Unveiling the AI Startup Boom in Central and Eastern Europe: Insights from Venture Capitalists

AI startups in CEE can seize opportunities and overcome challenges in securing VC investment. To attract VC funding, AI startups should use AI technology to solve real and pressing problems.

Artificial intelligence (AI) is making waves in the startup world, disrupting various industries. We had the chance to speak with prominent venture capitalists (VCs) in Central and Eastern Europe (CEE), including Credo Ventures, Presto Ventures, N1 VC, Czech Founders VC, Y Soft Ventures, Impulse Ventures, J&T Ventures, StartUp Kitchen and Tensor Ventures, to gather their insights on AI startups in the region. In this article, we aim to answer the question: Is AI just a major hype used by LinkedIn influencers, or is it a life-changing trend that we should pay attention to? Join us as we explore the opinions and perspectives of these VCs.

AI Startup Ecosystem Booms in Eastern Europe's CEE Region, with Romania Leading the Way

The CEE region, mainly Eastern Europe, with Romania leading the way, is witnessing a surge in the growth of the AI startup ecosystem. This region has garnered international attention due to its talented workforce and access to resources, resulting in the emergence of innovative AI startups across various industries and domains. Primarily, startups focus on healthcare, fintech, agriculture, manufacturing, logistics, retail, and sustainability. Notably, the Czech Republic excels in marketing & sales, software & data, and hardware & IoT. At the same time, Poland stands out in e-commerce, retail, marketing & sales, and healthcare. Hungary has its strengths in education, food tech, and transportation.

CEE holds a significant position in the industrial robotics market, with Czechia and Poland being the top-earning markets. Slovenia leads in AI adoption within the region and boasts the highest robotization density. The automotive industry in Czechia and Slovenia heavily relies on industrial robotic automation.

The CEE region has nurtured a strong talent pool, fostered research excellence, received government support, and benefited from its proximity to key markets. With a history of entrepreneurship and a supportive ecosystem, the region has become a hub for AI innovation and adoption. According to the International Data Corporation, the European AI market is projected to reach $191 billion by 2026, growing at a 25% compound annual growth rate (CAGR).

To encourage collaboration and support in the AI sector, the CEE region has established initiatives and programs such as the European AI Alliance, the AI4EU platform, Digital Innovation Hubs, the AI-on-demand platform, and the European Partnership on AI, Data, and Robotics.

Success Stories of AI StartUps in the CEE Region

Several Central and Eastern European AI startups have gained significant recognition and success. Here are three notable examples:

UiPath: Originally from Romania, UiPath is a software company that provides a platform for robotic process automation (RPA) using AI. Their platform automates repetitive and manual tasks across various industries since 2005. UiPath has experienced remarkable growth, with 8,000 customers and a valuation of $35 billion as of April 2021.

Bolt: Founded in Estonia in 2014, Bolt is a mobility platform offering ride-sharing, food delivery, and micro-mobility services. Leveraging AI, Bolt optimizes its operations, pricing strategy, and user experience. With rapid customer base growth, Bolt has exceeded 75 million users and achieved a valuation of $4.75 billion as of September 2021.

AILIS: A Polish company that develops natural language processing (NLP) solutions for various industries, including healthcare, education, finance, and media. Founded in 2018, AILIS has created AI-powered tools such as a chatbot platform, a text summarization tool, and a content generation tool. The company has been recognized with multiple awards, including the Best AI StartUp at CESAwards 2019.

So, why Are VCs Attracted to AI Startups?

AI startups are undergoing rapid growth and attracting increased investment from Venture Capital Funds compared to previous years. According to the Organization for Economic Cooperation and Development (OECD), the global annual value of VC investments in AI startups rose from $3 billion in 2012 to nearly $75 billion in 2020. The USA and China remain at the forefront of funding, accounting for 81% of the total amount invested in AI startups in 2022.

One of the main reasons for this attraction is that AI startups harness artificial intelligence technologies, such as generative AI, to create innovative content and applications. These advancements in AI programs, which have been trained on large language models developed by Google, Microsoft, and Meta, demonstrate the potential of generative AI as a promising area for VC investments. Its applications span various industries, including gaming, design, copywriting, media, and entertainment.

Furthermore, AI startups are addressing market demands and tackling real-world problems. They are actively working on issues like workforce shortages in transportation and improving safety and efficiency. Notably, AI startups focused on autonomous driving and mobility technology have attracted significant investments, receiving $19 billion in VC funding in 2020 and $95 billion between 2012 and 2020.

What are the key factors VCs consider when investing in an AI startup?

When investing in an AI startup, venture capitalists (VCs) consider several key factors: 

#Focus on Problem, Solution, and Team

VCs primarily assess startups based on three critical elements: the problem they aim to solve, the proposed solution, and the team driving the initiative. AI, often viewed as a foundational technology, is considered a means to an end rather than the product itself. Klára Kocarová from N1 VC succinctly said, "I consider AI to be a foundational technology, not the product itself."

At the same time, Credo Ventures places high value on the technical capability of the founder, regardless of whether AI is part of the startup's offering. Research and experience pushing the state-of-the-art (SOTA) are highly regarded, aiming for a defensible position for at least a decade.

#Founder-Centric Evaluation

Václav Pavlečka from Czech Founders VC shared that they adopt a comprehensive approach, evaluating startups based on metrics applicable to all startups. They scrutinize the founder and the team, emphasizing their involvement, experience, relevance in the field, market understanding, timing, and the disruptive potential within a niche.

