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How policy-makers can support the startup ecosystem in Western Balkans

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How policy-makers can support
the startup ecosystem
Policy recommendations for the Western Balkans

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Policy recommendations for the Western Balkans
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Policy recommendations for the Western Balkans
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How policy-makers can support the startup ecosystem Policy...

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How policy-makers can support the startup ecosystem in Western Balkans

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This document represents a collaborative effort of practitioners of the startup
ecosystem in economies of Western Balkans (W6) in Albania, Bosnia and Herzegovina,
Kosovo, Montenegro, North Macedonia, and Serbia. The aim of the document is to
summarize the most urgent needs for action to policy-makers in the region.
The resulting policy recommendations are based on the aggregation of inputs and
comments from more than 20 interviews with regional startup founders at different
stages of development, local and international investors with strong knowledge of the
region’s specifics, managers of local innovation and technology hubs, representatives of
incubators, accelerators, lawyers, and accountants specialized in work with startups,
innovation and intellectual property.
These policy recommendations were elaborated in a panel discussion at Western
Balkans Digital Summit Belgrade in April 2019. Representatives of Digital Initiative
Serbia, Innovation Center Kosovo, South Central Ventures, Spark Mostar, and Startup
Europe exchanged thoughts and ideas about the most important action points for
enhancing startup entrepreneurship in the region.
This document follows the structure of the six interconnected and interdependent
pillars of startup ecosystems: policy, finance, market, business support, human capital,
and culture. The focus of the document is on policy as the fundamental pillar, and its
interaction and influence on other elements of the ecosystem.

This document represents a collaborative effort of practitioners of the startup
ecosystem in economies of Western Balkans (W6) in Albania, Bosnia and Herzegovina,
Kosovo, Montenegro, North Macedonia, and Serbia. The aim of the document is to
summarize the most urgent needs for action to policy-makers in the region.
The resulting policy recommendations are based on the aggregation of inputs and
comments from more than 20 interviews with regional startup founders at different
stages of development, local and international investors with strong knowledge of the
region’s specifics, managers of local innovation and technology hubs, representatives of
incubators, accelerators, lawyers, and accountants specialized in work with startups,
innovation and intellectual property.
These policy recommendations were elaborated in a panel discussion at Western
Balkans Digital Summit Belgrade in April 2019. Representatives of Digital Initiative
Serbia, Innovation Center Kosovo, South Central Ventures, Spark Mostar, and Startup
Europe exchanged thoughts and ideas about the most important action points for
enhancing startup entrepreneurship in the region.
This document follows the structure of the six interconnected and interdependent
pillars of startup ecosystems: policy, finance, market, business support, human capital,
and culture. The focus of the document is on policy as the fundamental pillar, and its
interaction and influence on other elements of the ecosystem.

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How policy-makers can support the startup ecosystem in Western Balkans

  1. 1. How policy-makers can support the startup ecosystem Policy recommendations for the Western Balkans
  2. 2. Policy recommendations for the Western Balkans Imprint Published by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Registered offices Bonn and Eschborn, Germany ‘Open Regional Funds for South-East Europe – Foreign Trade GIZ GmbH, Bosnia and Herzegovina, Zmaja od Bosne 7-7a, Importanne Centar O3/IV, 71000 Sarajevo Phone +387 33 957 500 Fax + 387 33 957 501 giz-bosnienherzegowina@giz.de www.giz.de/ As at April 2019 Photo credits photographer: pagе 4. Anel Alijagic Design Belmin Salkica Text Armin Konjalic GIZ is responsible for the content of this publication. On behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ)
  3. 3. Policy recommendations for the Western Balkans Table of content How policy-makers can support the startup ecosystem Policy recommendations for the Western Balkans ................................................................................................................1 Table of content.....................................................................................................................................3 About......................................................................................................................................................4 1. Policy .............................................................................................................................................5 1.1 Strengthen collaboration between government and startup ecosystem stakeholders.....5 Example: Startup