TO
MR. TOMISLAV DONCHEV
DEPUTY PRIME MINISTER OF THE REPUBLIC OF BULGARIA
Re: Position of BESCO – The Bulgarian Startup Association on the proposal for the Recovery and Resilience Plan of the Republic of Bulgaria
DEAR MR. DONCHEV,
First of all, we would like to congratulate you on the innovative and future-oriented method of presenting the Recovery and Resilience Plan of the Republic of Bulgaria. The use of new technologies in public administration is an important message to the entire Bulgarian people and something we highly appreciate.
The presented Plan identifies possible solutions to structural problems in the economy of the Republic of Bulgaria. The crisis caused by the spread of COVID-19 has drawn even more attention to critical sectors of the economy that are in urgent need of reform. This crisis also represents an opportunity to carry out these important changes.
We support the prioritization of reforms in education. We propose even bolder actions. In addition to prioritizing STEM specialties in curricula, we believe it is very important to allow schools to flexibly amend existing curricula or create new ones and submit them to the Ministry of Education for approval. It is also important to think about reforms in the funding model of educational institutions at all levels. Universities should provide greater freedom of course choice, end the practice of permanent contracts for lecturers, and link their remuneration to students’ willingness to study with them. We believe it is necessary to work toward more competition in public educational institutions, which would lead to better results and greater practical applicability of what young people learn.
We believe that for the funds attracted under the Recovery Plan to be truly useful, they should be market-oriented and the share of funds distributed as direct grants and subsidies should be reduced. Grant money creates preconditions for abuse and does not help foster entrepreneurial thinking among young people.
On behalf of BESCO – The Bulgarian Startup Association, we hereby submit proposals related to innovation, business, and the Bulgarian economy.
The three key factors for the development of an innovative economy are:
Bulgaria faces shortages in all three areas, and we believe the recommendations proposed below will lead to progress in each of them.
Bulgaria is one of the countries with the fastest declining populations in the world, the quality of education is relatively low, and highly qualified personnel are either insufficient or leaving the country. In the ICT industry alone, the shortage of personnel for whom jobs already exist is estimated at over 100,000 people.
At the same time, Bulgaria significantly lags behind in entrepreneurial attitudes. Unlike in other countries, where there are sometimes too many entrepreneurs, in Bulgaria more than 95% of people do not want to start their own business, even in the field of innovation and high value-added industries.
In terms of investment capital, Bulgaria does not have well-functioning capital markets; the institutional and legal framework for the innovation economy is underdeveloped; most investors manage funds based on public money; and there is a lack of private investment in R&D and innovation.
Taking into account the need for changes in these areas, we submit the following proposals for amendments and additions to the proposed Recovery and Development Plan.
In the text of PILLAR 1: INNOVATIVE BULGARIA, we propose the following change:
Current text:
“Comprehensive education reform for updating curricula, disseminating innovation, expanding coverage, building on successful practices and distance learning skills, orientation toward STEM, and development of cognitive skills…”
To be amended as follows:
“Comprehensive education reform for updating and liberalizing curricula, disseminating innovation, expanding coverage, building on successful practices and distance learning skills, orientation toward STEM, and development of cognitive skills…”
Reasoning:
At present, each school may choose one of several curricula and must then strictly follow the selected one. Feedback from more innovative schools is that it would be very helpful if they could prepare their own curriculum, entirely new or based on an existing one. The Ministry of Education should approve the proposed curricula, but schools themselves should be able to amend them beforehand in order to test and innovate in the educational process. We believe such liberalization would enable some schools to introduce new successful practices, measure results, and thereby contribute to improving the entire educational process in the country.
In PILLAR 1: INNOVATIVE BULGARIA, in the section on Research and Innovation, we propose the following change:
Current text:
“The country is still classified among the ‘modest innovators’, with Bulgaria’s weak relative performance mainly due to the quality of research in the country, including publication and patent activity, the links between private and public research, the offering of high-tech and innovative products by Bulgarian business, and—last but not least—the low effectiveness of coordination efforts among the various executive branch structures involved in designing and implementing policies in the various aspects of the issue.”
