How’s the Latvian science startup scene?

Latvian science startups have raised over 5 million euros of5 investment, and are looking to double this figure soon. Meanwhile, a new lineup of 10-15 select science technologies will be paired with entrepreneurial co-founders at Commercialization Reactor’s annual Ignition Event on November 4-5 in Riga.

How do stakeholders see the future of Latvian science startup scene? Let’s find out:

Startup: worthy value-added career paths

Anton Adamovitch, co-founder and CEO of biotech startup Conelum is enthusiastic about the future. He is one of the young entrepreneurs featured in Forbes 30 before 30 list and believes in making Latvia a great place for science-based startups. Anton believes that the most important factor is providing youth with worthwhile career paths in knowledge-based economy, so they would not necessarily have to look abroad for opportunities to make a difference:

“This topic is very sensitive and important for me. I had graduated science in 2012 at Glasgow and realised I do not want to do science itself, I want to be an entrepreneur building companies with scientific knowledge at its core. Commercialization Reactor, a science-based startup nursery with  features of both an accelerator and live-along mentoring program, lured me back to Riga to pursue this extraordinary career path. Since 2012 I am all-in developing a science startup as an entrepreneur. I see the future of Latvian science startup scene will be determined by the number of good opportunities for ambitious young people to work on commercialising impactful new technology, which entrepreneurs like me can find during the Ignition Event of Commercialization Reactor.”

Anton’s company solves the problem of lengthy pre-market product safety tests in the dairy industry, which currently take from 24h to 5 days, depending on the method. Conelum shortens this time to 30 minutes. They have already signed up several large EU dairy producers as potential clients and are now finalising EU certification process to start expanding the business.

Investor: 5-7 years horizon, global potential

Toby Moore, managing partner at Imprimatur Capital, the most active early-stage investor in Latvian science startups also  holds a degree in life sciences from University of Adelaide.

“We have always been interested in enterprise software, rather than consumer apps or B2C mobile. The B2B brands are much less visible in public compared to Angry Birds or Candy Crush, so those stories don’t usually make the headlines until a large tech firm buys them. But that is the software investment business we are in: finding and supporting teams with innovative enterprise products that add value and which customers are willing to pay for, rather than a B2C ad-based business model.”

Imprimatur Capital’s portfolio includes several Latvian science-based startups that match this description, including Conelum, Evoled, Koatum, MolPort, Maintenel Automation, Naco Technologies, NanoOptoMetrics and SonarWorks. Their last exit of Naco Technologies to Schaeffler Group made a positive return.

Toby acknowledges that Imprimatur differentiates science startups that fit their investment strategy:

“Drug development can take ten or fifteen years, so we don’t invest in that. But we do look at bio-analytics technologies, machine vision, robotics and other hardware startups. Ours is a typical ten-year VC fund and we look at five to seven years from initial investment to exit.”

In 2015 Imprimatur completed an M&A trade sale of Latvian Naco Technologies, an industrial nano-coatings startup, to Germany-based Schaeffler Group, a global leader in low friction coatings for the automotive sector. Toby comments on the deal:

“We seed-invested in Naco Technologies in 2011. The company had customers and revenue in Europe and the US. It was time to pass the growing business on to a world-class strategic investor who will continue to expand the high-tech R&D centre in Riga.”

Another interesting case is the Green Tech Incubator in Riga. Since 2014, University of Latvia and Riga Technical University are working together to promote science-based startups, in this case with a cleantech theme. Funding and international commercialisation support has been provided by the Norwegian government. In the past two years, more than 80 clean tech startups or projects have been supported by the Green Tech Incubator and many of them are led by MSc and PhD students at LU or RTU. Toby gives his perspective:

“Hopefully this experience will encourage more of them to consider founding or working in startups. During the past 3-4 years we have noticed that founders have become more articulate in pitching their startups, the quality of the product/market fit has improved and there is more pre-seed and angel funding available to enable more MVPs and business models to be launched, tested and improved. For us as a seed/startup investor that is a good trend.”

Community: strong networks, global recognition

Latvian Startup Association unites 56 members, including local science startups. It sees a strong science startup potential in Latvia.

“Koatum and Conelum recently won 1st and 2nd place at Life Science Baltics pitch competition. Snowision, Eventech and Nano RAY-T are signing first major deals. Latvian Startup Association sees its role in facilitating more startup exits across a range of industries, supporting each other from experience and growing local knowledge economy as well as creating proper legal and regulatory environment for founding and growing hi-tech business in Latvia,” said Jekaterina Novicka, Chairwoman of the Board of Latvian Startup Association.

Commercialization Reactor is active in the region since 2009. Besides the lively early-stage startups that we meet in pitch competitions, teams from first batches are approaching maturity, with first notable exit taking place in December 2015 with a positive return to all investors.

