WHERE ROMANIA TALKS BUSINESS LOCAL ENTREPRENEURS LOOKING TO STRIKE BIG IN DEEP TECH MARKET

Local entrepreneurs looking

to strike big in deep tech market

Companies in Romania attracted over USD 1 billion worth of deep tech investments by 2019, in a growing field that encompasses a wide array of startups using artificial intelligence (AI), blockchain or robotics solutions.

By Ovidiu Posirca

Romania was ranked 11th in Europe by the amount of capital invested in deep tech companies E ntrepreneurs developing deep tech startups are facing roughly the same set of challenges related to attractment fund targeting startups. “Although the talent is here, the challenge is that 3F (Friends, Family & Fools) early financing opto 2015, according to data from the State of European Tech report. The European market is dominated by AI companies, which got ing funding and talent as other players in the tions are not that accessible in this area due to close to USD 5 billion worth of investments startup ecosystem. But companies in this field the lack of financial power and therefore it is a last year. need to put research & development (R&D) challenge for founders to support themselves Romania was ranked 11th in Europe by operations in place from the early stages, through the R&D process until an MVP (minithe amount of capital invested in deep tech which makes them more capital intensive. mum viable product - e.n.) is ready. There is companies. In 2019, the investment volume

Developing your first prototype in blockalso scarcity in terms of capital on the market reached USD 762 million, mainly due to the chain, the technology behind Bitcoin, might and an R&D project means bigger technical USD 570 million funding round secured by cost you USD 200,000, while for biotech the risks while investors want to see something UiPath, the robotic process automation (RPA) cost could reach USD 1.3 million, according functional,” Bogdan told BR. startup founded by Daniel Dines and Marius to joint research by Boston Consulting Group Tirca. Between 2014 and 2018, investments in and Hello Tomorrow. ROMANIA’S GROWING PROFILE IN THE Romanian deep tech firms stood at USD 456

Less than 20 percent of newly created DEEP TECH INDUSTRY million, according to the State of European startups in Romania and Central and Eastern Across Europe, investments in deep tech Tech report. The potential of deep tech startEurope are doing deep tech, says Alexandru companies reached a record USD 8.4 billion ups is best proven by UiPath, says Cristian Bogdan, CEO of Roca X, a domestic investin 2019, soaring almost threefold compared Munteanu, managing partner of Early Game

Ventures. “Such companies start as R&D laboratories and move into an actual business once their new technology shows early signs of validation. The smart investor knows this and structures the deal in such a way as to allow founders the time and the resources to prove their vision and their tech,” Munteanu told BR.

BRINGING A NEW TECHNOLOGY INTO THE COMMERCIAL MARKET Developing a new technology in biotech might take around 4 years, with half the time dedicated to building the first prototype, while for blockchain it might take 1.4 years to the first prototype and 1 year to reach the market, according to an analysis of startups in the Hello Tomorrow Challenge.

Analysts at Boston Consulting Group (BCG) suggest that public-private financing schemes are becoming increasingly important in financing deep tech ventures since the conventional funding route might not work.

“Many companies are seeking funding in the early research phase, long before they can put a product or even prototype in the hands of potential customers, meaning that investors have few if any KPIs (key performance indicators – e.n.) with which they can evaluate traction and market potential,” wrote BCG consultants in a report. And then there is

the challenge of properly understanding the potential of an emerging technology on the side of investment funds.

Structuring a funding deal for a deep tech startup could require more control for investors, clearer milestones and KPIs, and potentially releasing the money in tranches as the product comes together and becomes functional, argues the CEO of Roca X.

“Mixed R&D grants and private investment could also represent options to further incentivise this segment which, because of the novelty of the technology, most often has to educate the market in how to use and benefit from it,” says the CEO. Both Roca X and Early

Game Ventures led a EUR 330,000 investment in Romanian deep tech startup Humans, which is working on a new technology designed to generate synthetic (AI-created) media.