Macedonia unites ecosystem stakeholders...................................................5 2. Finance...........................................................................................................................................6 2.1. Create a co-financing mechanism and subsidies for investments and innovation ..........6 2.2. Introduce Business Angels and Venture Capital Law.........................................................6 2.3. Introduce tax benefits for capital re-investment into startups, innovation, and R&D.....6 Example: New tax incentives for investment in innovation and R&D in Serbia ......................7 3. Markets..........................................................................................................................................8 3.1. Facilitate access to international markets...........................................................................8 3.2. Strengthen regional markets................................................................................................8 Example: Startup Europe Western Balkans Network ................................................................8 3.3. Leverage diaspora networks .................................................................................................9 4. Business Support........................................................................................................................10 4.1. Support incubators and accelerators.................................................................................10 Example: Business incubator for tackling youth unemployment............................................10 4.2. Improve access to information for legal specific inquiries ..........................................10 4.3. Create e-government services for entrepreneurs..............................................................11 Example: Central business registry initiative ...........................................................................11 5. Human Capital ............................................................................................................................12 5.1. Introducing an entrepreneurial mindset through education.........................................12 5.2. Remove administrative burdens for hiring foreign human capital/professionals .......12 5.3. Introduce the right to offer the company’s equity options to employees.......................12 6. Culture..........................................................................................................................................13 6.1. Promote self-employment and business creation ............................................................13 Example: Startup TV Show .........................................................................................................13 6.2. Create a pragmatic legislation flexible to new industry trends.......................................13 Summary..............................................................................................................................................14
  4. 4. Policy recommendations for the Western Balkans About This document is created within the project Strengthening the Startup Ecosystem in the Western Balkan region as a part of the Open Regional Funds for South-East Europe – Foreign Trade, implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ). This document represents a collaborative effort of practitioners of the startup ecosystem in economies of Western Balkans (W6) in Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. The aim of the document is to summarize the most urgent needs for action to policy-makers in the region. The resulting policy recommendations are based on the aggregation of inputs and comments from more than 20 interviews with regional startup founders at different stages of development, local and international investors with strong knowledge of the region’s specifics, managers of local innovation and technology hubs, representatives of incubators, accelerators, lawyers, and accountants specialized in work with startups, innovation and intellectual property. These policy recommendations were elaborated in a panel discussion at Western Balkans Digital Summit Belgrade in April 2019. Representatives of Digital Initiative Serbia, Innovation Center Kosovo, South Central Ventures, Spark Mostar, and Startup Europe exchanged thoughts and ideas about the most important action points for enhancing startup entrepreneurship in the region. This document follows the structure of the six interconnected and interdependent pillars of startup ecosystems: policy, finance, market, business support, human capital, and culture. The focus of the document is on policy as the fundamental pillar, and its interaction and influence on other elements of the ecosystem. About the author Armin Konjalic is passionately involved in establishing the startup ecosystem and supporting entrepreneurship across Central and Eastern Europe (CEE) by creating bridges between talents, startups, investors, and institutions. Armin published a 500-page report “Startup Investments and Innovation Ecosystem in Emerging Europe” featuring key players, investment data, insights and, success stories of the entrepreneurial renaissance in 24 countries of the post-communist world. He is recognized as one of the leading experts of innovation and entrepreneurship in CEE.
