Business

Why are Large International Funds Focused on Croatian ICT Companies?

By 28 February 2023

February the 28th, 2023 - Not everything is as bleak as it might seem at first glance. Did you know that Croatian ICT companies are attracting more and more attention from large international funds?

As Marija Brnic/Poslovni Dnevnik writes, according to the analysis published in Delo, neighbouring Slovenia is quite considerably lagging behind others in development, especially in the ICT sector, while Croatia has achieved great results and Ljubljana could learn a lot from it.

Last year, venture capital investments in Slovenia amounted to ''just'' 160 million, the lowest of all EU member states. From 2012 to 2021, all of them except Slovenia experienced growth in venture capital investment, and in that period Estonia, Finland and Denmark experienced the greatest boom of all at the EU level. In terms of the value of the share of venture capital investment in GDP, Slovenia is in a very unimpressive last place, according to an analysis of the ICT sector conducted for the Ljubljana Technology Forum by Grant Thornton.

The importance of this form of investment is extremely important for encouraging the rapid development of companies that have an innovative and promising product or technology, and that have difficulty getting capital to pass that most uncertain phase. Among all the newer EU member states, Estonia has become the most interesting country for venture capital investments in technology projects, and it ranks first in the entire EU in terms of the share of these investments in its GDP.

Last year, there were 1.3 billion euros of venture capital investments in start-up companies based in Estonia, and a total of 3.1 billion euros in the last five years. In the Czech Republic, the value of these investments in the five-year period stood at an impressive 1.5 billion, and when it comes to Croatian ICT companies and those from Lithuania, investments came to more than one billion euros, the same amount as in nearby Greece.

The Slovenians single out the Estonian example as the most successful of all, because immediately after the fall of communism, that country reached for the simplification and digitisation of its often complex administrative procedures, as well as a much more simple tax system with one rate, and they were the first to open the door to digital nomads, who can request a digital identity card and access e-services, and they've already attracted more than 50 thousand of them.

Croatian ICT companies and this country's business ecosystem has been on the radar of international venture capital funds and other financial giants for some time now, even if the headlines might make one easily believe otherwisw. The latest case of Damir Sabol's incredible Photomath being taken over by Google is just one fantastic example of how much the Croatian venture capital market has grown in the past decade.

At the same time, the neighbouring Slovenians state that a considerable number of Croatian ICT companies moved their headquarters abroad after receiving money from venture capital funds, but many, such as Rimac Automobil and Infobip, have remained firmly in Croatia. Among the advantages in the development of the startup system here in Croatia, there is, for example, the exemption from paying capital gains tax when selling shares in a startup and tax relief for angel investors, and a positive effect is also expected from a fund of 50 million euros to support innovations and startups announced by the Croatian Government.

Another significant thorn in the side of Slovenia is the fact that the share of expenditure on research and development has fallen sharply from 2012 to 2021, from 2.6 to 2.1 percent, while across the rest of the EU it has increased from 2.1 to 2. 3 percent. Slovenia also lags behind in patenting and the share of high-tech industries in its GDP. Part of the blame for this lies with privatisation, because in most former socialist countries, private foreign companies entered into industrial companies and brought new energy with them.

On the other hand, the justification that high salary taxes are the reason for avoiding venture capital investments is refuted by statistics, because for example France and Belgium, which have very high wage taxation rates, are more attractive for venture capital investments than the new EU member states from across Central and Eastern Europe, with the exception of Estonia.

Slovenia, on the other hand, looks at the Estonian example as a confirmation that the country's potential for innovation and its commercialisation can definitely be developed, but with the condition that all governments adhere to that same approach and consistently implement digitalisation, and they see Croatia and Greece as countries that are successfully following the Estonian model.

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