Banker: Banks in Bulgaria are Starting to Fund Software Companies and Startups

There is a widespread understanding that banks do not fund software companies and startups. Some of the players on the market, however, have started to open up towards innovative and high-growth companies. This doesn’t necessarily mean that the sector is shifting and would from now on pour money into the startup ecosystem but banks are actively looking for ways to enter the niche. Own venture funds (Unicredit Bulbank, Raiffeisen Bank International) , competitions and partnerships with guarantee funds, what would lower the banks’ own risk when funding startups, to name a few.

Raiffeisen Bulgaria has recently announced its second agreement with the European Investment Fund, which will enable the local lender to provide €43M in loans between  €25K and €7.5M to innovative SMEs. Now, startups are still a drop in the ocean of the banking business, but the micro segment is expected to grow in the years ahead.

Trending Topics met Dobromir Dobrev, Deputy CEO of Raiffeisen Bulgaria, to ask him whether local banks have finaly decided to be more flexible and fund young companies.

Trending Topics: Raiffeisen Bulgaria has recently signed its second deal with the EIF under the InnovFin initiative. This will enable the local unit to fund innovative small and medium-sized enterprises. Does this agreement give the bank any competitive advantage on the market when dealing with high-risk companies?

Dobromir Dobrev: Thanks to that agreement Raiffeisen has the opportunity to lower the level of collateral required from the client and thus to broaden the access of Bulgarian companies to financing. However, there are some requirements that a client needs to answer. The program is for companies that are willing to innovate, but that is a broad area. To be a fast growing company or to have patents in the past two years are among the eligibility criteria. There’s no limitation regarding industries and it’s not limited to IT.

The projects across verticals that were provided with loans thanks to the first deal under the InnovFin initiative are an evidence. A coworking space and idea incubator, a broadband service provider, to name a few. We have also provided funding for production innovations of established companies.

What about loans for startups?

The financing that we provide under the InnovFin program, though it does not exclude them, is not so directly aimed at them. We have another product for startups under the EIF’s COSME Guarantee Initiative. In the micro segment, we have a product for companies with a history of up to 12 months. Through this product we could provide both investment and working capital. The maximum we lend in this segment is €15K and the industries are also not limited. For the few months since the start of this specialized product, we have negotiated 10 loans.

If a recently-founded company with a promising idea comes to Raiffeisen, would you fund it?

Not really. Ideas in traditional lending are a good start, but  the company must have a developed product and some finances. The preferred client would need capital to scale-up or expand. On the other hand, the above mentioned financing for startups allows us to give credit to a company in a very early stage of development but only up to €15K.

Often we hear from software companies in the ecosystem that banks have rejected them because they don’t have the assets to secure a loan. However, today’s promising companies don’t have buildings and machines to secure a loan. So under what conditions banks invest in software companies?

This is an interesting question. Software business is one of the niches we have entered recently thanks to the EIF guarantee programs as well. This allows us to explore the lending with lower collateral. Yes, we invest in software companies and we see the sector as a very promising one. In the recent years, we have had several cases in which we have funded acquisition deals within the software industry.  Our collateral requirements under these guarantee agreements are now much lower. Of course, the company’s finances are also important.

Being limited to provide loans for startup companies, Raiffeisen, as well as other players on the market such as Unicredit, have launched VC-like financial instruments. Why?

In general, commercial banks are not involved in risky financing. On the other hand, we observe some efforts of banks to open up to the sectors, where VCs traditionally operate. The Raiffeisen Elevator Ventures is one initiative in this direction. It is very similar to an equity fund. It’s a new project and has so far been operated on group level in Vienna, but Bulgarian companies are also eligible as the program covers the entire region. The regional fintech competition of Raiffeisen Bank International – Elevator Lab is another interesting experiment of ours. In Bulgaria we already work on projects with some of the finalists in the competition. For example, we’ve already started project both in retail and corporate banking with Evrotrust – the local winner of the challenge.

It is a hype to be part of the startup ecosystem. What does Raiffeisen aim besides PR?

We ourselves want to be pragmatic. There is real business sense for us to proactively look for collaboration with technology companies. We invest time and resources to be among the first on the market to offer particular services to our clients. The PR effect is a nice addition.

Why would a company go to a bank and not to a VC fund? Are there any advantages in particular?

We do not want to compete with VCs, there is no way. We are rather looking for our niche. In recent years, the mantra that banks do not fund risky ventures is changing. There, for example, the money is exhaustible, there are strict criteria for who can get them, and the whole process until signing a deal is very long. For a startup company, speed is a key factor and banks could provide a response within a few days. If the response is positive, the funding is transferred within few weeks. The most valuable element of the deal, however, is perhaps the scale-up opportunity that a bank could provide. As a bank we give companies the opportunity to scale quickly by implementing their solution on international level within the Raiffeisen Group.