Europe's Tech Startup Boom

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World-class science and math education in the former Soviet bloc has created a deep pool of technology talent that puts the equivalent of India in Europe's backyard. Western startups are now racing to hire Eastern European computer scientists, who make 20% to 50% less than Western Europeans and often are more highly motivated. It's now possible for Western European companies to expand their R&D capacity and better compete with other startups in the global market," says Edward Braginsky, a partner at TVM Capital in Boston.

Garlik's Ilube, for example, was stunned to discover that his Polish software engineers were working all night long to crack the coding needed for the company's first product. "There is a fascination with the technology and a hunger to prove their worth," says Ilube. "They don't want to miss a deadline. We can go very light on management because we know they will deliver." Other venture capitalists agree that Eastern European entrepreneurs are more driven and hungrier for success. "It's phenomenal. They work as hard as engineers did in Silicon Valley 30 years ago," says TVM's Braginsky.

Better Brain Trust than India

For tech startups, cheaper brainpower in Eastern Europe speeds time to market and turbocharges returns (see BusinessWeek.com, 5/30/07, "Where the VCs Are Flocking Now"). Venture-backed Dutch software startup Tridion set up a joint venture with a Ukrainian software house and outsourced a large chunk of its core R&D for three years to the Kiev-based operation. "We use Eastern Europe as a talent pool to lower the cost of R&D," says Ivan Farneti, partner at Doughty Hanson Technology Ventures in London. "You can support 22 software engineers in the East for the price of six in the U.K. It's a no-brainer."

Doughty Hanson netted 250% on its $6.7 million early-stage investment in Tridion when the company was sold last month for $93 million to SDL International. "The results of this kind of outsourcing in Eastern Europe are phenomenally good compared to India, where they are more random," adds Farneti.

Eastern Europe's brain trust may outshine India's and China's when it comes to the creative talent for developing new products, some venture capitalists say. Eastern Europeans excel at building systems from scratch, and they rank tops in the programming contests hosted by the likes of Google (GOOG) and Microsoft (MSFT) to cull the world's best software talent. "Russians and East Europeans tend to be more creative and less disciplined," says Esther Dyson, an investor in several Russian software houses. "If you want a problem solved, go to Central and Eastern Europe. If you know the solution and want to farm out the work, go to India."

Gail Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau.