“The small size of the [Bulgarian] market doesn’t reflect the level of companies’ competence and sophistication,” says Mr Elvin Guri, founder of Empower Capital, one of few Bulgarian venture capital funds. Early-stage companies in Bulgaria are struggling due to a shortage of funding, but their untapped potential may be released with effective incentivising by the Bulgarian government and the European Union.
In 2016, foreign direct investment (FDI) in Bulgaria was €701.7m, a 72% decrease from 2015, according to the Bulgarian National Bank. FDI peaked in 2007 and foreign investors have been reluctant to invest in the country in the aftermath of the financial crisis.
Corruption in the political and judicial systems has also deterred investors, and in fact, Bulgarian lawyers advise their foreign clients to include in their business contracts a clause permitting arbitration outside Bulgaria in the case of a dispute. They also recommend establishing an investment partnership abroad, so that only the operating company is based in Bulgaria.
The majority of partnerships between Bulgarian and international businesses now function more smoothly than previously, however, as international chambers of commerce, sectoral business associations, and western diplomats lobby actively on behalf of investors facing problems.
EU Promotion for Bulgarian Start-Ups
The European Union has sought to promote investment in the South East Balkan country via the Joint European Resources for Micro to Medium Enterprises (Jeremie), an initiative of the European Commission developed together with the European Investment Fund. It promotes the use of financial engineering instruments to improve access to finance for SMEs via Structural Funds interventions.
One Bulgarian official says that €120m+ has been invested since 2013 in companies backed by Jeremie, via four Bulgaria-based venture capital funds, and the market has room to grow: Empower Capital’s Mr Guri puts the potential for private equity investment across south-east Europe at €5.6bn.
Cause for Concern
Not everyone is optimistic, however, about the flood of capital brought about by Jeremie. Imre Hild, chief executive of iCatapult, a Budapest-based accelerator, says too many VC fund managers have private equity backgrounds and do not understand the mindset or needs of entrepreneurial start-ups: they acquire majority stakes and then micromanage the companies, almost certainly stripping them of their creativity and innovation.
The Bulgarian government is also working to attract foreign investors: in regions of high unemployment, investors enjoy tax breaks on reinvested profits and subsidies on social insurance payments. In addition, investors can take advantage of low wage costs (€4.40 per hour) and a flat tax rate of 10% on corporate profits and personal income, the lowest in the EU. The government is also actively reducing red tape for investments in manufacturing and services.
These incentives are key to securing funding for start-ups, as increased amounts of private financing will be critical to making small businesses sustainable in the longer term. Otherwise, they will move to the UK, Germany, or the US, where venture capital and private equity funding are readily available, warns Evgeny Angelov, chairman of the Bulgarian Private Equity and Venture Capital Association and former Economic Advisor to the President of Bulgaria.
Low Labour Costs
Low labour costs in particular set Bulgarian start-ups up well in terms of competitiveness. As an example, take the following two small high-tech companies: MClimate, based in Sofia, and tado°, based in Munich. They are both Internet of Things firms focusing on smart homes and offer similar product suites that include smart thermostats, controlled via apps, that adjust to the real-time behaviour of residents of private homes and small businesses.
The difference in funding between the two is significant: tado° just closed its Series C round, bringing its total funding to $56.29m. MClimate, on the other hand, is operating with only seed funding, which totals US$690.82k. Note that tado° is a few years older. MClimate reviews on Google Play are 3.4 stars, while tado° reviews are at 4.1.
While the difference in rating highlights a customer preference, the low costs of MClimate allow it to operate healthily in the market, and it’s possible that with more funding Bulgarian companies like MClimate would compete more aggressively against their more capitalised counterparts.
Bulgarian startups have so far proved competitive in the tech sphere: “These are companies that have developed world-beating technologies. They have tremendous possibilities,” stated Mr Mark Crandall, founder of PostScriptum Ventures, a venture capital group that specialises in start-ups and niche investments mainly in the energy sector.
