Bulgaria may be among the poorest members of the European Union, but its efforts in the IT sector are beginning to pay off: the fastest developing local company has a revenue growth rate of over 300 percent in the last five years. Meanwhile, this year marked the beginning of the American dream for one Bulgarian startup founded in a dorm room: it was bought for $260m by a US company, a remarkable success for the local market.
And that's not all: Bulgaria is maintaining its competitive edge in outsourcing with HP, IBM, Microsoft, Oracle, VMWare, and SAP witnessing double-digit growth in their local operations. Overall, the Bulgarian technology industry is about to reach an all-time high in its contribution to the country's GDP.
IT and the fall of communism
Like many former communist countries, Bulgaria has a long-standing tradition of a strong technology industry.
During the communist era, the country was one of the largest PC manufacturers within the region, selling products across the former USSR. In 1989, right after the fall of the Berlin Wall, street protests began, and forced the Communist Party to give up power. Bulgaria opened its borders to the western world for the first time in decades and started its difficult transition to capitalism.
"After the collapse of the system, many well educated and experienced IT, communication, and software engineers emigrated to Western Europe and the US, and the government-regulated IT industry disappeared in a couple of weeks," George Brashnarov, board member and former chairman of the Bulgarian Association of Software Companies (BASSCOM), told ZDNet.
"New IT companies started to become visible in the mid-1990s, based on successful privatization of some of the government scientific labs, but most importantly because of the interest from foreign companies in exploring and using the potential of Bulgaria in software development, most of the time led by the same specialists who emigrated five or six years ago," he said.
Today, Bulgaria has companies across the technology spectrum: communications and hardware, as well as software products and services. "The total value of the market is around €4bn and the distribution is more or less equal between those three areas," Brashnarov said.
Software R&D and outsourcing evolving rapidly
Bulgaria's IT sector employs over 20,000 professional software engineers in R&D companies, according to BASSCOM's state of the industry report published earlier this month. The software R&D sector alone is expected to grow by 15 percent this year, after an 11 percent rise in 2013. In monetary terms, it is expected to break the $1bn barrier in 2014, accounting for 1.74 percent of the country's GDP - a fivefold increase in nine years.
"Sixty-five percent of the software industry's revenues are from export, mainly to the rest of EU and the US," Brashnarov said.
Last year, the outsourcing sector generated revenue of $630m, an increase of 60 percent in the past four years, according to the Bulgarian Outsourcing Association. Last year, 20,000 IT professionals were working in outsourcing, a number only expected to rise in the coming years.
Several outsourcing analysts recommend the country as an attractive location thanks to its skilled and motivated developers.
Bulgaria is the only European country that made it to the Top 10 of the 2014 AT Kearney Global Services Location Index, which details the best destinations for outsourcing. "Bulgaria is home to advanced IT centers serving both multinational and local companies, [and] focuses on traditional software development for captive players such as CSC and SAP," the report said.
Among the criteria considered in the report are financial attractiveness, business environment, and human resources. India, China, and Malaysia lead the index, while Europe is represented by Poland (11th), Lithuania (15th), Germany (17th), Romania (18th), Estonia (22nd), and Latvia (23th).
A separate report, the 2014 Tholons Top 100 Outsourcing Destinations, places the Bulgarian capital of Sofia at 52nd place for outsourcing locations, below Krakow (9th) and Warsaw (32nd) in Poland, Hungary's capital Budapest (26th), and the Romanian capital of Bucharest (40th).
Opportunities and setbacks
BASSCOM's Brashnarov knows why his country is successful in software. It benefits from "the very high level of specialization among its IT engineers, and well-developed infrastructure - including one of the fastest and most reliable internet connections in Europe," he said. "Another strength is the open market situation without any government registration/certification procedures."
Bulgaria offers the sixth lowest tax levels in the EU and the European Free Trade Association for a medium-sized company, according to PricewaterhouseCoopers' Paying Taxes 2015 analysis.
Brashnarov adds that Bulgaria has flat taxation of only 10 percent for both corporates and individuals, low rents for office spaces, and an open-minded mentality that allows easy collaboration in a multinational environment.
Luxoft is one company that has been attracted to Bulgaria. It opened a software center in Sofia this February and Konstantin Konov, managing director for the country, told ZDNet the main reason for Luxoft's expansion into the country was the technical talent pool.
"Bulgaria ranks third in the world for certified IT professionals per capita," he said. "Among the key advantages of the industry are the highly qualified workforce and competitive pricing." The country's location was another reason: Bulgaria is part of the European Union and provides easy access to South-East Europe, Russia/CIS, the Middle East, and North Africa.
When it comes to the country's disadvantages, Luxoft's Konov lists "below average R&D spending and ineffective spending of funds [by the country's government]; an inefficient system for the protection of intellectual property rights, specifically service innovation and business process innovations; and a shortage of labour combining technical knowledge with business and soft skill sets".
Konov believes the talent pool in Bulgaria is beginning to dry up, although education reform could help prevent the developing skills crisis.
High growth rate for companies of all sizes
SAP Labs is another international company with a significant presence in Bulgaria. It opened an office in the country fourteen years ago and now employs 600 software specialists across the country. This year it opened a new department charged with improving the user interface and experience of SAP software.