“The recent acquisition of Naco Technologies by the international leader in innovation, Schaeffler Group, proves that Commericalization Reactor (CR) model is working. Start-ups that are “born” in CR are able to survive, attract financing and successfully grow. Naco Technologies continues to develop its technology in Latvia for applications that are used worldwide by Schaeffler Group. That highlights Riga as a significant R&D player on global nano coating map. I truly believe that further success stories from CR will attract more innovative industries and players to our region,” said Alexander Parfinovich, Managing Director of Naco Technologies, Member of Latvian Startup Association.

Government: knowledge economy

Developing Latvian knowledge economy through startups is the responsibility of Ministry of Economics, which is primarily  executed by two bodies: Development finance institution ALTUM and Latvian Investment and Development Agency (LIAA).

ALTUM is the biggest investor in Imprimatur Capital seed fund, which has invested in both Life Science Baltics prize winners: Koatum and Conelum. This summer ALTUM has provided additional 1.5M funding to Imprimatur Capital and extended their startup investment period until June 30, 2017. Within event support programme, ALTUM also supports Commercialization Reactor, the birthplace of both winners.

Dace Berzina, the head of Financial intermediary division at ALTUM:

“Both governmental support mechanisms have proven successful in stimulating the creation and growth of Latvian startups. In the nearest future, Latvia plans to expand startup support by initiating its first startup acceleration funds that would focus on nurturing local startup success stories.”

LIAA is the government body responsible for a promotion of business development and facilitation of foreign investment and global competitiveness of Latvian  companies. Government agencies usually start to develop specific policies for particular industries when industry’s community becomes sufficiently organised and attracts attention in the media and society. The head of Innovation support at LIAA Technology department Sarmite Karlsone is positive about Latvian science startups:

“Science-based startups are pivotal to ensure that Latvia continues to develop as a knowledge-based economy, not merely a place with relatively cheap labour for traditional manufacturing. 2016 can be called the year of organization for the startup industry. The newly formed Latvian Startup Association has developed a bill for special taxation laws in startup industry, expected to take effect from Jan 1, 2017. LIAA and Ministry of Economics see it as the basis for developing new, dynamic companies that would change both employment market and economic structure.”

Additionally, several projects EU structural fund projects provide relevant support: Innovation Motivation program gives support to valuable startup events such as hackathons, workshops and annual scientific startup conference, starting from the last quarter of 2016. The Technology Transfer system improvement program provides support for technology certification, testing and prototyping, attracting highly qualified workers and other aspects of developing a science-based startup. The program is scheduled to commence in the first quarter of 2017.

Accelerator: key success factors – smart money and access to industry

Commercialization Reactor operates since 2009, has reviewed over 600 IPs, produced 80 startup teams to date, 25 of which became companies, and is open to review scientific technology from any country. Applications with the most commercialization potential are invited for further discussions with potential entrepreneurial co-founders.

The founder of Commercialization Reactor Nikolai Adamovitch has graduated with a degree in nuclear physics right before the collapse of Soviet Union. After developing and selling his own business, Nikolai created Commercialization Reactor to create and accelerate science startups with global potential in a range of industries.

“It is important to acknowledge that traditional science and IT startups need different support. The most important success factor for a science startup is close connection with industry. Surely, entrepreneurs can wing it, but it takes longer and costs more, while competition is breathing down your neck.”

The distinction between science and IT startups has been circulating in investor circles for a while now. Nikolai stresses that the truth is more subtle than this:

“The key distinctive feature that sets science startups apart from everything else is not their industry. It is a strong scientific base, usually in the form of patented intellectual property (IP). This creates a barrier to entry, balances the playing field and lets startups from smaller economies compete globally with teams from larger markets. For example, we have science startups that work in IT industry, but they all have advanced patented mathematical algorithms and teams of experienced university scientists behind them. This is what makes them science startups.”

Nikolai also acknowledges that only 2 of Commercialization Reactor companies (Conelum and Eventech) are working on intellectual property developed at Latvian universities. The remaining 23 technologies, including the recently exited Naco Technologies, are imported:

“Business models for science startups come from teams talking to industry and finding a real product-market fit. A small economy like ours cannot produce a continuous stream of globally competitive scientific ideas but it can import and develop them into science startups. Not because we are bad, just because even our biggest industry players are still considered SMEs on a global scale. But we can import the best IP from around the world, give them a warm welcome and a launchpad to take on the big markets. This is the only way I see for Latvia: we cannot compete with China in quantity of mass manufacturing, but we can compete with any country in quality of technology.”

Nikolai recognizes that smart money does not come easy, especially at the early stage. He stresses the importance of public support through programs like soft loans, public pre-seed and seed funds, the newly developed acceleration fund programme.

“We are on the right track here, Latvia continues to recognize the importance of science startups to the economy. The next step is to strengthen connections with smart money and develop a streamlined support process to help them work with industry players without moving companies abroad, I am convinced that Latvia will see more scientific R&D centres like Naco Technologies in the future.”