PRAGUE/WARSAW (Reuters) – When altFINS’ private backer pulled out of a financing deal in March due to the coronavirus pandemic, the Slovak blockchain startup had another option – publicly-funded venture firm Crowdberry.

After losing out on the original deal in November, Crowdberry managed to secure better terms the second time round, while altFINS got the money it needed.

“This was the path of least resistance and they (Crowdberry) were a very good strategic partner,” said altFINS founder Richard Fetyko, whose company is developing an online platform to trade digital assets.

The episode underlines how some publicly-backed venture firms are stepping up to keep seed money flowing to infant companies in former communist countries such as Poland, the Czech Republic, Slovakia and Hungary as private investors retreat from the region’s nascent startup scene.

“A number of emerging companies will have no other choice but to tap these funds because private money will be very cautious because of the pandemic,” Crowdberry partner Michal Nespor told Reuters.

Before the pandemic, many startups in central and eastern Europe (CEE) preferred private investors, who often offer better valuations and links to global investors in places like Silicon Valley for bigger funding rounds later on, company founders and venture firms say.

But with private seed money drying up, they are increasingly turning to publicly-funded options as they look to create the region’s next $1 billion “unicorn”, following in the footsteps of Polish online marketplace Allegro, Romanian software firm UiPath, and new FTSE 100 member Avast.

Martin Bodocky, general partner of publicly-funded Czech venture firm Nation 1, said companies like his offered greater stability than private investors, with their limited partners more likely to continue providing money during a crisis.

“Public funding offers a protection and an advantage. We don’t expect any venture capital firm to die here,” he said.

Much of the money that flows into early stage CEE venture capital funds comes from the European Investment Fund (EIF), said Michal Kosina, the EIF’s senior mandate manager responsible for several CEE-focused investment programmes.

While the EIF finances firms across Europe, it may take particularly high stakes in CEE funds given the overall lack of private – especially institutional – investors there, he added.

“In times of crisis, limited partners may lower their appetite for this asset class and in some cases may even default on or try to renegotiate their existing commitments,” he said. “So, in this sense, the public capital in the region is good for startups because with public sources the money remains there.”

BUSY TIME

CEE countries offer a host of advantages for new businesses including a long tradition of producing graduates strong in maths and computer science and a low cost base that allows entrepreneurs to do more with less as companies grow.

In 2019, CEE venture funding hit nearly 1.4 billion euros ($1.6 billion), surging from 223 million euros in 2013, according to data from funding research firm Dealroom.co. The region has produced 12 unicorns with a combined value of 30 billion euros and offers a promising pipeline of startups.

The amount is a fraction of the 38.8 billion euros raised in Europe in 2019, according to Dealroom.co data. But the growth has attracted an increasing number of global investors for later stage deals, founders and venture firms say.

For early stage deals, though, public funds can play a key role.

Bence Katona, chief executive of Hungarian state-owned investor Hiventures, told Reuters his firm had increased funding for startups to help them weather the pandemic.

Hiventures was the most active seed investor in European companies in 2019, directing money to 76 startups, according to data from Crunchbase. Its investments include PanIQ Room, which franchises escape room attractions such as MagIQ Room and The Prison, and tech firm SignAll, which translates sign language.

“Market players won’t take that risk now,” Katona said. “I am seeing they are waiting to see what will happen in the next three months. We made more investments during this period. It has been a busy time for us.”

Michael Zalesak, co-founder of Czech-based Lighthouse Ventures, is similarly active.

“We are getting more deal flow because angel investing has dropped significantly,” he said, noting his firm had closed six deals valued at more than 2 million euros in total since the pandemic began.

Startups in Poland, the biggest CEE economy, are also turning to state-backed funding options, such as PFR Ventures.

“Financing with involvement of public funds was more attractive from our perspective because we could raise much more capital,” said Przemyslaw Berendt, CEO of Polish startup Talent Alpha, which in 2019 raised $5 million.

Private investors are still doing deals.

Andrej Kiska of Prague-based Credo Ventures said his group had closed three since March and was close to wrapping up a few others.

But while company founders may dream of prestige and contacts that come with a global investor, he said local venture capital firms currently offered the most important commodity.

“These days cash is king and this will keep deals flowing,” Kiska said.

(This story corrects spelling of altFINS in paragraphs 1-3)

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