Where The VCs Are Flocking Now

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Diving into Russia, though, still carries plenty of risk, and for some the country remains strictly off-limits. With its rampant corruption, shifting legal environment, and competition from deep-pocketed locals, Russia can be a tough place for Western VCs. "One reason not to go to Russia is the amount of Russian money available," says Pekka Santeri Mäki, managing director of 3TS Capital Partners Ltd., which shuns Russia for Central Europe and is closing deals with two tech startups in Romania.

Indeed, Central Europe has no shortage of brilliant minds and promising technologies waiting to be set loose. New York VC Martin Jasinski visited 50 companies in Poland last year and was impressed with startup Medicalgorithmics, which recently received European approval to market a portable electrocardiogram monitor that sends data wirelessly to a patient's doctor. Medicalgorithmics is the first investment of New Europe Ventures, a $75 million fund aimed at Eastern Europe.

While there's plenty of tech talent in the region, its companies are often less endowed with management chops. So some investors are providing financial and marketing smarts. U.S. and European backers of LogMeIn, a maker of popular software for remote access to PCs, urged the company to move its marketing headquarters to Boston, which helped put sales on track to double this year, to $40 million. And Acronis, a Russian software house that makes disaster recovery programs, left its research-and-development team of 150 outside Moscow but moved its headquarters to Burlington, Mass., and hired an American CEO to pump up global sales.

One pleasant surprise for VCs is the red-hot Warsaw Stock Exchange. Last year, 38 companies raised a total of $1.9 billion in initial public offerings in Warsaw—second in Europe behind the London Stock Exchange. That helped fuel a 42% rise in Warsaw's benchmark index in 2006. Since January, 19 more companies have gone public in the Polish capital, helping to push the exchange up by an additional 18% so far this year. In October the bourse will launch a secondary market tailored to listings for technology startups as it seeks to extend its allure as a regional exchange.

The winners on the Warsaw bourse could soon be joined by a handful of Russian startups that are eyeing public offerings. One is Yandex, a 10-year-old Web search company based in Moscow that has a 50% market share in Russia, vs. Google's 15%. Yandex' revenues doubled last year, to $72 million, and a planned IPO could give the company a market capitalization of some $1 billion.

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