  5. 5. Policy recommendations for the Western Balkans 1. Policy 1.1 Strengthen collaboration between government and startup ecosystem stakeholders New technologies and business practices are developing at a faster pace than policy- makers and regulatory bodies can follow. The best way for governments to catch up with the latest trends and market needs is strengthening communication and collaboration through expert working groups. Such activities include open discussion for future policies about improvements of the conditions for innovative businesses with the startup community It is highly recommended to engage organizations representing local startups, venture capitalists, and business angels in a government-initiated expert working group in order to build national strategies for the support and promotion of the emerging startup industry. Example: Startup Macedonia unites ecosystem stakeholders Startup Macedonia1 is an association of startup enthusiasts, experts, investors, accelerators, and other organizations dedicated to creating a favorable work environment for startups in North Macedonia by: • facilitating an open dialogue among all stakeholders, including the government, in the ecosystem in order to identify problems and solutions to eliminate obstacles that hinder the growth of startups in North Macedonia; • enabling national and international cooperation between startups, startup support organizations, investment funds and other ecosystem actors; • encouraging the innovation culture, entrepreneurial spirit, and investments in startups; • creating a full support system for startups in North Macedonia. 1 https://startupmacedonia.mk/introducing-startup-macedonia/
  6. 6. Policy recommendations for the Western Balkans 2. Finance 2.1. Create a co-financing mechanism and subsidies for investments and innovation The lack of access to capital is a strong hindering factor for entrepreneurs in the Western Balkan region. It is the key reason why startup founders are likely to register their business abroad in countries with subsidies and other forms of benefits for startups and a well-established investor community. In order to retain local entrepreneurs and talents, it is necessary to increase the number of available funding sources. This can be achieved by creating new co-financing initiatives for investors and to continue supporting the existing governmental financial instruments and tools for attracting investors, such as: • Creating a national investment instrument dedicated to innovation and R&D; • Fostering investments of business angels into local companies through subsidies; • Co-investing in national/regional venture capital funds. 2.2. Introduce Business Angels and Venture Capital Law Most of the Western Balkans countries have inadequate legislation regarding venture capital funds and business angels. As a result, there are limited options for domestic startups to raise capital from domestic investors. International investors will likely require startups from the Western Balkans to register the company abroad in a more investor-friendly jurisdiction. It is highly recommended to introduce a more precise definition of venture capital funds and business angels to the law and to introduce the required investment instruments. As an example, a convertible note is one of the most popular investment vehicles for early-stage venture investments, when it is difficult to determine a company's valuation. Convertible notes are structured as loans with the intention of converting into equity, at a specific milestone, often at the valuation of later funding rounds. Convertible notes are just one of several investment instruments that should be more clearly defined in national investment-related laws. 2.3. Introduce tax benefits for capital re-investment into startups, innovation, and R&D In more mature startup ecosystems, corporations are becoming one of the key players supporting the growth of startups. In order to embrace innovation and to diversify assets, corporations are offering their infrastructure, networks, market access, and capital investments to innovative startups. It is recommended to create tax benefit mechanisms for corporations reinvesting profits into startups, innovation, and R&D infrastructure.
  7. 7. Policy recommendations for the Western Balkans Example: New tax incentives for investment in innovation and R&D in Serbia Serbia introduced a tax credit for equity investment in a newly incorporated company that performs an innovation activity. The tax credit will account for 30% of the indicated equity investment. Special terms and conditions have been established to define what a newly incorporated company that performs an innovation activity is. The ceiling for the tax credit amounts to €850,000. Expenses that are directly associated with R&D performed by a taxpayer in the Republic of Serbia can be recognized in the double amount as a deductible expense in the tax balance sheet. The incentive applies for the tax period starting in 2019.
  8. 8. Policy recommendations for the Western Balkans 3. Markets 3.1. Facilitate access to international markets Most startups have the ambition to grow internationally. Local startups from the Western Balkans face difficulties to serve world-wide clients due to the inability to integrate payment platforms like PayPal, Stripe, Braintree, and other forms of electronic transactions. Free movement of capital is one of the key fundamentals for enabling access to the global market. The solution for this hindrance would be a reform of financial regulations that would allow a flawless integration of international multi-currency payment systems. 3.2. Strengthen regional markets The key difference between a startup and small and medium enterprises (SMEs) is scalability. Scalable startups seek for models of market expansions and rapid user growth. The blocking factors for startups in Western Balkans are difficulties to build up scalable models in the region. If a startup's solution is applicable in one local market, it is likely that its solution is applicable throughout the whole region with certain adaptations. The idea of serving the market of the whole Western Balkans is compelling for startups and their investors, but difficult to achieve because of entry barriers. The fragmented markets of Western Balkans are usually considered as too small to be appealing for international investors, while the region as a whole would be considered as a more attractive market. The easier access to the regional market, the better growth opportunities for local companies. It is recommended that national startup ecosystem stakeholders work together on interregional cooperation programs. Example: Startup Europe Western Balkans Network2 This initiative was launched in November 2018 by the European Commission and Startup Europe to create a network of local startup ecosystem leaders from the Western Balkans to strengthen the exchange of know-how and best practices. 2 https://sewesternbalkans.eu/
  9. 9. Policy recommendations for the Western Balkans The key focus is the creation of synergies with the startup ecosystem players on the regional and European level. 3.3. Leverage diaspora networks The Western Balkan region is severely impacted by brain drain with thousands of young and educated people leaving their homeland each year. By taking advantage of the new skills, knowledge, network, and capital that these individuals gained abroad, brain drain can convert into a brain gain for the region. Startups from the region can get invaluable support by engaging diaspora in form of mentorship, investments, and access to international markets. The support of diaspora to a socio-economic recovery of the home country is mostly represented through unfacilitated remittances instead of well-established exchange programs for diaspora partnerships. Local companies could leverage diaspora networks to find investors, cofounders, export partners, and brand ambassadors. It is necessary to create a set of collaboration tools to enhance relations between diaspora networks and local businesses.
