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Central Europe's economic revival is entering a new phase. Since the fall of the Berlin Wall, low-cost manufacturing and outsourcing have been key drivers of the region's growth. But now, grassroots entrepreneurship is starting to flourish from the Baltic to the Balkans.
That's a key finding of the 2006 ranking of Europe's 500 Hot Growth Companies, a survey of small and midsize growth champions. Two years ago, when BusinessWeek first published the list -- compiled by Brussels nonprofit group Entrepreneurs for Growth -- it contained no companies from the old Communist bloc. In 2005, only one made the list. This year there are 46 -- from Latvian coffee shop chain Double Coffee to a Czech software developer to CVO Group, a recruiter in Hungary. "What's striking is how many of them are not in traditional manufacturing, but in clever, intellectual businesses," says Steve Hollis, the London-based head of European markets for consulting giant KPMG.
That's not to say that Western Europe has been shut out. Far from it. Germany, France, and Britain were home to 236 of the 500 companies on the list, which ranks enterprises based on their job-creating power over the past three years. And the three Western countries accounted for half the 148,700 jobs the 500 companies created from 2002 to 2005 (for a full list, go to www.businessweek.com/go/eurogrowth).
This year's list is dominated by small companies: Four-fifths have fewer than 1,000 employees. And they're bolstering Europe's economic strength. The 500 averaged an 18% increase in revenue and 16% in employment, compared with 1.6% overall economic growth in the 25 European Union countries last year. Businesses as diverse as Italian yacht maker Ferretti, Spanish nursing home operator Intercentros Ballesol, and Spreadshirt -- a German startup that sells customized T-shirts over the Internet -- all made the cut. And fully one-third are high-tech companies, everything from IT outsourcing firms to systems integration consultants.
Many of these dynamos are finding growth far beyond Europe's borders. Take Gameloft, a French developer of downloadable games for mobile phones that's No. 1 on this year's list. It has built a $58.5 million global business by making deals with cell-phone operators in more than 70 countries and has a half-dozen development studios on three continents cranking out games such as Derek Jeter Pro Baseball and Prince of Persia, an action adventure featuring warriors and princesses that has been a hit in Asia. "Everyone from the Congo to Siberia can play our games," says CEO Michel Guillemot.
The big change this year, though, is the surge from the East. Why now? For one thing, there's more capital to nourish small companies in the region. The EU's 2004 eastward expansion helped by giving entrepreneurs a psychological boost and increasing the confidence of outsiders. Foreign investment in the EU's eight new Central European members grew 20% last year, to $32.3 billion. And a recent study by the European Venture Capital Assn. found that Central and Eastern Europe were the preferred destinations for new investments by European venture funds -- ahead of Western Europe, Asia, and the U.S.
Venture money helped Budapest-based CVO Group get on its feet. Founded in 1996, CVO moved to the fast track in 2001 when it got $3 million from a group of funds including the London-based 3i Group. Since then, revenues have soared nearly sixfold, to $17 million, while the staff grew from 75 to 200, working in nine countries throughout the region. The early capital infusion helped "solidify our business and add depth," says the company's Scottish-born CEO, Norrie Sinclair. That positioned CVO to cash in on turbocharged hiring by rapidly expanding companies. "There's tremendous growth here, and we're a barometer," Sinclair says.
The push by multinationals into manufacturing and outsourcing in the region has created opportunities for suppliers. For instance Murdter Dvorak, a Czech machine-tool company that supplies the region's booming auto parts industry, saw its sales grow to $8 million last year from $306,000 in 2002. The good times are helping to build a middle class that is giving a boost to local retail and service companies. Slovenia's Engrotus, founded in 1990, has expanded from a single store to one of that country's biggest retailers and is now adding outlets across the Balkans. And Double Coffee, which started in Latvia in 2002, has 45 outlets and is adding locations across the Baltics and the Ukraine. "People are becoming more socialized and open," says Nick Ustinov, co-founder of DC Holdings, Double Coffee's parent. "Riga has become a modern European city." With ambitious young people such as Ustinov in charge, Central Europe's growth won't cool anytime soon.
By Carol Matlack, with Jason Bush in Moscow