Innovation is often recognised as an important catalyst for economic and business growth. As Central and Eastern Europe (CEE) looks forward to the recovery stages of the COVID-19 pandemic, innovative solutions are imperative to respond to the unprecedented challenges the region (and globe) faces.
The pre-COVID issues hampering innovation have not faded and the high risks associated with financing an innovation ecosystem remain among the most pressing challenges which continue to impede its development.
Traditional business can be developed on the basis of historical performance, but innovation requires a leap of faith and uncertainty. Especially when created and developed by start-ups, financing innovation has all the characteristics of financial speculation. For entrepreneurs to flourish and scale-up, they need to create innovative services and products.
Famous entrepreneurs like Richard Brandson (Virgin), the late Ingvar Kamprad (Ikea), Niklas Zennstrom (Skype) and Hasso Plattner (SAP) have one thing in common: they took more than average risks in innovation, and ultimately built a fortune. And with that fortune they pushed up European economies, not only through their own enterprises, but by inspiring an army of other entrepreneurs who together helped governments realise economic growth.
The EU recognises the value of investing in innovation. The EU Commission promotes the commercialisation and uptake of innovation through the Horizon 2020 programme, its successor Horizon Europe and the European Structural and Investment Funds (ESIF). With a proposed budget of €100 billion, Horizon Europe will help bring innovative ideas to life. ESIF will dedicate around €110 billion to innovation activities, ICTs, and small and medium-sized enterprises (SME). Moreover from the beginning of 2021, the European Commission will launch and implement the Digital Europe programme, supporting the usage of digital technologies like supercomputing, artificial intelligence and cybersecurity.
The challenge for CEE governments is to create the circumstances in which entrepreneurs become top performers and serial entrepreneurs.
The challenge for CEE governments is to create the environment in which entrepreneurs become top performers and serial entrepreneurs.
Flourishing innovation ecosystems in the original EU15 countries are the result of many decades of careful planning and large public investments in technological developments. Other CEE governments cannot simply copy these processes, because they have been developed over time and need a large contribution from public investments. Instead, CEE governments need smart strategies to leapfrog into advanced innovation eco-systems with far lower investment costs than those of the EU15.
What are the key challenges that CEE governments face in building advanced innovation ecosystems? We outline the five most important obstacles and how the region can approach them.
- Finance for innovation is still not there
- There is no value in innovation without a “go-to-market-strategy”
- Start-ups who do not cooperate, are on a dead-end road
- Local investors lack investment experience
- Innovators are locked in to corporate jobs
Finance for innovation is still not there
A comprehensive European innovation financing system is in the making, but far from complete. The EU15 countries have developed financial instruments and innovation intermediary organisations to support the development of Small and Medium Sized Enterprises (SMEs) and innovative developments. Individually, the countries also have systems for bank loans, crowdfunding, intermediary organisations, and so on to support their nation’s innovation entrepreneurs.
But in CEE, few countries have the same financial instruments. Estonia, Czech Republic and Slovenia have begun to recognize the importance of building local innovation ecosystems and are the frontrunners for our region. But other countries need to follow their lead.
Bringing innovation to the top of the agenda will provide CEE economies strong indigeneous enterprises that create their own technologies. This needs bold decisions, as CEE governments have only just begun to understand the need for innovation throughout their economies.
There is no value in innovation without a “go-to-market-strategy”
Why do would-be entrepreneurs get a cold shoulder from investors when they brag about their inventions and innovative ideas? The answer is simple: Investors need to understand the added value of innovative ideas, which can only be proven in the market.
There is no value in innovation without a "go-to-market strategy.” If a business strategy is based upon a saturated market, investors will get even more annoyed. Therefore, a sound "go-to-market strategy” should be based upon a market which is attractive from a commercial perspective and addresses urgent societal needs.
Successful examples include the market for Copernicus data and services (think about the need for climate change data), the Blue Economy, precision farming and the sharing economy. These markets are developing thanks to new technologies, such as artificial intelligence, 5G and the Internet of Things.