To be amended as follows:
“The country is still classified among the ‘modest innovators’, with Bulgaria’s weak relative performance mainly due to the quality of research in the country, including publication and patent activity, the links between private and public research, the offering of high-tech and innovative products by Bulgarian business, the shortage of sufficiently highly qualified personnel, the underdeveloped capital market, and the lack of sufficient investment from Alternative Investment Funds, and—last but not least—the low effectiveness of coordination efforts among the various executive branch structures involved in designing and implementing policies in the various aspects of the issue.”
Reasoning:
The lack of sufficient talent and sufficient investment is a key reason why we remain in the group of “modest innovators.” We consider it important that these issues be included in the text so that solving them may be prioritized. Bulgaria lags behind other countries on both criteria, and without them we cannot develop innovation.
In PILLAR 1: INNOVATIVE BULGARIA, in the section on Research and Innovation, we propose the following addition:
Current text:
“The main goal is to ensure a favorable environment for the implementation of new products and processes and for the development of innovative enterprises, as a necessary prerequisite for the creation of a high-tech industrial base that will put the economy on a new and higher growth trajectory. Priority is given to strengthening and stimulating scientific activity in higher education institutions, as well as to the overall improvement of research infrastructure and capacity to develop critical mass and knowledge for coping with the dual transition and preparing regions for accelerated development.”
To be supplemented as follows:
“The main goal is to ensure a favorable environment for the implementation of new products and processes and for the development of innovative enterprises, as a necessary prerequisite for the creation of a high-tech industrial base that will put the economy on a new and higher growth trajectory. Priority is given to strengthening and stimulating scientific activity in higher education institutions, as well as to the overall improvement of research infrastructure and capacity to develop critical mass and knowledge for coping with the dual transition and preparing regions for accelerated development. The result of the envisaged activities and reforms will be a strong link between science, technology transfer, startup companies, small and medium-sized enterprises, and large corporations—a whole ecosystem in which Bulgarian science works on developments that solve business problems, startup companies remain close to academia and universities and rapidly test and validate potential innovations, while large companies support the whole process and bring successful products and services to the global market.”
In PILLAR 1: INNOVATIVE BULGARIA, in the section on Research and Innovation, within the Program for Accelerating Economic Recovery and Transformation through Science and Innovation, we propose the creation of a fourth pillar with the following text:
Over the last 10 years, Bulgaria has developed a successful startup ecosystem. Through support from the European Investment Fund and later through the Fund of Funds, equity investment funds for startups and innovative companies were created. Today, thanks to these investments and efforts, we have companies reaching market valuations of hundreds of millions and attracting additional investment to the country. The goal now is for this ecosystem to continue growing at an even faster pace. Startup companies are the indispensable link between science and innovation on the one hand and the economy and traditional business on the other.
To develop successful collaboration between science, innovation, and startup companies, we will work in three main directions:
Access to more engineers, programmers, and highly qualified professionals is a fundamental issue for the development of innovation. Bulgaria faces a demographic challenge and we aim to address the problems identified so far. During the next programming period, we will establish simplified procedures for attracting highly qualified personnel from other countries; through education reforms, we will produce more of our own specialists; and we will support the retraining of working-age people who need new skills related to digitalization and the industries of the future. In order to achieve this goal, in addition to supporting companies that attract and develop talent, we will ease procedures by making Bulgaria one of the places with the fastest visa procedures for engineers, programmers, and entrepreneurs.
Support through public resources is very important, especially at the level of technology transfer, but for our companies to develop more successful innovations, private capital must also be ensured. Through reforms, we will facilitate voluntary pension funds in Bulgaria investing in equity funds. We aim to create a mechanism for stimulating angel investments, as well as for creating and developing more equity funds that cover all stages of company growth.