This sector specialisation could prove useful for future EU funding, as the union emphasises the need, through structural and investment funds, to make the EU’s single market fit for the digital era by removing regulatory walls and merging the existing 28 national markets into one robust market place. The European Commission claims the move could add €415bn to the EU’s economy annually while creating hundreds of thousands of new jobs.
While Bulgaria hopes to position itself as an information technology leader in Southern Europe, businesses are finding it difficult to keep up with accelerating demand for skilled workers: although around 2,000 IT and computer science graduates enter the labour market every year, few of them have the specific skills that businesses need.
“The success of Bulgaria’s high-tech industry will depend on our ability to generate the necessary capacity of relevantly educated engineers,”
states Mr Roddy Dervishev, chief executive of Sibiz.
“If we are not able to build sufficient engineering capacity, this may lead to stagnation, withdrawal of investments and Bulgaria will not establish itself as a high-tech destination.”
Both the private and public sectors are attempting to change this situation with appropriate training, but the results will take time to show.
In conclusion, the economic conditions of Bulgaria are improving, but the country’s vibrant start-up environment will suffer unless capital inflows continue to grow and quality in the labour market holds up. The attempts of the government and the EU may be the key to helping SMEs prosper, and the result may be a sea of opportunity for venture capitalists and innovators.
2018: A Bullish Year for Greece?
Two things of importance have recently occurred. The yield on Greek bonds has reached a new low (though, just in time to participate in a potential bear market) and the Syriza led government has enacted measures likely to secure the next tranche of euros. With the Greek economy heading towards achieving 2.5% growth YoY in 2018 and hopefully ending its Sisyphean 10-year cycle of bailouts this summer, the economy is starting to look ripe for foreign investment.
As Q4 2017 approached, things were starting to look up. Either because, as some have thought, after almost 10 years of crisis we’ve reached Greece-fatigue with comparatively lesser news coverage or because, as some notable commentators (such as Deutsche CEO John Cryan or American ambassador to Greece Geoffrey Pyatt) have argued, conditions are genuinely ameliorating.
With return linked to risk, the lowering of the Greek bond yield (which has fallen from more than 7% at the start of the year to 3.92% at the time of writing) is the market’s way of telling us that the outlook is improving.
Equity markets in Greece aren’t doing too shabbily either: Athens Composite Index (ASE: ATH) is up 32.24% at the time of writing, compared to last year. On one hand, it’s tempting to ignore the performance of the index. After all, since the shares have started trading again following the 2015 debacle, most of the companies included in the index – Greek banks, largely – had nowhere to go but up. On the other, reports on Greek industry are surprisingly positive, with the latest IHS PMI report on the region conveying high confidence in the sector and the ‘most marked growth in over nine and a half years’.
The reportage of the past few weeks has been centred on the possibility of Greece exiting its bailout successfully this August, on what it would take to do that and even what success might look like. This past Monday, amongst a furore of protests, the Syriza government moved to enact several fiscal and industrial reforms aimed at hopefully bringing Greece more in line with the criteria of its debtors (more here) in hopes of securing its next tranche of monies.
The vehemence of the protests (with some claiming new quorum rules on strikes are akin to slavery) seems to be inversely correlated with efficacy: Prime minister Tsipras and Finance minister Tsakalotos must surely be looking ahead to Monday the 22nd and up towards mitteleuropa in hope of approval. Whether this is a democratic stance to take is irrelevant, and with the party having a mandate to rule until 2019, they are surely gambling on a return to borrowing at European market levels and financial normalcy without too many stringent conditions. It’s a gamble, yes, but a politically expedient – and perhaps even an astute – one.