“The biggest investment up to this first round of funding consisted of the work of the company’s founders, especially given that the R&D started before the business idea, with the technical co-founders of Humans working out of passion. Only later did the commercial applications of the innovation take shape and Humans was set-up. The initial financing came from the founders’ own funds,” Sabin Dima, the CEO of Humans, told BR. The technology developed by the Romanian startup could be used primarily in the entertainment sector. Dima says that for instance, this will allow

your favourite actor to read an audiobook or your favourite celebrity to teach online classes. “It could also bring a drastic change to the advertising industry: the same commercial can have different characters, as they can appear in the ad without being physically present. Plus, the audio-video postproduction can be personalised in any language,” says the entrepreneur. Dima is confident that UiPath’s achievement of unicorn status (a startup valued at more than USD 1 billion) shows that the market potential for deep tech startups is impressive.

“Programmers should have the courage to found or work with startups, where they can create technology instead of just being enablers for existing technologies. At the same time, the link between academic society and startups should be tighter, to take innovation out of the lab and bring it to the market, just like Humans intends to do,” concludes Dima.

Other emerging Romanian startups with deep tech components include TypingDNA, a behavioural biometrics company, and CyberSwarm, a deep tech company developing a neuromorphic System-on-a-Chip for cybersecurity. CyberSwarm has ongoing partnerships with academia on the development of micro-technologies.

Key factors of the COVID-19 pandemic’s uneven impact

on countries and businesses

The first official statistics coming from Europe, the US, and China have suggested a huge toll on economic activity in the first quarter of 2020, with GDP falling in most countries due to significant lockdown measures causing disruptions and unemployment surging to very high levels. Even if many experts believe that the worst is still to come, the impact of the coronavirus crisis has been uneven across the globe and among different economic sectors.

By Sorin Melenciuc

Romania has lower reliance on foreign tourists as its poor infrastructure and low reputation attract a limited number of travellers from abroad

In the European Union, seasonally adjusted GDP decreased by 3.3 percent during the first quarter of 2020 compared to the previous quarter, according to a flash estimate published by Eurostat. These were the sharpest declines seen since 1995. In March 2020, the final month of the covered period, COVID-19 containment measures began to be widely introduced by EU Member States. Compared to the same quarter of the previous year, seasonally adjusted GDP decreased by 2.6 percent in the EU in Q1 2020, after a 1.3 percent growth rate in the previous quarter. This was the sharpest decline since the third quarter of 2009.

LARGE DIFFERENCES BETWEEN COUNTRIES However, the scale of disruption in economic activity has been quite different from one country to another and was based not just on containment measures, but also on the structure of different economies. In the EU, the most severely hit economies in Q1 2020 were France (with a GDP decline of 5.4 percent year-on-year and 5.8 percent quarter-onquarter), Italy (-4.8 percent y/y, -4.7 percent q/q), Slovakia (4.1 percent y/y, 5.4 percent q/q), Spain (-4.1 percent y/y, -5.2 percent q/q), and Portugal (-2.4 percent y/y, -3.9 percent q/q). In France, the GDP fall in Q1 was the most severe since 1968, and this sharp decline was largely due to lower spending and investment. But experts expect a much larger drop in the second quarter. “However, the health crisis we are going through had only limited effects on activity in the first quarter. With six weeks of containment in the second quarter versus just two in the first quarter, GDP is expected to bottom out in the second quarter of 2020,” Crédit Agricole analysts wrote in a research note.

But there is also another key factor, also seen in other southern European countries: a large share of tourism-related businesses in the economy, which were shut down during the lockdown periods imposed by the authorities.

In Slovakia, it was the country’s reliance on the car manufacturing sector that caused the large drop in overall economic activity, as many car factories were closed down temporarily due to lower demand during the lockdowns.

At the opposite end of the scale, some EU member states managed to end the first quarter in a positive territory. Romania (with a growth rate of 0.3 percent q/q and 2.7 percent y/y) was followed by Bulgaria (0.3 percent q/q, 2.4 percent y/y) and Finland (0.1 percent q/q, 0.4 percent y/y), but some other eastern Euro

pean countries, like Hungary or Poland, also experienced a lower impact of the coronavirus crisis in Q1 2020.