We recognize the need for changes in the legal framework so that Bulgaria becomes a place where it is easy to start a business, manage it flexibly, have the possibility to fail, and encourage initiative and entrepreneurship. We will reform legislation to better regulate convertible loans, vesting agreements, employee stock option agreements in startup companies, and through the advancement of e-government we will create opportunities for electronic share registration, digital employment books, digital communication with institutions, and easier management of innovative businesses from anywhere in the world.
Reasoning:
We believe that over the last 10 years significant investment has been made in building a strong startup ecosystem in Bulgaria. It was created and developed, and now it is right either to support it more strongly or it will disappear. Startups are key to innovation and technology transfer. We believe it is right to separate out the key aspects concerning the startup ecosystem into a distinct pillar.
In the text on Smart Industry, we propose the following addition:
Current text:
“…only 6% of SMEs sell online (the EU average is 17%), 3% of SMEs sell across borders, and only 2% of their turnover comes from online trade.”
To be supplemented as follows:
“…only 6% of SMEs sell online (the EU average is 17%), 3% of SMEs sell across borders, and only 2% of their turnover comes from online trade. Bulgaria is still far from the goal that by 2025, 50% of companies in the European Union should use open data and big data in their business.”
Reasoning:
We believe it is important for the Plan to mention prioritizing the development of infrastructure related to open data, and this is the right place to include text highlighting the challenge we aim to address.
In the Business Environment section, we propose the following addition:
Current text:
“Businesses facing solvency problems have no opportunity to restructure their financial obligations to creditors outside the cumbersome formal insolvency procedure.”
To be supplemented as follows:
“Businesses facing solvency problems have no opportunity to restructure their financial obligations to creditors outside the cumbersome formal insolvency procedure. More innovative companies and startups face difficulties in attracting investors and, still being in an earlier stage of development, are highly vulnerable.”
Reasoning:
Since the beginning of the crisis, support for startups and innovative companies has in practice been lacking. We believe it is high time to distinguish between the criteria used to determine damage to conventional businesses and to fast-growing innovative companies, and that this text would show understanding of that issue.
In the Business Environment section, we propose the following addition:
Current text:
“A more effective framework would help non-viable firms in financial distress to cease their activity, thus avoiding the locking-up of resources and the deterioration of bank assets.”
To be supplemented as follows:
“A more effective framework would help non-viable firms in financial distress to cease their activity, thus avoiding the locking-up of resources and the deterioration of bank assets. Introducing a more flexible form of company governance and of relations with their employees and investors would increase their chances of survival and development, even in conditions of reduced liquidity. The development of capital markets, investment in Alternative Investment Funds, and prioritizing market-based mechanisms for financial support to entrepreneurs would give Bulgarian business a chance not only to survive, but also to grow at a much better pace in the process of exiting the crisis.”
Reasoning:
We fully support the proposal made regarding insolvency. We believe the proposed wording complements the broader picture of necessary reforms to help entrepreneurs get through the crisis.
In addition to the proposed amendments and additions, we would also like to make recommendations and clarifications regarding priorities that would help the country emerge from the crisis and achieve economic growth with high added value.
“Angel investors” are individuals who make equity investments at the earliest stage of development of an innovative company, usually between BGN 10,000 and BGN 100,000. In Bulgaria, this almost never happens. In developed countries, there are various mechanisms encouraging this type of investment. The United Kingdom, for example, stimulates this activity through the so-called EIS and SEIS mechanisms. They work on the principle that the state refunds taxes amounting to up to 75% of the angel investment if the financed company fails. In Bulgaria, such investments are not encouraged. As a result, Bulgarian companies register in the UK, where even Bulgarian investors register under those mechanisms, and the transaction is completed under British law. The final result is that a Bulgarian company founded and financed by Bulgarians becomes a foreign company; the taxes remain abroad; and the intellectual property goes there too. Our wish is to develop a similar mechanism that would encourage such investments here. This would achieve three important things:
Where capital markets are developed, pension funds play an important role as a source of capital for Alternative Investment Funds (VC funds, private equity and venture funds that invest in startups, technological and innovative companies, and other businesses). This is also the case in Western Europe, Romania, and Croatia.