Greece offers a tempting arena for investment, but it will take more than access to the European purse to improve things, especially if SMEs and startups – surely an indicator of health in any economy – are to get off the ground. Gone are the days described in Michael Lewis’ Boomerang with its tableau of incognito meetings in hotels with tax collectors who were reprimanded for being too good at their jobs: taxation in Greece has become stringent enough to seriously affect entrepreneurs:
‘For an employee to receive over 2,000 euros net per month, their employer must pay more to the state – in taxes and contributions – than to the worker. When an employee collects 3,000 euros, their final cost to their employer each month is 7,127 euros, of which 4,134 euros goes to the state (58 percent of the total).’ Source
Even maritime activity, traditionally a staple of the Greek economy, is being affected by these strict taxation measures. Despite stirrings amongst Greece’s nascent venture capital community, Syriza-led Greece is hardly shaping up to be entrepreneur friendly and it may well be that we’re looking at an environment better suited to quick-witted, short-term speculators than investors hoping for long-term growth.
More than money is needed for the kind of recovery and environment beloved by investors.
The minotaur is still in the labyrinth, but perhaps 2018 may just turn bullish.
Brexit Phase Two: EU-UK Trade Talks
What unites European political parties across the political spectrum is a demand that while Britain discusses its future with the EU, it adheres to the principle of freedom of movement throughout the phase two transitional period. This is together with all the other rules of EU membership, including compliance with decisions of the European Court of Justice (ECJ).
While Brussels conducts day to day negotiations, it will fall to rotating EU presidents to secure cohesion and solidarity among EU27 member states holding diverse agendas for the conduct of Brexit talks. For the next six months, this leadership task falls to Bulgaria. Romania – the EU’s fastest growing economy (in 2017) – takes on the role in January 2019 at what will be a critical time when Britain (finally) leaves the European Union.
On the 29th March next year, Britain will become a ‘third country’ putting its relationship with the EU on a par with Turkey subject to any refinements on single market entry or a ‘bespoke’ customs union granting limited rights for its financial services sector. Business confidence continues to focus on going concerns that without regulatory alignment with the EU, few benefits will be provided from Brexit. It lobbies for ‘frictionless’ trade, which effectively must keep it in line with single market rules for both goods and services.
Car manufacturers have constantly reminded government ministers of potential damage to supply lines by the imposition of trade barriers. They would assert that decades of foreign investment (FDI) in the UK car industry was made in good faith in the knowledge that Britain, with its flexible and liberalized economy, provided the best entry point for the more lucrative EU market. In fairness, other factors also played a part – not least that UK employment laws were less restrictive than in mainland Europe as a result of the Thatcher government’s reforms in the 1980s.
There is still a question whether Britain leaves next year without a deal. Although this looks unlikely, Michel Barnier’s team at the EU Commission prepares for this scenario – taking repeated threats from the hard Brexit camp at face value. Tracking progress for the shape of an eventual deal is not easy, but clues are already appearing. French President Macron’s visit to London on Thursday 18th January helped to re-invigorate the ‘Entent Cordiale’ which historically focused on European military defence cooperation. A renewed Calais Agreement to maintain a tight border on migration would also help to improve Franco-Anglo relations.
But on a post- Brexit trade agreement Macron stands firm in stating:
“If you want access to the single market – including financial services be – my guest. But you need to contribute to the budget and acknowledge European Jurisdiction. There will be no hypocrisy in this respect otherwise it would not work. It would destroy the single market.”
It is hard to see from this statement that the EU27 will weaken from this stance, or that France can be persuaded of a more pragmatic approach by other EU members.
However, this did not stop PM Theresa May from re-iterating her desire for a deep and special partnership with the EU: “I believe it should cover goods and services.” She went on to say “I think the city of London will continue to be a major global financial centre… That is an advantage not just for the UK, it’s actually good for Europe and good for the global financial system.”
In the coming months, understandably, Britain will seek to pick off different EU states to push forward its vision of future trade relations. It is unlikely this “divide-and-rule” strategy will ultimately succeed, and it may well delay the satisfactory outcome of negotiations within the agreed timeline. It is in the interest of both sides to hammer out a deal for the stability of the EU and UK economies.
May Meets Macron
The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.
Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.
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