Alexander “Sasha” Galitsky, Ph. D., is co-founder and managing partner at Almaz Capital Partners, one of the most prominent international funds with roots in Eastern Europe. This interview is an excerpt from “Startup Investment & Innovation in Emerging Europe,” a research study just released by East-West Digital News.
Which technologies are CEE startups strongest at developing?
In this vast region, you can find plenty of startups in a variety of fields; but let me cite just a few examples which reflect the outstanding tech engineering potential of certain countries.
Eastern Europe and Russia represent the second largest community in the world (after the USA) contributing to the Blockchain technology, and the third largest Bitcoin mining pool. The region accounts for 8.2% of Bitcoin active nodes and a substantial fraction of global ICO funding. Several companies from the region are global pioneers in Blockchain: they include BitFury (Latvia, Ukraine), Ethereum (Russia), Iconomi (Slovenia), and Golem (Poland).
CEE programmers also excel in IT security – for the best and for the worst. Russia, Romania and Hungary are among the top 10 countries in the world with the highest number of hackers. Teams from Ukraine, Poland and Russia hold the three first places in the Capture The Flag computer security contests.
In the field of machine intelligence, the Markov chains, Markov random field and Markov models are the very basis of deep learning, while the Hidden Markov Model (by Ruslan Stratonovich) is the main model for speech recognition. Alexey Ivakhnenko, who was a prominent a Soviet and Ukrainian mathematician, is still referred to as the father of Deep Learning.
As for data engineering, Russia and neighboring countries take the fourth place in Kaggle, the world’s largest data scientists community. And Yandex Data School is the largest non-university based school of data analysis, with about 500 graduates since 2007.
How did this engineering force and talent emerge?
To a substantial extent, today’s strength is a legacy of the past. Under communism, these countries were busy developing copies of IBM computers. This activity involved Bulgaria and Hungary (computer disks, disk drives, printers and etc.), East Germany (memory chips, processors), and Czechoslovakia as well as the Soviet republics of Estonia (cybernetics in Tartu), Latvia (microelectronics), and Lithuania (monitors manufactured in Kaunas). Based on these specializations, engineering schools, R&D and production capacities emerged — and they have continued to develop until now.
Of course, the situation differed among countries. Thus, Romania and Yugoslavia were particular cases. With their autonomous, autarchic approach, they didn’t take part in this regional division of labor and specialization. Nevertheless, some great technical schools were built locally.
In terms of entrepreneurship, the legacy has generally been negative. There are just five entrepreneurs in 1,000 inhabitants in Russia, and up to 20 or exceptionally more (40 in Kazakhstan) in other countries of the region — a far cry from the USA’s 71 entrepreneurs per thousand inhabitants. This reluctance to individual risks is obviously a part of psychological legacy from previous times.
Many startup entrepreneurs in the region leave their countries. Is the grass really greener for them in Western Europe, Silicon Valley or Singapore?
In the modern tech world no one, neither a person nor a country, has exclusivity for innovation. Great tech idea may emerge in any place in the world today. It’s today’s reality and the beauty of the modern connected by internet world. To build a successful company, tech entrepreneurs need access to three essential things: capital; access to a large market; and only after this to the knowledge and skills.
Highly-skilled engineers, a pretty big pool of them, and at a reasonable price, are the biggest advantage of CEE today in comparison with other regions, especially when taking into account the shortage of skilled engineers in Silicon Valley. In addition, local CEE engineers are more loyal to their employer than in Silicon Valley and even in Western Europe.
CEE startups today can get seed capital (often state-backed) from local VCs, but there’s a lack of capital at further stages, like series A and B. More importantly, there is a lack of experience of local VCs in bringing companies to the global scale. Local B2B markets are usually very small, especially when new breakthrough technology is emerging and hitting the market. USA businesses are attuned to new innovations, which could increase their efficiency and profitability. In addition, USA market at the early stages of emerging technologies represents 90% or more of the global market.
Of course, access to the global market is possible even in small countries – in Finland, for example, many startups accessed the global market via Nokia – but it is still easier to start a global company from a big Western tech hub, especially from Silicon Valley, than from Bratislava or even Moscow.
Why is private capital so scarce in the region?
Usually private capital comes with a certain level of historic maturity. In the early 1970s, private capital in Silicon Valley amounted to some $100 million vs $2 billion of state investment. In the end of last decade, state investments was around $4 billion and private grew to over $35 billion. And in Israel, the VC boom didn’t occur before the mid 1990s.
Maturity means such things as success stories and a developed ecosystem, which attract investors. Another requirement is a certain level of demand on the domestic market, which generates a need for innovation to support the growth of specific segments.
It may sound paradoxical, but fast macroeconomic growth — which most CEE countries have enjoyed over the past 20 years — is not really a positive factor for the development of venture capital. The faster the economy grows, the higher are returns in the traditional sectors – which tend to attract more capital.
Please tell us a bit about your investment activity in the region
Almaz Capital has invested in more than 30 companies over nine years of operations. Our strong believe is that B2B technology companies are usually global vs B2C companies, which are often local. We do not primarily invest in local business opportunities but rather leverage the outstanding local ideas and engineering talent pool to build global businesses.
Our portfolio companies have all their R&D teams in the former Eastern bloc, but the majority of them have their sales and marketing offices in the USA. We have defined several areas of interest — for example, AI and ML, cyber security and data engineering — which correspond to the CEE’s strongest legacy in terms of talents and technologies.
We’ve had eight exits so far: Odin, acquired by Ingram Micro; Plesk acquired by Oakley Capital; Appscotch, acquired by App Annie; nScaled acquired by Acronis; Vyatta, acquired by Brocade; Qik, acquired by Skype; and Yandex, which went public on the NASDAQ in 2011.
Another exit — one of the largest ones — took place in Sept. 2016 with Verizon’s strategic acquisition of Sensity Systems, a startup based in the US and Hungary. Verizon sought to complement its suite of smart city connected solutions. One year before the acquisition, the company had received funding from Cisco, GE, Mohr Davidow Ventures and Acuity.
We have a few regrets associated with our exits as well, like taking cash for a stake in Qik instead of shares in Skype, or not getting a larger stake in Yandex when we had the opportunity to invest more capital.
We have around 25 companies remaining in our current portfolio.
- Alexander “Sasha” Galitsky, Ph. D., is co-founder and managing partner at Almaz Capital Partners, an international venture fund head-quartered in Portola Valley, CA, backed by Cisco Systems, the EBRD and the IFC. A prominent innovator, entrepreneur and investor in the USA and Europe, Mr Galitsky was distinguished by several industry awards and media. He serves the board of directors of several companies, including Acronis, Octonion/PIQ, CarPrice, Jelastic, Parallels, PetCube, StarWind. A former researcher, Mr. Galitsky has over 30 patents for a variety of inventions, including parallel processing, WiFi and VPN security technologies.
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