For such investments to work in Bulgaria, three main reforms are needed:
For this policy to work, a systematic approach is needed in building the investment infrastructure of pension funds. Practice around the world shows that in many countries AIF investments are among the most profitable for pension funds, with returns around 10% annually at present. In Bulgaria, pension funds are highly conservative and do not invest in AIFs, so a measure is needed to initiate this process.
This would lead to:
The Bulgarian Stock Exchange is connected to global markets through the German electronic trading system Xetra. Xetra allows Bulgarian investors to buy shares of 1.7 million German and European issuers electronically, but no German or European investor can buy shares of Bulgarian companies traded on the BSE electronically due to the lack of development and connectivity in the opposite direction. The BSE is majority-owned by the Bulgarian state, and responsibility for its development lies with its owner. It is necessary to invest in the infrastructure of the capital market (BSE and Central Depository) so that European and German investors can invest in Bulgaria. Such investment would allow European and international investors to freely invest in Bulgaria and trade shares of Bulgarian companies electronically on the BSE.
The BSE is making substantial efforts to support Bulgarian innovative industries and to stimulate capital markets. The BEAM market is an excellent initiative that will give many startups and scaleups access to the stock exchange even before becoming public companies. We believe it is very important to prioritize support for BSE programs promoting the BEAM market, including incentives for investment through this mechanism. For it to work optimally, it is also important to raise the current investment threshold from EUR 3 million to EUR 8 million, in line with the relevant European directive.
Bulgaria theoretically has the EU Blue Card. In practice, with a shortage of around 100,000 people in the IT industry alone, we issue only about 200 Blue Cards per year. The procedure takes over 5 months. By comparison, in other EU countries it takes between 2 weeks and a month, and the Netherlands has an expedited procedure of only two days. It is unrealistic for a company to start a hiring process, find a person, have them willing to come, and then make them wait 5 months for permission (sometimes up to 8 months). As a result, Poland succeeded in attracting close to 2 million programmers and engineers from Ukraine. Many of these people could have been here if we had a better-functioning Blue Card system, because the businesses ready to hire and pay them are here.
At the moment Bulgaria has a very valuable opportunity to attract hundreds of thousands of people from Belarus. We have the chance to promote ourselves much better to Eastern Europe and the Balkans. For this to happen, besides improving the procedure, it is necessary:
Bulgaria does not have enough entrepreneurs, especially those developing companies in innovation, high technology, and industries with high added value. We need a functioning Startup Visa, but we also need targeted programs to promote the country as a destination for entrepreneurs, position Bulgaria better at major entrepreneurial events around the world, and create an initiative that helps foreign entrepreneurs settle more easily here. A great example is the UK and the British Embassy’s UK Soft-Landing program, through which entrepreneurs moving to the UK are guided step by step through administrative procedures, finding office space, investors, and more.
For such an initiative to succeed, it is very important to adopt the new type of company we are advocating for and to solve current issues related to option pools, vesting, convertible loans, tag-alongs, drag-alongs, and more.
One of the key conditions for recovery from the crisis is for people in Bulgaria themselves to be proactive, entrepreneurial, and courageous in realizing their ideas. Bulgaria still does not have a Personal Bankruptcy Act, although we appreciate that Parliament is now working on it. Other major gaps in our legislation are the extremely slow and expensive voluntary liquidation procedure for companies, which makes no distinction between large corporations and companies that have never or barely operated, as well as the very burdensome and discouraging insolvency procedure.
We believe that in addition to urgent amendments to the Commercial Act concerning liquidation and insolvency, we should go further and create programs that encourage young people to try starting businesses of their own. We propose creating programs in protected environments for students, reviewing the work of guarantee funds and improving them where necessary so as to reduce the real risk for banks, and in general studying why entrepreneurial attitudes are so low and investing efforts in changing this.
Israel describes very well the connection between business and education and the role of technology transfer.
