Back in 2021, Hajdi Cenan had a realisation. As part of a European Commission initiative bringing together representatives from start-up ecosystems across the EU, she was invited to present the Croatian start-up scene. But something was missing.

“That was the moment where we realised that Croatia was the only EU country without a national start-up association,” says Ms Cenan, who is the co-founder of ‘airt’, an AI start-up; member of the Croatian AI Association; and president of ‘Cro Startup’, the country’s first national association exclusively for start-ups. 

Despite communication and a supportive culture within the relatively small tech community in the Adriatic country of four million people, Ms Cenan says there was a lack of coordination and joint initiatives to improve conditions for start-ups.

In March 2022, a group of Croatian entrepreneurs and investors founded Cro Startup. It aims to reduce regulatory barriers to investing in start-ups and create a more attractive ecosystem for foreign entrepreneurs and talent.

“We are working to make the environment more hospitable,” explains Božidar Pavlović, a board member at Cro Startup, who is currently raising a growth-stage venture capital (VC) fund to invest in start-ups in Croatia and the surrounding region.

As Croatian entrepreneurs and investors come together to make their country more start-up-friendly, they hope to attract more late-stage capital and stem the flow of talent and companies moving to larger tech hubs, such as London.

Ecosystem switch

While Croatia is a well-known destination for travellers, with tourism accounting for 16.8% of its gross domestic product (GDP) in 2019, its start-up scene has historically got far less international attention. But that began to change with Infobip, a global communications platform start-up founded in 2006, in the Croatian town of Vodnjan. 

In July 2020, Infobip became the country’s first ‘unicorn’ — or private company valued at above $1bn — after raising more than $200m from One Equity Partners, a New York-based private equity firm.

For Ms Cenan, who notes the start-up scene was very fragmented at the time, Infobip’s crowning as the country’s first unicorn brought about a sudden “switch” in the country. “We were able to really show that there is an industry in Croatia that has been successful not because of the ecosystem, but because of the perseverance of founders,” she says.

Fast-forward to today, Croatia has more than 500 start-ups, according to the second-quarter 2022 Startup Report published by local newspaper Jutarnji list. The vast majority are located in the capital Zagreb, but there are increasingly start-ups being founded in other smaller cities including Split, Šibenik and Rijeka. 

Relocating problem

While Infobip continues to have a significant presence in Croatia, it has its corporate headquarters in London. Photomath, a prominent AI start-up founded in Zagreb, moved its headquarters to Silicon Valley, US.

This reflects an issue facing many start-up ecosystems in smaller countries: promising companies relocate to established hubs in search of capital, expertise and clients.

Vedran Blagus, a principal at South Central Ventures, an early stage VC fund focused on the Western Balkans, says he encourages Croatian start-ups to move to countries like the UK and US to help their growth.

“Croatia is still unknown on the map for Western investors,” he says, noting the difficulty that Croatian entrepreneurs face in raising later stage capital. 

Mr Pavlović agrees, saying that Croatia and the Western Balkans are “chronically underfunded”, adding that there are many promising tech start-ups with product-market fit that are looking for funding in the region.

Boosting funding

While financing remains an issue for many Croatian start-ups, big-name investors have been recently active in the Adriatic country. In June 2022, Croatian electric supercar maker Rimac Group raised €500m at a valuation of $2bn in a funding round that included SoftBank, Porsche and Goldman Sachs.

The fact that Rimac Group is a majority shareholder in Bugatti Rimac, a joint venture with Italian supercar brand Bugatti, has helped boost Croatia’s image among global investors, says Julien Coustaury of Fil Rouge Capital, a Zagreb-based VC fund and accelerator.

But Mr Coustaury says it is still “extremely hard to get an institutional investor” to invest in VC funds in the region, adding that local pension funds make up the majority of limited partners in VC funds.

Cro Startup wants to help boost funding for local start-ups by bringing in tax relief for angel investors. Ms Cenan says that there is “a critical mass of people who have resources that they could invest in start-ups”, but there remains risk aversion and a lack of understanding. This is played out in the numbers.

Between 2017 and 2021, cumulative capital invested in technology in Croatia stood at just $64 per capita, according to Atomico’s 2021 State of European Tech report. This is notably lower than the European average of $269 per capita.

Talent attraction

Another challenge facing Croatia, like all start-up ecosystems across the globe, is the attraction and retention of talent. Despite very strong technical talent coming from Croatia’s universities, Mr Coustaury says “it suffers from brain drain”, particularly as Croatians can move freely and work in other EU countries. 

But others stress that the Adriatic country’s relatively low-cost but good quality of life is working in its favour. Mr Pavlović says that a digital nomad visa, which was brought in by the Croatian government in January 2021, has helped attract foreign software developers to the country. 

Another reason for entrepreneurs moving is the high contribution tax on salaries, which acts as a constraint on growth of early stage start-ups. Mr Blagus says about 40% to 45% of gross salaries goes to taxes, which is very difficult to finance for start-ups.

Ms Cenan says Cro Startup plans to lobby the government to allow start-ups employee stock options, which will help to retain and attract more talent. 

“Croatia is a nice place to live and a great place to have a business,” she says. “We just have to make it a better environment for entrepreneurs and start-ups.”

This article first appeared in the June/July 2022 edition of fDi Intelligence.