  10. 10. Policy recommendations for the Western Balkans 4. Business Support 4.1. Support incubators and accelerators Incubators and accelerators offer training programs designed for the creation and growth of startups. Incubators are providing essential support for startups in preparing their products for the market. At later stages, accelerators provide a similar approach to support the growth and market expansion. As the number of startups is growing in the region, there is a need for additional programs dedicated to specific industry verticals. There is a positive trend of a growing number of incubation and acceleration programs in the capital cities, but rarely in second-tier cities which mostly face a problem of high youth-unemployment rates. Governmental development agencies are encouraged to use business incubators as a model of providing financial and non-financial support for entrepreneurs, especially in less developed cities and regions, which lack such programs. Example: Business incubator for tackling youth unemployment REZ - Regional Development Agency for Central BiH, in cooperation with the European Union and the Center for Youth Education established the BeeZone3 business incubator in Travnik, Bosnia and Herzegovina. Its goal is to create a more favorable business environment to support the labor market in central BiH through the establishment of institutional and infrastructural prerequisites for increasing self-employment and business creation. The program provides financial, educational, and administrative support for first- time founders. Since the start of the program in mid-2018, 12 new companies have been created in Travnik. 4.2. Improve access to information for legal specific inquiries It is often difficult for local startup founders to understand specific legal practices, especially when working with customers abroad and adopting to specific taxation regulations. First time founders often have no concept of liability and understanding of how the local taxation system works. These actions would prevent unintentional economic crimes. It would be of a big help for new businesses, if there would be an information 3 https://beezone.ba/
  11. 11. Policy recommendations for the Western Balkans point for resolving specific legal questions. Governments could create a voucher system for discounted consultations with licensed accountants and lawyers specialized in startups and innovation. 4.3. Create e-government services for entrepreneurs The most discouraging factor for starting a business in the Western Balkan countries is slow offline processes of registration and complicated procedures of legal documentation creation. In order to develop a strong digital economy, it is necessary to finalize the digitization of the following administrative processes: • online company registration; • electronic signature and digital contracts; • online tax reports and invoices; • digital identity verification. The creation of a ‘one-stop-shop’ as a digital service center offering integrated e- government services for entrepreneurs in all countries of the Western Balkan region would be a relieve for the local entrepreneurs. Example: Central business registry initiative In March 2019, the European Bank for Reconstruction and Development (EBRD) launched the Business and Financial Data Exchange (BIFIDEX)4 together with the Serbian Business Registers Agency and the Central Register of the Republic of North Macedonia as the first countries to join this regional initiative. The portal serves as a one-stop information point for businesses and investors, providing up-to-date information from national business registry agencies. Improving access to up-to-date and trustworthy information and increasing transparency will encourage greater confidence in the local markets. 4 https://www.ebrd.com/news/2019/western-balkans-regional-business-registry- goes-online-.html
  12. 12. Policy recommendations for the Western Balkans 5. Human Capital 5.1. Introducing an entrepreneurial mindset through education Due to the lack of practical and teamwork learning methods in classrooms throughout the Western Balkans, formal education does not sufficiently provide graduates with an entrepreneurial mindset and skills. Entrepreneurship in education prepares responsible and entrepreneurial individuals. There, skills, knowledge, and attitudes are developed that are necessary to manage companies. A reform of the education sector should introduce entrepreneurship activities in high school and university curricula, with a particular focus on practical and teamwork exercises. 