Most startups in Slovakia are considering moving abroad. The star of the region is Poland. From Dennik N.
Slovak startups are too often considering moving their business abroad, says the law firm Highgate Law & Tax, which specializes in the cross-border business activities of innovative companies. According to an internal poll they conducted among startups, 67% of them are considering moving.
They say there are two main reasons for this. The first one is the relatively complicated conditions for setting up a startup.
Secondly, foreign investors are not particularly interested in entering the Slovak market. Their reasons include the unpredictability of the political environment, high taxes, poor law enforceability, frequently changing legislation, and unclear rules in the capital markets.
Instead, they prefer neighboring countries such as Poland, which CEOWORLD magazine says was one of the seven most startup-friendly countries in 2021. Slovakia is only number 34 in the ranking.
More investment in startups could help Slovakia. Examples from the U.S., the UK, and Scandinavia show that startups bring innovation to the economy, make processes more effective and cheaper, increase competitiveness, and create jobs with high added value.
These countries put a lot more resources into startups, knowing they are the key to economic growth. In some cases, startups get more money from the state than they do from private funds.
It’s not like Slovakia is not making any progress at all. The Office of the Government has set aside 630 million euros from the Recovery and Resilience Plan for supporting research into and creation of new startups. In September, a national strategy for research, development and innovation, valid until 2030, should be approved.
Weak State Support
“The primary problem in the area of supporting new, innovative companies in Slovakia is the very limited state funding available, as well as poor legal certainty for international venture capital,” says Eva Almasiova, the spokeswoman of the Slovak startup Fuergy.
The problem is not so much the state not investing enough in venture businesses, but rather excessive centralization in decision-making, as well as poor redistribution of resources, she says. Companies are then forced to look for venture funding in the private sector.
This sector is not active enough in Slovakia, and it is incapable of offering sufficient options to companies that require strong capital coverage. Logically, they then start to look for funding outside of Slovakia. Then, however, they often discover that investors are unwilling to finance a Slovak enterprise, for example because of insufficient legal certainty in Slovakia.
“External conditions thus force the startup to export its know-how, as well as the added value for the Slovak economy, to another country,” says Almasiova.
Frequent Changes in Legislation
“The stability of the legislative environment in Slovakia can in the long term be viewed as generally negative,” the state-run Slovak Business Agency has been saying for years.
A predictable legal system has a significant impact on the quality of the business environment for startups, says the agency. Unlike larger companies and supra-national corporations, startups often lack the financial and human resources they could dedicate to dealing with administrative and regulatory requirements.
All of this could be changed quite simply. For example, changes in legislation could be approved only with sufficient advance warning. According to the agency, another step that would help stabilize the environment would be the harmonization of deadlines for any changes in legislation, as is the case in the UK.
Over there, new legislation can only come into force on 1 January or 1 July. Also, notification of any new legislative change must take place at least three months in advance of its coming into force.
This all means companies have enough time to familiarize themselves with new legislation and get ready to comply with it. That is one reason the UK has become a preferred destination for young entrepreneurs.
High Taxes
Tax lawyer Peter Varga from the law firm Highgate Law & Tax says Slovakia has a problem with high taxes, as well as with complicated administrative requirements related to the trading of financial instruments and crypto-currencies.
Other issues, Varga says, include ambiguous tax standards, such as rules related to income tax exemptions in the case of sales of companies, or to the taxing of unrealized profits. Also, the unpredictable decision-making process of tax authorities, especially in VAT-related cases. Then there is also poor law enforceability.
“Typically, foreign investors do not want to enter Slovak startups through a Slovak holding company. They are worried, which is understandable. Slovakia does not provide sufficient legal and political predictability,” says Varga.
Some startups are even concerned that Slovakia might move in a more eastward direction, politically speaking, which would “further reduce the predictability of the legal environment and undermine rule of law principles even more,” he says. This dissuades foreign investors, who are worried about losing their capital. Therefore, they prefer to invest in countries with more stability.
Almasiova cites another issue, which is less pronounced in other countries: the tendency of the Slovak market toward oligopolization – a strong position of a few players within the market. Another Slovak specificity is the low purchasing power of the B2C (business to customer) market.
For startups, these are often serious obstacles for them to enter the market, which logically forces them to look for business opportunities outside of Slovakia. This is just a step away from moving their entire business abroad.
Obstacles in Starting a Business
Another obstacle is the unnecessarily complicated process of setting up a business. According to the Slovak Business Agency, in Slovakia the process takes an average of 12.5 days. In real life, however, it is often much more than that.
In New Zealand, for example, the entire process of setting up a business takes one day and can be done on a single website. In Slovakia, the agency says, you need to address a number of different authorities.
A one-stop-shop system has been established, which speeds up the entire process. Nevertheless, the setting up of a company still involves a relatively complicated and lengthy administrative process, which represents an unnecessary obstacle for entering the market.
Positive role models from abroad could also help improve Slovakia’s startup system.
“Examples include Skype and Bolt from Estonia, UiPath from Romania, and Rohlik.cz from the Czech Republic – all companies with a market capitalization of billions of euros, which have significantly contributed to the forming of the startup scenes there,” says Jaroslav Bukovina, an analyst at the Department of Science, Research, and Innovation in Slovakia’s Office of the Government. “The owners of these companies gained capital and experience, which they then used in creating more startups in the country, also attracting the interest of foreign investors.”
Lawyers from Highgate Law & Tax, who are also members of the working group for drafting legislation at the Ministry of Finance, say that a future outflow of companies and taxes from Slovakia could be prevented by a clear effort of the state to reduce taxes, as well as a more stable legal and political environment.
The OECD also recommends Slovakia to reduce the administrative burden imposed on startups, suggesting to start by introducing licensing rules following the “silence is consent” principle.
Better schools and more government support for innovation would also help. For example, by funding the initial phases of the development of a company, or by connecting the players in an ecosystem, whether through co-working hubs, hackathons, or accelerators.
This fall, Bukovina says the Office of the Government will propose a strategy that will seek to remove the major obstacles. It should, for instance, introduce the option of more attractive rewards for startup employees in the form of ownership shares.
A Surprisingly Progressive Poland
Slovakia could also find inspiration in Poland, which last year ranked seventh among all countries in startup friendliness. Only the U.S., UK, Canada, Israel, India, and Germany rank higher, according to CEOWORLD magazine.
The Polish market is large enough for a company to achieve financial stabilization there. It also offers many more options of both state funding and private venture funding.
“Polish investors are much more knowledgeable when it comes to the specificities of venture funding. Their financial options are also broader, compared to Slovakia,” concludes Almasiova.
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Karolina Kiripolska is a journalist writing for Dennik N, a leading Slovak news outlet where this article originally appeared. Reprinted with permission. Translated by Matus Nemeth.
