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Fever Dreams

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Finance New Europe – by Michael Stein

FNE checks the temperature of the region's increasingly popular IT sector and finds out if it's as hot as it once was

With CEE being tagged the latest high-tech hotspot, a number of questions arise that might be worth asking: Just what are the qualifications for hotspot status? Where is the heat coming from? And how can the temperature be measured, if at all?

The first significant measurement has to be raw growth. Projected by IT market research specialist IDC to rise by a compound annual rate of 10% through 2009, the region's IT sector is expanding roughly twice as fast as its western European counterpart. By that time, IT spending in the region is expected to exceed USD 40.5 billion, nearly double the USD 20.4 billion in 2004. And the current focus on regional IT isn't the feverish heat felt during the internet boom of the late 1990s. Today's upsurge is more measured, and, according to many in the industry figures, founded on more solid ground.

Starting up and starting over

The burst of the internet bubble was a worldwide phenomenon, affecting IT firms across many sub-sectors. For CEE companies, though, as relative newcomers to market capitalism and with far fewer resources to fall back on, the setback was considerable. It wasn't only optimism and initiative that were required to start again, but a new approach altogether. Ondrej Bartos, CEO of the Tuesday Business Network and one of the founders of First Tuesday CZ back in 1999, recalled the situation, "In 2001 and 2002, when all the internet optimism busted and expectations were brought down, we had to think about how to change the concept so it would still bring people together, but on a more reasonable and logical basis."

Mr. Bartos considers the current Czech IT scene "active and dynamic." The dotcom-era optimism is there, but has been tempered by experience. "Most of today's startups don't begin with such unrealistic expectations and premises as at the end of 1990s," he explained, "Now, everybody knows that they fi rst have to prove that their concept works, before they look for funding from investors or [seek to be] acquired. On the other hand, what I miss a bit these days is more ambition in the projects, more expansion plans, a more international or global approach, so to speak."

Learning by the numbers

Besides economic strength, particularly among the newest EU members, another positive factor in how the region's IT sector is viewed is the longstanding emphasis on science and math in CEE educational systems. Reaching back to communist (or even earlier) attempts to surpass western technological achievements, this phenomenon hasn't generally been associated with profit-making ventures. Whatever its origins, though, a historical priority has become an asset of considerable importance, one which both governments and companies are increasingly making use of.

In a conversation with Romania's IT Viewpoint information service, the country's minister for communications and information technology, Zsolt Nagy, emphasized the importance of "public and private partnerships between educational institutions and the business community." According to Mr. Nagy, the benefits of these arrangements extend from the companies and investors involved to the research capabilities of the universities and the IT sector overall.

As one of the leading software engineering companies operating in the region, EPAM likewise has a strong interest in supporting an ongoing source of potential employees. The company's CEO, Arkadiy Dobkin, is himself a graduate of the Belarusian National Technical University, so he knows a thing or two about this resource. "We invest a lot in employee development in CEE locations through internal and external corporate training programs, close cooperation with leading IT universities in the cities where EPAM has development centers and sponsorship of IT competitions," he explained.

Similar partnerships abound throughout the region. Another example is the case of Grisoft, the Czech antivirus software provider. Grisoft has a long-term agreement in place with the Technical University in its native Brno to engage in research on information technology security. It also sponsors a student contest in that subject and in cryptology.

With the rise in IT salaries throughout the region and the draw of higher paying employment abroad these partnerships serve another purpose as well - recruitment. Multinational and local companies are scouring the market for IT specialists, thus it has become necessary to identify and attract talent as early as possible.

According to Ondrej Cihar, marketing manager of Czech software company Et netera, "The lack of good, skilled, experienced people who aren't overpaid is really a problem in the Czech Republic," he said. "This is one of the reasons we have focused on students of Czech technical universities this year and participated in a series of events - job fairs, where students and companies meet in one place."

Local success stories

Founded in 1997 by two graduates of the Czech Technical University, Et netera has grown into a prime example of another side of the region's IT success. Vaclav Bittner, technological and project director, and Martin Holecko, chief executive of business development, "thought of starting a company to make websites at a time when there were only three or four companies doing it," explained Mr. Cihar. "For [the founders] it was a part-time job, started in their parents' living rooms."

Today the company has 55 employees and it posted CZK 64.1 billion in revenues in 2005. Specializing in content management, document management and other facets of enterprise content management, it has consistently been ranked as one of the fastest growing companies in the region.

Some of the fire in the CEE IT sector is a product of the region itself. Not only because of the beauty it's famed for and rising standard of living it's currently enjoying, but also its strategic location, which has been a crucial draw for companies and investors. Multinationals are moving into the region and expanding at a rapid pace.

Exstream Software CEE, the main European office of the US based firm, opened in Prague in early 2003. "One of the most important reasons to choose Prague was to use its excellent location," explained managing director Jiri Krejci, "allowing us to immediately help potential customers in the new EU countries adapt to ever increasing document quality levels standard in Western Europe."

Like the more successful firms native to the region, Exstream has been on fi re of late. In 2004, the firm showed year-on-year growth of 188%.

The company's objective for its CEE offi ce is to promote Exstream's enterprise personalization technology - Dialogue - both in the new EU members and nearby markets such as Italy, Greece and the Balkans. In addition, Mr. Krejci added that the firm will "build a strong foundation for expansion in Turkey, Russia and the Middle East". Boasting clients such as ING (in the Czech Republic, Hungary and Poland), T-Mobile Hungary, Orange Romania and Croatian Telecom, Exstream's regional presence became even stronger in January 2006 with the opening of a service center in Prague to assist with international distribution.

Show me the money

The bottom line for any business sector, hotspot or not, is whether it brings in sustainable investment. In 2004, EUR 547 million was invested in the region, only a fraction of the more than USD 10 billion invested in its western neighbors.

Nevertheless, it represents an increase of 22% from the previous year, according to the European Private Equity & Venture Capital Association.

But the figures don't tell the whole story, particularly when a significant portion of investment is geared towards later-stage companies. "Pure startups don't have many options to raise capital," said Mr. Bartos from Tuesday Business Network. Some of the problem lies with the entrepreneurs themselves, who he described as often being too reluctant to give up any control of their company. There has been progress, though, as Mr. Bartos attested to. "On the positive side there have been some early stage transactions in 2005 and 2006 which show that the market is getting more active, from both the entrepreneurs' and investors' sides."