Start-ups who do not cooperate, are on a dead-end road
In Europe, successful start-ups cooperate with existing businesses, instead of trying to replace or compete with them. For example, Deliveroo provides an added-benefit for restaurants and Opportunity Network cooperates with banks and corporations. A PwC study carried out for DG Grow of the European Commission highlights the strength of European enterprises: the intensity of external patent collaboration is inversely proportional to its distance to Frankfurt am Main. Start-ups established in Frankfurt have optimal access to knowledge, innovation intermediaries, innovation funding and corporates in order to achieve their ambitions.
For CEE countries, it will be harder for start-ups based in Vilnius, Sofia or Kosice than in Prague, Ljubljana and Bratislava, for example. The latter cities have greater access to funding, markets, clients, skills, and legal and administrative support. Creating a local innovation ecosystem will help those countries further away from Frankfurt become less dependent.
A strong national innovation ecosystem will enable start-ups and scale-ups to cooperate with corporates, cooperate with each other, access knowledge from local research institutions, access innovation intermediaries and access innovation funding.
Local investors lack investment experience
Investors throughout CEE appear to be more interested in competing with their peers instead of outperforming them. A “me too” strategy of investing in supermarkets, pharmacies and casinos is prevalent in the region, but investing in unique initiatives would have a wider impact. By taking the risk and exploring emerging opportunities, new business networks are created, crowdfunding flourishes and local investors learn from and cooperate with their international peers.
Innovators are locked in to corporate jobs
Young innovative talent in CEE tends to be drawn to corporations instead of start-ups. If this continues, governments in the region will struggle to stimulate innovative entrepreneurship.
An example from Tallinn University of Technology in Estonia shows the benefits of engaging these youth and fostering their innovative talents with a culture of entrepreneurship and innovation. Mektory, a knowledge transformation organisation for students at the University, encourages students to take initiative, whether it’s a start-up or a simple project. This instills a mindset that encourages them to pursue entrepreneurial roles as opposed to more traditional career paths. As a result, students created the proof-of-concept fund Prototron. In five years, Prototron has received 1300 applications, of which 35 start-ups received funds. This generated more than €3 million in revenue and raised another €10 million in venture capital.
Estonia’s model could be replicated in CEE to expand the entrepreneurial network and encourage innovation.
Innovation beyond COVID-19
Building on momentum: Innovation beyond COVID-19
COVID-19 has forced businesses across sectors and industries to find innovative solutions to unprecedented challenges. The uncertainty that accompanied the pandemic demonstrates the importance of exchanging innovative ideas, and advances the need to finance an innovation ecosystem in our region.
At the outbreak of the coronavirus pandemic, public institutions around the world were asking for advice from companies, entrepreneurs and other states on solutions to overcome the pandemic faster. Solutions to enhance communication with citizens and between state institutions, to improve healthcare systems and to develop digital transformation within companies and for public services. This brought innovation to the forefront.
COVID-19 has raised awareness of innovation, but the root roadblock to financing an innovation ecosystem is mindset. Building a network of entrepreneurs and support for innovative inventions depends on the mindset of both citizens and governments.
Governments can build on the current momentum and begin encouraging entrepreneurship in their countries. Introducing training or incentives as early as high school, for example, would help instill the mentality early on and demonstrate the viability of creating your own business. It will be key for governments to identify funding for the development of the education systems that corresponds to the dynamic environment.
By further supporting existing entrepreneurs, governments can develop a foundation for the future of those high schoolers. This can be done by incentivizing successful entrepreneurs to become serial entrepreneurs or investors, and by stimulating the network around them. The connectivity of these entrepreneurs is key to sustaining the innovation ecosystem. Connectivity refers not only to internal employee relations, but also international connectivity. This is essential to source technologies, to follow the latest trends, to avoid duplication and to enter international markets and value chains.
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