"There are more and more IT companies with global influence, and foreign companies rely on the exceptional talent and professionalism of the Bulgarian IT specialists," Radoslav Nikolov, managing director of SAP Labs Bulgaria, told ZDNet.com.
"The good IT climate in our country is the reason for the software boom, which we have seen recently. The software industry here historically has steady growth over the years," he said.
The fastest growing company in Bulgaria is Mnemonica, with a 317 percent revenue growth rate over the last five years. It was included on Deloitte's latest Technology Fast 50 in Central Europe, a list containing the most rapidly growing tech companies. Mnemonica specializes in providing IT for data storage systems and virtualization technology. Another Bulgarian company, Imperia Online, is listed as a 'rising star' by Deloitte.
Iravan Hira, HP's managing director in the country, finds Sofia a comfortable place to do business and his company is growing there. "With two-digit growth during the last three years, HP in Bulgaria is growing faster than the market growth of the country. Both in servers and storage systems, HP has almost 50 percent market share in 2014, according to IDC," Hira told ZDNet. HP Bulgaria runs projects for datacenters in the financial services, energy, utilities, telecommunications, and manufacturing industries.
Hira talks about the "great potential of Bulgaria in the IT outsourcing industry", a foundation that can be built on. He believes there is still room for growth, provided that politicians support this field. "There should be a systemized state policy for developing the IT sector and attracting foreign investment," he said.
Focus on the future
Most of the IT giants operating in Bulgaria are trying to find ways to help the market evolve further, an approach they believe could ultimately prove beneficial for them. Microsoft, for instance, offers a YouthSpark programme, an initiative which provides opportunities for young people and organisations through funding, training, and networking.
"We see a lot of additional opportunities exactly in this segment - IT professionals and startups. Sofia is one of the most promising startup hubs in Eastern Europe," a spokesperson for Microsoft Bulgaria told ZDNet.com.
Microsoft has been working with more than 900 local companies since opening its Bulgarian office in 1999, and has invested more than $2m to support education over the last decade.
"Although the number of IT-related jobs is growing exponentially in the country, just five percent of all students graduate in science, technology, engineering, and math (STEM). That's less than half of the 11 percent of STEM graduates in the UK, Germany, Greece, and Ireland, according to Eurostat," the spokesperson said.
Promising startup scene
With over 120 startups receiving €21m of funding over the last two years, Bulgaria's new tech ecosystem is beginning to take shape. Dilyan Dimitrov, founder of the Eleven startup accelerator, believes that entrepreneurs in the country have a big advantage: they aim globally right from day one, and don't consider Bulgaria their target market, as the country is small.
"In the last two years, the startup community in Bulgaria has changed dramatically. It's an ecosystem now. The startup community in Sofia has grown much stronger, now that money is available in the market," he told ZDNet during the How To Web Conference in Bucharest, one of the largest events in the region dedicated to helping startups.
"Ideally, in a few years' time, a lot of these young entrepreneurs will be second-generation entrepreneurs. They will come back into the community as angel investors, mentors, maybe start a second startup. Right now we're just building the first layer," he said.
One example of a successful Bulgarian startup is Telerik, a business which began in a dorm room and was recently bought by US company Progress Software for $262.5m. Telerik offers a .Net toolbox, a mobile development platform, and Sitefinity, a content management system. On top of these, they've built a community of developers that has reached 1.4 million.
After the acquisition, Telerik's R&D team will remain in Bulgaria, while their product, marketing, and sales teams will be split between the two countries.
Several factors have contributed to Telerik's success. Svetozar Georgiev, co-founder and co-CEO of the startup, told ZDNet: "We have a fast go-to-market strategy, with short release cycles that allow our company to stay innovative and quick to respond to the market landscape."
"Another key factor in our success has been attracting and developing the right talent. We extensively invest, recruit, and retain top professionals, and when no talent is available in the market, we've taken steps to fill the void," he said. In 2009 the company founded the Telerik Academy, an organization which offers free training for anyone wanting to have a go in the tech world.
In order for Bulgaria to be the startup ecosystem everyone wants, the country needs to educate not only techies, but marketing and sales professionals as well, according to Telerik's Georgiev. "There is a huge potential," he said.
Attracting angels from Western Europe
Lyuben Belov, managing partner at seed fund LAUNCHub, senses the ecosystem is rapidly moving in the right direction, with Bulgaria raising its profile and even helping startups from nearby countries like Romania and Macedonia.
One setback is that the region doesn't have many angel investors. Belov's team is constantly trying to attract money from Western Europe and the US. "More and more angel investors are coming to the events in the SEE region. They have acknowledged the tech potential and educational preparation in our countries and are ready to take part," he told ZDNet.
The startup scene is nevertheless evolving at warp speed. "It was only in the past three years that we started talking about funding in terms of acceleration, seed, and venture capital," Belov said. "The EU institutions and initiatives played an important role here too. I can say both Bulgaria and the region experienced a super change in digital entrepreneurship for the last three years."
According to Marina Handjieva, LAUNCHub's marketing manager, the entire mentality is changing in Bulgaria, as citizens realise their country can be more than just an outsourcing destination.
"It's a way of thinking that is brought up at home, within the family, and later at school. It starts with: use your head, your imagination, and do something on your own. So far it has been: get someone to teach you and find someone to work for," she said.
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