#Defensibility: Safeguarding the Innovation

Defensibility is crucial, particularly in an environment where AI can be seen as a commodity for startups. For example, Vojta Roček from Presto Ventures emphasized the importance of defensibility, stating, "AI is a commodity for most startups - how will you defend your AI solution against everyone around you?"

#Prioritizing Team and Market

In the early stages of investing, VCs like Credo Ventures simplify their evaluation, focusing primarily on two key factors: the team and the market. Assessing the team's capabilities becomes paramount, especially when revenue and usage data are limited. It is crucial to understand the alignment of the startup's business idea with the founder's prior experiences and the logical continuation of their trajectory. 

"At pre-seed or seed, there is usually no revenue, or even usage, so a lot of the time it is the situation of a 'two co-founders with a deck' scenario," shared Matěj Míček.

#Founder's Experience and Team Dynamics

Jan Romportl, a notable AI Consultant, highlighted the importance of the team, particularly their experience and expertise in AI and business. Striking a balance between AI expertise and a strong business drive is crucial. For example, a co-founder combination of a business-oriented CEO and a technically proficient CTO is often favored.

#Market Viability and Strategic Positioning

Tensor Ventures put the emphasis on the need for startups to define a strategic approach and carve a distinct niche amidst industry giants exhibiting significant resources and algorithms.  Simply, startups must define a strategic approach and carve a distinctive niche amidst industry giants flaunting important resources and algorithms. 

#Technology and Business Integration

Y Soft Ventures underscores VCs' holistic approach, considering that technology is only a portion of the product and the product is only a fraction of the overall business. Evaluations encompass the founder's fit, value proposition, differentiation from competitors, and a clear strategy. When assessing AI startups, discussions extend to the technology stack, machine learning models, data processing, scalability, and intellectual property.

#Market Size and Unique Solution

J&T Ventures, as early-stage investors, stresses the importance of evaluating the market size and the problem an AI solution addresses. They also look at the uniqueness and innovation in the solution, in addition to considering the experience and seniority of the executive team when making investment decisions.

At the same time, StartUp Kitchen, a networking initiative, noted the significance of market size, the cost savings clients or customers can achieve by implementing the AI startup's technology, and potential profit margins from recurring payments.

Tips for AI Startups in Central and Eastern Europe Seeking VC Investment

AI startups in CEE have unique opportunities and challenges when seeking VC investment. To successfully attract VC funding, startups should consider some tips:

#Don't Get Caught Up in the Hype

AI startups in CEE should avoid getting caught up in the hype surrounding AI. Instead of solely labeling themselves AI startups, they should focus on their unique value proposition. By allocating their specific strengths and solving real problems, startups can differentiate themselves. According to seasoned investor Vojta Roček, this approach can lead to more tremendous success.

#Find the Right Product-Market Fit

The key to success for AI startups is finding the right product-market fit. Startups should have a deep understanding of the problems faced by their target market. It is crucial to avoid bias and assume their solution is the best. For example, Czech Founders VC highlights the significance of showing traction and continuously adapting to the market to ensure that startups are effectively meeting the needs of their customers.

# Solve Real Problems with AI

AI startups should prioritize solving authentic problems using AI technology. By gaining industry experience and identifying specific verticals' most significant challenges, startups can provide substantial value to potential customers. Experienced investor Jan Romportl noted that this approach can lead to a competitive advantage. So, building resilient and antifragile businesses prioritizing business margin overgrowth is crucial.

#Prioritize Customer-Centricity

N1 VC emphasizes the importance of delivering value to customers and ensuring a positive customer experience. In other words, AI startups should prioritize customer-centricity. Instead of solely focusing on AI technology, startups should concentrate on delivering outcomes that benefit customers - AI should be seen as a tool to solve customer problems and enhance their experience.

#Consider Key Factors for VC Investment:

Presto Ventures VC cautions against pursuing unconventional ideas that may raise concerns among investors: Startups should consider several key factors when seeking VC investment, such as team, technology, sector, and market. Mainly, thoroughly researching the competition, avoiding redundancy, and considering the long-term defensibility of their products is advisable. 

#Deliver Exceptional Value and Establish Differentiators

Impulse Ventures highlights the importance of delivering value beyond AI technology. AI startups must prioritize delivering exceptional value and establishing clear differentiators to distinguish themselves. Even though AI technology may be trendy, startups should focus on providing value to specific customer personas

#Build Relationships with Investors Early On

According to Y Soft Ventures, building relationships with investors early increases the chances of attracting the right investors. Specifically, startups should conduct thorough market research to identify investors aligned with their stage, geography, and investment thesis. Perfecting the pitch and clearly articulating the value proposition and sustainable competitive advantage are essential. 

#Focus on Clear and Concise Communication

At the same time, J&T Ventures emphasizes the need for startups to communicate in a way easily understood, as clear and concise communication is vital for AI startups. Startups should have a simple communication setup where they can effectively explain the product, its application, and its unique selling proposition - this will capture the interest of potential investors.

Central and Eastern Europe has emerged as a thriving hub for AI startups, driven by a talented workforce, resource access, and a supportive ecosystem. The region's AI startup boom is fueled by its ability to address market demands, tackle real-world problems, and deliver rapid growth. 

By focusing on their unique value proposition, finding the right product-market fit, prioritizing customer-centricity, and establishing clear differentiators, AI startups in CEE are well-positioned to attract VC investment and shape the future of AI innovation in the region.

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