BUILDING VALUE IN ROMANIA

Can Romania be a future hub for innovation? There are reasons to say both yes and no, as Romania is a country with a high potential to bring innovation to world markets, but is held back by a somewhat antiquated system, leaving the country between past and future.

Let’s look at a few factors to give a wider picture of the economic potential.

The country’s GDP is at an all-time high and it is growing at little under 7% per year [1], making it one of the faster growing countries in Europe. After the collapse of the Communist Bloc in 1989, the country opened up to international markets and investors, and underwent major privatisations, which were criticised as they resulted in exploitation of resources and for being detrimental to Romanian people. Romania entered the European Union in 2007, which led to further reforms.

Romania has been attractive for foreign investors for many years, thanks to its lower prices, skilled workforce and ease of doing business compared to other countries with comparable prices. Corruption is a notorious problem that has been hard to eradicate for many years, and that hinders many structural investments. Despite this, Romania has a relatively high quality of life, low unemployment and has one of the fastest internet connections in the EU.

The reason why all this is important, is to understand the shift that is taking place, and that we can expect in the future, when analysing the country’s innovation potential. The Romanian economy for the past few years, since entering the European Union, has lent much of its workforce to foreign subsidiaries, helping to bring innovations to other countries. Its relative recent history as a free economy means that there is little knowledge in the commercialisation of services and products, while the knowledge has been vastly skewed towards the creation of products.

Romanian students rank very high in mathematics. A European Union research facility will be built near Bucharest: ELI-NP (Extreme Light Infrastructure Nuclear-Physics) is going to be the most advanced research facility in the world focusing on the study of photonuclear physics, which is set to have applications for a variety of sectors. This can turn the country into a centre for scientific and technical innovation.

Romania’s future may now be in the hands of the private sector. The country has accelerated the development of its own startup ecosystem in the past 3-4 years, which helps capitalise on the local technical and scientific skills, and commercialise Romanian companies internationally.

Romania is counting its first successes in terms startup funding, valuations and exits.

Risk finance is available for the best projects, but it is still mostly unavailable for the majority of new companies. The Romanian Stock Exchange has even launched the AeRo market in 2014, allowing smaller companies to raise public funds, but few startups use or consider this option.

Startup funding is on the rise and has spiked at the start of 2017, and recent fundraisings indicate even higher values for 2018, but despite the hype around these statistics, funding has peaked in some quarters because it was concentrated around a few gems who had large fundraising rounds. However, innovation and entrepreneurship is fed by success stories, and now that successes are starting to add up, it is clear that they are not exceptions, but instead we are beginning to see a shift in the country’s entrepreneurial activity, mainly in terms of quality of companies.

We can then celebrate Romania’s first unicorn, as UiPath, a company developing robotic process automation software, has just raised $265m in its latest series C round. The company was born in Romania, and later moved its headquarters to the United States, but it is still considered a Romanian company, where it operated at a small scale for seven years before being exposed to international VC capital and beginning its hyper-growth story. This story alone illustrates how exposure to smart money is necessary for companies to realise their full potential. Just like UiPath, there could be many other companies with very valid products filling market gaps, which may fail because the founders lack the knowledge to commercialise them, or they lack the role models and successes of homegrown companies, which leads them to push harder and bring products to market faster.

Concentrating in few key relevant sectors may be the key to have fast access to knowledge, resources and mentors when building a new company. Not to mention the 105,000 developers living in the country. [2] Some mention lack of trust and transparency in the business culture, little support of government and higher education institution as barriers to a working entrepreneurship system. [3]

Changing this could turn Romania from an outsourcing country into an innovation hub. It is also becoming common for startups born here to seek capital elsewhere, move its headquarters where capital is found, and keep their technical employees here, where there is access to a skilled and low-cost workforce. It also perceived as an advantage, when selling to international and global clients, to approach them from sales offices in Western Europe or the US to increase trust.

Startups and SMEs are equally important for innovation; it is also important how they work together and whether the market is acquisitive. Looking at the total number of exits found (may not be exhaustive) of companies headquartered in Romania, the acquisition market is clearly becoming more active. [4]

BUILDING VALUE IN ROMANIA Valithea Advisory

The sectors involved are still quite fragmented, but there is a clear concentration in local chemical and manufacturing companies, health care clinics mostly by a handful of highly acquisitive buyers, retail companies mostly bought by foreign groups, and digital companies such as digital magazines, payment companies and enterprise software.

BUILDING VALUE IN ROMANIA Valithea Advisory

Over a quarter of companies were acquired by Private Equity Firms, while the rest were purchased by strategic buyers. As for PE firms, many of these were Polish or UK firms, while many strategic buyers came from the US, West European countries or South Africa. Indeed, Naspers, an international media group from South Africa, was responsible for one of the largest acquisitions, buying 70% of the e-commerce group eMag for $ 83 million.

BUILDING VALUE IN ROMANIA Valithea Advisory

Instead, it is difficult to extract meaningful data from valuation trends, except for pointing out that most acquisitions are under $ 10 million, apart for few acquisitions of retail (Profi Rom Food), eMag, and TotalSoft (IT services). EV/Revenue values are mostly just under 1x, revealing low valuations also in cases of healthy profits.

BUILDING VALUE IN ROMANIA Valithea Advisory

As for funding, valuations also do not show a linear trend, and we have few data points of companies headquartered in Romania with valuation data available. Startup funding rounds tend to stay under $ 1 million, and valuations just over $ 5 million for a few years after market entry, except a few gems (e.g. Bitdefender, valued at $600 million at 17 years of operations). Funding rounds, however, are between 12.5% and 15% in most cases, at least for early-stages, and seem therefore in line with international standards (16 data points found overall).

BUILDING VALUE IN ROMANIA Valithea Advisory

This of course, does not take into account all the transactions with missing financial data, or the companies that have relocated to capital-rich cities, but it confirms a few points that characterises Romanian companies and where value should be built in the private sector:

  • Additional expertise needed for the international commercialisation of products
  • Products should be brought to market faster to compete effectively
  • More capital should be available to the companies that have measurable traction and scalability potential
  • A focus on specific sectors on which accelerators, investors, mentors, educational institutions, startups and SMEs can collaborate and become global market leaders
  • An early internationalisation that allows the companies to be considered among key players by international investors

 

Average data in recent transactions in Romania:

EV/Revenue (Exits) 0.8x

Early-stage Funding round stake 14%

 

 

[1] World Bank

[2] Atomico, The State of European Tech 2017

[3] Romanian Startup Scene: The Missing Factors That Could Fuel Its Growth, Medium

[4] Crunchbase (all graphs data)