.”

Morani adds that the impact of successful entrepreneurs in the tech space reinvesting into their home countries shouldn’t be understated. Skype – which was developed in cooperation with four Estonian developers in the early 2000s – is an example of this. “[The Skype founders] decided to reinvest not only the money made out of the sale of Skype but their experience, network connections and talent into the local tech spaces and it created an area of huge potential,” he says.

Musielak believes that this continued introspective feedback and support is key to an eastern European country keeping up with, or even surpassing, its global rivals. “The first wave of founders in Poland were really looking at their own internal markets; it wasn’t a global, capitalist outlook," he says. "The success of that bunch produced the second wave of Polish entrepreneurs, start-ups, and so on, and this pattern has continued.”

The future of CEE tech

As the world continues its recovery from Covid-19 and the importance of tech in everyone's lives continues to rise, the CEE region's strengths in this area will only become more pronounced as an asset. When asked which source investment markets will prove a continued and important ally for the CEE region, western Europe and the US are cited as the most significant, according to Bańczyk. As to why the CEE region is so popular with these investors, he adds: "It is in their best interests to have reliable service providers without the constant necessity of due diligence, quality checks and all the expensive legal and protection, data integrity, contract insurance, etc..."

It is possible that the CEE region, and the tech capabilities it offers investors, could become a significant pawn in the global market, particularly as tensions continue between the US and China.

"We are not seeing a lot of investment from China or India because there is a pretty clear division when it comes to capital and how it flows," says Mileszyk. "We do have a lot of American companies here and also western European companies."

So given the rate of tech expansion, the hunger for success, the agility of its talent pool and the growing start-up culture, could the CEE region become the software, coding and tech talent centre of the world?

"Not yet," says Bańczyk. "However, it can and hopefully will. The kind of positive stereotype of the eastern European coder is already emerging naturally, without any cohesive promotional activity. All they need to do is to water these plants and watch them grow."

The CEE region has come a long way very quickly in the past 30 years, banishing many negative stereotypes and carving out a reputation as a world-class destination for tech talent. Its main challenge now, however, is retaining and nurturing those workers for the betterment of the whole region, and not just becoming a talent factory for rich countries in western Europe, North America and beyond.

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