ROMANIA’S RARE CASE OF GDP GROWTH In Romania, the GDP growth in Q1 2020 had two main drivers: public spending and construction. “Even for Q4 2019, but particularly for Q1 2020, one difficult item to estimate has been the impact of the huge budgetary spending, which started in December last year and continued into 2020. The 1.7 percent of GDP budget deficit in the first quarter of this year was the highest ever. Hence, we expect public consumption to have remained the main growth driver in Q1 2020,” ING Bank analysts said in a report.

The other major driver was the construction sector, which rose by 32.8 percent yearon-year in Q1 2020 – by far the largest increase in the EU. Activity in this sector was very volatile across EU member states and differences in growth rates are very important. In March, “the largest decreases in production in construction were observed in France (-41.2 percent), Italy (-35.4 percent) and Belgium (-23.2 percent). The highest increases were seen in Romania (+28.1 percent), Germany (+5.1 percent), Poland and Finland (both +1.5 percent),” Eurostat said.

Romania has another particularity in the EU: a lower reliance on foreign tourists as its poor infrastructure and low reputation attract a limited number of travellers from abroad – and tourism has only a limited contribution to the country’s economic output. In fact, more than three quarters of tourists in Romania are locals, and many Romanians usually spend their holidays abroad - and this could prove to be an asset this summer, when international tourism will certainly only partially recover, while domestic tourism is expected to be more resilient. In fact, Romania has restarted much of its tourist activities since June 1, while international tourism and flights are not expected to fully restart until July.

LIMITED RESOURCES However, the economic decline is expected to be very severe in Romania in the second quarter, as in many other countries, while the recovery could take longer. “We believe that the first quarter has marked a turning point in Romania’s trade balance dynamics. We expect imports to contract faster than exports in the coming months with a recovery that will first be visible in the export sector, as we expect the eurozone economy to start recovering before Romania’s,” ING analysts estimate. Experts point out that exports and imports have been contracting since March, wage advances have slowed down and could turn negative this year, retail sales are contracting as well, and industrial production has plunged. The main problem for Romania is its government’s limited resources to tackle the crisis. In fact, Romania’s crisis mitigation programme amounts to 3.2 percent of GDP, of which 2 percent of GDP are public guarantees – and this sum is relatively small compared to programmes announced in other countries. Direct support is just 1.2 percent of GDP because the government has conducted procyclical policy in the past and brought the public deficit to a high level – and this means that it could only add a small fiscal stimulus now. At the same time, the National Bank of Romania (BNR) started its first-ever quantitative easing (QE) programme in April, but its scale is limited due to worries about RON fragility, according to experts. However, there are some positive signs from Romania’s main trade partner.

“Encouragingly, our eurozone team’s analysis of Google COVID-19 Community Mobility Reports suggests we are starting to move away from the worst of the lockdown. The latest Google data suggests German activity has recovered to 84 percent of levels seen in January – which will be welcome for CE4 (Poland, Romania, Czech Republic and Hungary) supply chains,” ING analysts say.

PLAGUED BUSINESSES AND EMPLOYMENT Romania, as many other countries, has shut non-essential businesses starting from midMarch, but the scale of these sectors in the Eastern European country is smaller than those in countries attracting many tourists and with more wealthy residents. According to official data released by the Labour Ministry, close to 1 million employment contracts have been suspended since the beginning of the crisis, the equivalent of around 18 percent of the active workforce – in February 2020, there were 5.6 million active employees in Romania. “This is broadly in line with what the government has estimated as a maximum number, but what is slightly more worrying in our view is that despite more and more

companies resuming activity, the overall number hasn’t really dropped significantly,” ING analysts note.

However, terminated contracts have been steadier and more gradual, reaching close to 350,000 - basically doubling the number of unemployed people in the country. But the government hopes that the restart in operations which has been gradually taken place since May 15 – with beaches and open-air restaurants opening on June 1 – will lower the number of unemployed people in Romania. Some experts warn that such hopes could be reversed if a large number of businesses fail to regain their pre-crisis customers and go bankrupt – and no one really knows how many businesses will actually survive the current crisis.