As can be seen in a well-functioning system, technology transfer is part of academia and universities, startup companies are very close to what happens there and are even participants, and they are the ones who quickly test whether developments coming from academia have market potential, can fail quickly, and test again, thereby developing forward what is successfully validated. Large corporations closely follow this process, set the direction for what scientists should work on, and the end result is the production of high value-added products and services and much higher GDP growth and living standards.
For this to work, it must first be validated that everything is legislatively structured properly, so that universities and academic institutions can have spin-off companies. It must be possible for any entrepreneur working with a university laboratory to give equity in the company to the institution, and the university should have the right to engage in such commercial activity.
The activity of the so-called Technology Transfer Offices must be reviewed. Unfortunately, today they do not function as they should. They should be led by entrepreneurs with knowledge of intellectual property and patents, who on the one hand tell scientists what to work on and what the market demands, and on the other hand monitor everything happening and “sell” the university’s work to business. Today’s offices were probably created with EU funding and are entirely formal and non-functioning, although they are crucial for the whole process.
We propose investing in several initiatives:
It is very important to understand that the model in which scientists apply for EU funding and include business representatives as partners is largely ineffective. Over the last 15 years we have seen good scientists in Bulgaria turn into people focused on chasing European funds and reporting activities without creating any value. It is also clear that in programs directly addressed to EU institutions, Bulgaria lags far behind all other countries in terms of innovation quality.
Every entrepreneur starting a business in Bulgaria should be able immediately to see what infrastructure exists, where laboratories and technologies in their field are located, which scientists work in similar areas, what has already been done, and which patents and developments we have. These two worlds need to communicate frequently, including informally. Then real teams working on real solutions will apply for financing.
The Czech Republic is a good example of how countries support their startups and entrepreneurs. They invest in getting their companies into the best accelerators and incubators in the world, such as Y Combinator and others. We believe Bulgaria should have a mechanism to support companies participating in such programs, as well as a scheme to finance their expenses during the months of participation. The result will be that our companies will have far better chances to enter global markets and will be better prepared and think more ambitiously.
The EU aims that by 2025 at least 50% of SMEs and startups should use big data analytics in their business, whereas currently only 12% do so. We propose implementing a comprehensive project consisting of the following stages:
In education, we welcome the desire for reforms, not just investments. We believe non-functioning practices need to be radically changed. We support the focus on changing curricula toward STEM, but beyond that, the drafting of curricula itself should be liberalized and every school should be allowed, if it chooses, to revise existing curricula or prepare entirely new ones subject to approval by the Ministry of Education. Market mechanisms related to lecturers’ work also need to be emphasized. At universities, 100% of courses should be elective, rather than the current nominal choice of 2 out of 3 options. Every student should be able to choose which courses to use to earn credits and attend subjects even from another specialization if others in their group choose differently. The practice of permanent contracts for university lecturers should end. As in Western countries, they should be on contracts of 2 to 5 years so that if they do not perform well, their contracts are not renewed, rather than being practically impossible to dismiss. Lecturers’ salaries should be linked to whether students actually want to study with them, and the entire “money follows the student” model should be abandoned.
In conclusion, we suggest considering a bold vision that unifies the whole document. At the moment it contains many good elements, but they do not seem sufficiently connected. A bold and clear vision matters because all of us see that in the nearly 14 years since joining the EU, Bulgaria remains last in living standards, while even the second-to-last country is developing faster than us. The aim of the plan is to reach full or 75% of average European living standards and wages, which would place Bulgaria ahead of countries like Poland, the Czech Republic, Hungary, Romania, Slovenia, Slovakia, Lithuania, and Latvia. This is a very ambitious goal and we support aiming there, but the plan does not explain why after 14 years we are still behind Romania and how we would now overtake them and the others. We believe a very clear and bold vision and direction should be stated, with everything else supporting that vision. It could be “Bulgaria to become the best place to start a business in the industries of the future,” or “Bulgaria to become the greenest country in 50 years,” and so on. There may be many variants, but we need such a clearly stated direction.
Respectfully,
BESCO – The Bulgarian Startup Association
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