5.2. Remove administrative burdens for hiring foreign human capital/professionals Due to the lack of available professionals with required skills, later stage startups and scale-ups from the Western Balkans are often obliged to resort to employees and experts from abroad. Yet, the process of getting a work-permit can take a few months. In order to attract non-national startup founders and foreign talent, a number of countries, such as Canada, Chile, Estonia, Latvia, Lithuania, and Portugal created a “startup-visa” program — a fast track for acquiring a visa and work permits. The region should define more welcoming conditions for non-nationals willing to contribute to local companies. 5.3. Introduce the right to offer the company’s equity options to employees One of the key drivers for successful startups is the concept of offering equity options to employees, founders, advisors, directors, and consultants. Vesting is one of the most popular mechanisms used by startups as a motivation to attract and retain talent within the venture. It is a model of rewarding an employee with equity options after working with a company for a previously agreed “vested period” of time, for instance for four years. In most of the Western Balkan countries, startups have difficulties in applying these mechanisms because of the lack of clear legal definitions of such practices by the law. Startups are expecting a clearer regulation and definition of the vesting practice and other equity-reward mechanisms by the law.
  13. 13. Policy recommendations for the Western Balkans 6. Culture 6.1. Promote self-employment and business creation Throughout the region of the Western Balkans, entrepreneurship often has a negative connotation in public opinion as a consequence of the collectivist paradigm from the past. Working for private businesses is often considered less appealing than a job in a public institution. Due to social pressure, young entrepreneurs are often discouraged to start their own business. Creating a national strategy of promotion of business creation and self-employment makes entrepreneurship more appealing by the public endorsement of entrepreneurial success stories through media and education. Example: Startup TV Show “PunPun Startups Battle Show” has been implemented by GIZ in cooperation with ICK and KOSBAN. The TV show aimed at promoting entrepreneurship among young people. The Battle of Startups is a contest between business ideas and concepts to win 10,000 € in cash and services. 6.2. Create a pragmatic legislation flexible to new industry trends By definition, startups are disrupting existing industries by innovative approaches and adopting unconventional business models. The growth of local startups can be obstructed by outdated legislation and suppression by conventional competitors. In times of rapid changes in new industries, legislation should become more pragmatic towards adopting new business approaches and technology innovation adopted by startups. It is important that policy-makers show more flexibility towards adoption of the law to the latest technology and business trends. Lack of support for adaptation of one innovative solution can be a demotivating factor for the startup community. A new generation of entrepreneurs might hesitate to pursue their own innovative ideas if their environment is reluctant of accepting new innovations.
  14. 14. Policy recommendations for the Western Balkans Summary Startup entrepreneurship is one of the key drivers of digital transformation and job creation in the economy of the 21st century. In order to increase chances for success of startups in the Western Balkans, it is necessary to bring together all actors of the ecosystem to work on national entrepreneurship and innovation strategies. The region is generally attractive because of outstanding technical talents, but local companies fail to reach their full potential because of the unfavorable business environment for innovative startups. This document defines the most critical necessities to unlock the potential of talented youth in the Western Balkans. Some of the most emphasized arguments are: - Stimulate regular communication of policy makers with startup ecosystem stakeholders; - Increase availability of capital by introducing investor-friendly laws and benefits; - Remove the obstacles for local companies competing for regional and global market share; - Reduce bureaucratic processes by introducing e-government digital tools for entrepreneurs; - Improve conditions for attracting and retaining talents; - Make entrepreneurship more appealing to new generations. The document is distributed to all players involved in the support of the Western Balkans startup ecosystem. Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH will continue to support efforts for implementation of these suggestions as part of Strengthening the Startup Ecosystem in the Western Balkan region project.

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