Despite a Decrease in Investments, Startups are Developing Positively in the Long Term

At the end of last year, with the launch of ChatGPT on the market, it was possible to predict that artificial intelligence would be the number one topic in the world of technology, startups, and the global economy in the coming year, driving the development of almost all industries, from finance to healthcare. And so it was: over the past twelve months, there has been no shortage of discussions, views, and readings about artificial intelligence and the AI tool ChatGPT. The rapid development of this technology has been particularly important for many global (as well as domestic) startups. Investment in newly established companies continued to be slower throughout the year, but 2023 has also brought new opportunities for founders to work on the sustainability of their business models.

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Hajdi Ćenan, airt

—– This year, the trend of decreasing investment continued. It is mentioned that there was even a 42 percent decrease in investments in America compared to 2022, and Europe is not much better with a 39 percent drop. However, this did not apply to the sector of startups engaged in generative artificial intelligence – emphasizes Hajdi Ćenan, president of the CRO Startup association and co-founder and director of the startup airt.

– I found the massive investment in the startup Mistral and its development of a large language open-source model that will compete with ChatGPT particularly interesting, and that in France, which has somehow positioned itself as a country that invests significantly in the development of this technology. It is interesting because the startup barely existed, it had no product, just a manifesto of about ten pages, yet it still received an investment of nearly half a billion dollars, which propelled it into unicorn status. Judging by recent results, it is developing well and could soon really become one of the main competitors to the GPT4 model – continues Ćenan.

Success on the AI Wave

Speaking about artificial intelligence, the most important event for the Croatian startup-scene this year was Google’s acquisition of Photomath, a company that, with its namesake application for solving mathematical problems, became a pioneer of artificial intelligence in Croatia. Although the official transaction amount has not been disclosed to date, it is assumed to be as much as 550 million dollars. Considering that almost all of Photomath’s employees were also co-owners of the startup, as stated by founder and (now former) Photomath director Damir Sabol, it is clear how significant this acquisition is for the entire startup-community. This year will therefore be remembered for Google buying a Croatian company at a time when investments in other startups were slowing down.

– The fact that a tech giant recognized the value of an initially Croatian startup and decided to include it in its portfolio is yet another proof of how projects and startups that originate here can become globally relevant. Initially Croatian, I say, because Photomath at one point, when seeking a larger investment, moved its headquarters to the United States and thus de facto became an American company. Nothing unusual, it is neither the first nor the last of our startups to go through a similar path, but it also indicates how much we still need to improve the startup ecosystem in Croatia so that we do not become just a country for research and development branches, while all real business is conducted elsewhere – explains Ćenan.

As for other AI startups in Croatia, they have, according to a report by the technology portal The Recursive, raised as much as a quarter of the total amount of investments in Central and Eastern Europe. Namely, of the 8.2 billion dollars invested in companies developing artificial intelligence-based solutions in the CEE region by August 2023, Croatian companies raised 2.05 billion, and the entire region is witnessing increasing interest from international investors. However, the AI startup ecosystem in CEE is still in its early stages, the authors of the report state, as nearly half of the 1100 analyzed companies have raised pre-seed and seed investments, and only 13 percent secured funding in later stages of development. The most dynamic Croatian companies with AI products, according to the report’s authors, are Rimac Automobili, Infobip, Cognism, ReversingLabs, and Gideon. Positive examples from Croatia also include the startups Newton Technologies Adria and Mindsmiths.

Mid-November was marked by an unprecedented scandal at the helm of one of the most important AI companies in the world, OpenAI, the creator of ChatGPT. Co-founder Sam Altman, after being dismissed by the Board, returned to lead the company a few days later along with a new management team. The problem, it seems, was a divergence in visions between Altman, who wanted rapid development of artificial intelligence and OpenAI’s market competition with other Western and Chinese players in the field, and the former management, which advocated non-profit development of AI for the benefit of humanity. Although the change in leadership at OpenAI does not directly affect the market of startups, the event shed light on and sparked further discussion about the direction of artificial intelligence development for all companies: will its progress be and remain in the interest of people or against them.

The significance of events such as the accelerated development of tools for applying artificial intelligence in business is confirmed by Filip Stipančić, a partner at Smion, a former Lean Startup Croatia. This, he says, allows many startups to be more competitive and efficient.

– Artificial intelligence creates a new talent pool and unicorns are emerging with fewer than ten employees – says Stipančić.

Tougher Financing, Layoffs…

While startups engaged in artificial intelligence enjoyed significant attention during 2023, all others faced many problems in the market. For example, the collapse of the American Silicon Valley Bank, one of the main banks for American startups, further shook the American tech and startup-world in March, which had previously been struggling with falling stock values, rising interest rates, and significantly fewer investments. As a result, startups are finding it increasingly difficult to secure new rounds of financing, and investors expect higher returns on investment and are generally more cautious. If not before, then certainly after the collapse of SVB, it became clear to startup founders that they must be more careful even when choosing banks to hold their deposits.

At the same time, rumors of mass layoffs began to circulate, first in Big Tech companies like Meta, Alphabet, Amazon, and Microsoft, and then in many other global companies from various sectors. It seems that unjustified hiring during the IT-prospective pandemic years has come back to haunt everyone.

The aforementioned negative trends in the global startup-scene have not spared Croatia either. In the media, we have thus heard more about mass layoffs in Croatian tech startups and companies than about large investments. Although no company has officially confirmed that they had to say goodbye to excess employees, this has been witnessed at informal (and even formal) gatherings, discussed on social media, and debated on forums.

As an important event for the domestic startup-scene, Stipančić mentions the formation and commencement of operations of EDIHs in Croatia, specifically European Digital Innovation Hubs that assist companies and public sector organizations in digital transformation. He also considers the beginning of specialization in sectoral development of startups, for example in healthcare, to be significant.

Now is the Best Time to Start

Thus, despite the crisis in IT and a smaller number of investments in startups than in previous years, the assessment of the past startup-year is still passing. Stipančić says that, globally, regardless of temporary difficulties in raising financing, startups are developing positively in the long term.

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Filip Stipančić

Privatna arhiva

—– Important are the events in the capital market, inflation, and the slowdown of investments in startups in early stages, but at the same time, a strong emphasis on sustainability, circular economy, and climate change mitigation creates new opportunities for their launch. There is a bright period ahead for the domestic and global startup ecosystem, and perhaps that is why now is the best time to start a company. There are an unlimited number of problems to solve and people who want to work. What is your excuse? – asks Stipančić, adding that with the arrival of new and the expansion of existing institutional investors, capital is becoming increasingly accessible to startups.

Ćenan, on the other hand, believes that the correction that occurred in the startup market was necessary.

– Namely, we had a valuation bubble that needed to be deflated. All startups that did not have a healthy business model simply disappeared or will soon disappear because they based their business on raising a new round of investment, rather than on a real, sustainable business. Those who have survived and those who are just coming will, however, need to have much better foundations, and this newly created situation can be a real opportunity for them – concludes Ćenan.