BR ANALYSIS. Smaller Romanian cities getting on the startup investment radar

Ovidiu Posirca 13/05/2019 | 15:06

Bucharest remains the most active entrepreneurial city, with regional hubs such as Cluj-Napoca, Iasi and Timisoara also home to a burgeoning startup scene. However, startup investors say that smaller cities can become attractive for would-be entrepreneurs, and having the right infrastructure and a large enough workforce in place might be a good starting point.

By Ovidiu Posirca

Entrepreneurs can spring up from any corner of the country, but starting a company in a city that has a technical university and good transport links, especially airports, could give small businesses a growth impetus, say commentators.

“Bucharest is the most active entrepreneurial city with about 20 percent of all Romanian entrepreneurial companies, but there are other cities where young people are opening new businesses – Cluj (6.1 percent), Timis (4.3 percent), Constanta (4 percent) and Ilfov (3,9 percent). In total, the top five counties accounted for 200,000 of all entrepreneurial companies, i.e. 39 percent of all active firms. Smaller cities can compete only through quality of life expressed in education, health system, proximity to large cities or infrastructure,” representatives of Instant Factoring, the Romanian online factoring fintech, told BR.

Leading startups can start from provincial towns

In Romania, large metropolitan areas are still the most attractive, “but this does not mean that small entrepreneurs cannot operate outside these areas,” adds Dinu Bumbacea, consulting partner-in-charge at Deloitte Romania, the professional services firms.

Bucharest had a GDP per inhabitant of EUR 22,400 in 2017, more than double the national average, and well above the European Union average. According to Romania’s economic forecast body (CNSP), eight out of 41 counties (excluding Bucharest) exceeded the EUR 10,000 threshold last year: Timis (EUR 12,897), Constanta (EUR 12,699), Cluj (EUR 11,937), Brasov (EUR 11,164), Ilfov (EUR 10,797), Alba (EUR 10,629), Sibiu (EUR 10,552), and Prahova (EUR 10,009).

Already, some startups that have secured funding have emerged from secondary cities. Smart Bill, the largest player in the online invoicing market, was founded in Sibiu, while SmartDreamers, the early stage HRTech business, was created in Targu Mures. Both startups are backed by venture capital and private equity fund 3TS Capital.

“Obviously, not any town can transform into an entrepreneurial or startup hub; some of the prerequisites are size, infrastructure and the education ecosystem. What we have noticed is that in particular those cities and towns with vibrant university centers and well connected airports have a clear tendency to grow much faster as entrepreneurial hubs. So it seems like the simple recipe for success at this: municipalities and local authorities have to consider supporting the development of universities, particularly in the technology fields, and also supporting infrastructural development, particularly airports,” Marius Ghenea, partner at 3TS Capital, told BR. He says that Cluj-Napoca has proved this can be done, while Iasi has also become connected to cities in Western Europe since the launch of its new airport terminals.

Ghenea adds that the important question is whether a distributed hub development is better than large, central hubs, like we see in the UK (London), Germany (Berlin) or France (Paris), or a concentration in just a few cities of most of the startup activity as in the US (San Francisco and the Valley, New York and maybe a couple of other cities).

One of the private equity funds looking to invest outside Bucharest is Morphosis Capital. Andrei Gemeneanu, managing partner of the fund, says that cities and regions outside the Romanian capital have valuable companies “with the potential to become national or even international champions”.

“Although the situation differs from one sector to another, one of the strategic advantages of Romania at international level is the relatively low cost of labor. This is especially visible in smaller cities and I hope that in the next few years we will see accelerated development, especially in the manufacturing sector,” Gemeneanu told BR.

Some of the cities with emerging entrepreneurial scenes are Oradea, Brasov, Ploiesti and Craiova, according to Instant Factoring, based on the funding requests received from small companies, alongside the larger cities.

Tertiary cities becoming interesting

While Bucharest and secondary cities such as Cluj-Napoca and Iasi already have several accelerators and large co-working facilities that cater to the entrepreneurial community, there is potential for development in smaller cities as well.

“Already cities like Bucharest and Cluj offer a lot of things for entrepreneurs, but they have also become quite competitive in terms of human capital and additionally, the cost of living is highest in these two cities, with Cluj having maybe a slight edge as quality of life overall is said to be statistically better there than in Bucharest, based on most of the recent annual international surveys on the quality of life in various EU cities. So I believe we should already be looking at ‘tertiary’ cities or towns, still in the 100-200k range population, but less crowded and with a relatively low cost of living and stress factors, such as Sibiu, Oradea or Targu Mures,” says Ghenea of 3TS Capital.

For Gemeneanu of Morphosis Capital, Iasi is a “hidden diamond” which is attracting a growing number of investors, while Timisoara and Cluj already have communities of young software developers and IT engineers with higher purchasing power. He says that there is room for development in northern Moldova, where a skilled workforce is still available at an accessible cost.

“Let’s not forget that there are 4 million Romanians living abroad whose purchasing power is higher than the ‘richest’ 4 million Romanians inside the country,” says Gemeneanu.

Meanwhile, local authorities could also make the smaller cities more attractive to would-be entrepreneurs. Providing free co-working spaces and easing access to funding are some of the steps that public authorities can take to boost the entrepreneurial culture, say representatives of Instant Factoring.

“Only by supporting the development of small businesses can a region hope to have a more developed economic environment and job opportunities, attracting talent and keeping people in their communities,” say the fintech representatives.

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