Why Eastern Europe is a Threat to Silicon Valley's Tech Industry


Twenty-four years after the fall of the Berlin Wall, Eastern Europe is still lagging behind the West. But the region is catching up in some regards, most recently in the realm of technological innovation. After decades of being under communist rule and central planning systems, Eastern European countries might be coming into their own in the fields of technology and innovation.

This part of Europe has always hosted a large-scale work force, and thus has been a great place for outsourcing. Capital-abundant parts of the world could count on Eastern European countries to provide them with the low-paying, low-skilled labor needed to produce their goods. But most recently, from Bulgaria to Czech Republic to Russia, Eastern Europe has shown potential to to become Europe's Silicon Valley.

The human assets of the region make it a major player in technological innovation according to Forbes, which consistently ranks Central Eastern Europe (CEE) at the top of the world in educational achievement in math, science, and technology. In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming competition were from Central and Eastern Europe This region also accounted for eight of the 13 winners at this year's ACM International Collegiate Programming Contest." Another factor contributing to the potential technological boom is that startup costs in Eastern Europe are much lower than in the United States. Ivan Burazin, CEO of Codeanywhere, stated, "You can build up a company for much less [in CEE] than you can in the Valley or Western Europe." Additionally, the establishment of a capital pipeline to the region is promising for the region. For example the JEREMIE program, in cooperation with the European Commission, offers Central European countries such as Hungary and Bulgaria the opportunity to finance start ups with equity, loans, or guarantees.

Central Eastern European countries propel human innovation, have favorable startup cost opportunities, and ample capital flow for investment in the form of JEREMIE. Yet, the process of becoming a tech hub is still an uphill battle for the region. Being under central planning systems for decades has hindered the region's ability to take risks and invest in new businesses. Stephane Gantchev, venture partner of LAUNCHub, explained, "Lots of people are teased by a secure job in a big tech company instead of chasing their dreams and founding a startup." Until these countries promote new cultural attitudes that lead their communities away from a conservative mentality and quell their aversion to risk, progress will stagnate. These countries might be getting financial help from programs such as JEREMIE to make startup loans available, but the region still needs entrepreneurial investment from outsiders who have the hands-on experience to steer development to an even higher level. This would allow for reinvestment in the region, which is what Microsoft did when purchasing Skype from Estonian-based developers, rather than moving profits elsewhere.

All that said, the potential is there for the region to continue on a path to become a technological hub in the next 15 to 20 years. Gantchev exemplifies the optimism: "We are very positive about the future of the startup and investment scene in CEE. The arrival of seed funds have filled a very important gap and give an initial boost to the best regional entrepreneurs. We see more and more companies from the region raising series A and follow on rounds from top tier European and American venture capital firms." Entrepreneurs and local governments will have to cooperate to establish effective policies that allow investors to play an adviser role in company startups to achieve the maximum profit capability in the region. Central Eastern Europe must motivate people and show them that creating a winning startup is possible. This will give birth to hundreds of high-value companies ready to serve the global markets.