Do Emerging VC Markets Mirror Established Ones? A Comparison of CEE, the USA and Israel

The initial phase of venture capital (VC) development in the United States and Israel – commonly referred to as the background conditions phase – reflects how economic and security crises can catalyse a market's emergence (Avnimelech et al., 2004). In the U.S., the decline of New England's garment industry and the Great Depression highlighted the need for new funding mechanisms to support smaller ventures (Hsu & Kenney, 2005). Additionally, post-World War II and Cold War imperatives increased demand for advanced technologies, especially in military applications, bringing renewed attention to underutilized scientific potential.

By contrast, Israel's Six-Day War and subsequent arms embargo accelerated the development of local R&D capacity in the defence sector, laying the foundation for future technological innovation and eventual VC growth (Vekstein, 1999). Government and institutional involvement, though uneven across the two countries, proved decisive in shaping early market structures. In the U.S., military-led R&D helped smaller tech firms and universities thrive, indirectly fostering a nascent VC ecosystem. In Israel, the government's Office of the Chief Scientist offered direct support for R&D, while foreign investment from multinational corporations brought essential financial resources and managerial expertise (Avnimelech et al., 2004). These parallel yet distinct efforts underscored the key role of government and institutional engagement in establishing initial market conditions for VC.

The transition from basic R&D ecosystems to organized venture capital (VC) structures in both the United States and Israel can be traced to the pre-emergence phase, which bridges nascent technology innovation and formalized VC financing. In the United States, this phase gained momentum following World War II, when state-directed military spending stimulated interest in high-tech ventures that required external funding. One pivotal development was the establishment of the American Research and Development Corporation (ARD), which channelled capital from institutional and private sources into emerging technology firms. Concurrently, foundations such as Venrock—backed by the Rockefeller family—provided additional capital and governance expertise, reinforcing the foundational VC community (Adams 2005). Although largely private-sector driven, government initiatives—often indirect—created favourable conditions for entrepreneurial activity, particularly in aerospace and computing (Hsu & Kenney, 2005).

Israel's pre-emergence phase, by contrast, was fuelled by a confluence of policy interventions and demographic shifts. In the late 1980s and early 1990s, substantial immigration from the former Soviet Union brought highly educated engineers and scientists. This demographic wave dovetailed with government-led programs such as the Magnet Program, Technology Incubators, and Inbal, which served multiple functions: they provided capital and managerial guidance, encouraged academic-industry collaboration, and facilitated the commercialization of early-stage technologies. Although some initiatives were more successful than others—Inbal, for instance, encountered challenges in raising private capital—the collective outcome was a marked expansion of the local high-tech start-up ecosystem (Avnimelech, 2009; Frenkel et al., 2005; Vekstein, 1999).

Despite dissimilar historical timelines, the United States and Israel demonstrated parallel trajectories during the pre-emergence phase. Both countries nurtured a culture of innovation—through public or quasi-public channels—that lowered barriers to market entry for new ventures. They also concentrated resources on strategic technology sectors, albeit for different national priorities: the United States emphasised its Cold War posture, while Israel focused on bolstering domestic research capacity. By the end of this phase in each market, formal VC organisations—along with a pool of skilled entrepreneurs and fund managers—were better positioned to embark on the next phase of rapid growth (Avnimelech et al., 2004).

During the emergence phase, the venture capital (VC) industries in the United States and Israel underwent transformational changes that solidified their positions as innovation hubs. In the United States, this period saw the formation of key institutions, including Draper, Gaither and Anderson (DGA)—the first VC firm to operate under a limited partnership model. This legal structure soon became the standard for subsequent VC organizations, fostering clarity in fund management and risk-sharing (Avnimelech et al., 2004). The launch of NASDAQ and the successful IPOs of high-tech pioneers like Intel reinforced investor confidence by providing liquidity and highlighting the growth potential of young tech firms.

An equally significant development was the Small Business Investment Company (SBIC) programme, introduced in 1958 under the auspices of the Small Business Administration (SBA). As detailed in House Report 104-873 (1996), SBIC was a public-private partnership co-investing in VC funds that targeted early-stage companies, addressing the equity gap for new entrepreneurs. Several household-name firms—including Apple, Tesla, Intel, and FedEx—received early support from SBIC funds (SBA, 2017). While the USA emphasised market-driven growth aided by public financial instruments, it was the creation of reliable institutions—from NASDAQ to SBIC—that helped transform sporadic investments into a thriving VC ecosystem.

In Israel, the emergence phase hinged on bold policy experiments, particularly the Yozma programme. Building on earlier lessons from Inbal—whose risk-reduction model encountered hurdles in attracting private investors—Yozma injected USD 100 million into a domestic VC industry that, until then, had been largely informal (Avnimelech & Teubal, 2004). A cornerstone of Yozma's strategy was its partnership model, requiring foreign and domestic institutions to collaborate as limited partners in newly formed VC funds. The programme also allowed private investors to buy out the government's share at cost, providing potent incentives for active, risk-taking management (Wonglimpiyarat 2015).

Between 1990 and 2000, Israeli VC investments soared from USD 5 million to USD 3.3 billion, with affiliated funds eventually managing more than USD 5.5 billion (Avnimelech et al., 2004). The Yozma initiative did more than pump capital into the market; it created a culture of innovation and collaborative learning that propelled Israel onto the global stage as the “Start-Up Nation.” This contrasts with the U.S. case, where private-sector institutions played a more organic role. Still, both trajectories emphasise how government intervention—whether direct or indirect—can catalyse a dormant VC market.

The crisis phase represents a pivotal juncture in venture capital (VC) evolution, as market shocks trigger a collective loss of confidence and a flight of capital away from early-stage investing (Avnimelech et al., 2004). In the United States, the 1970s brought significant turmoil; stock market declines and growing uncertainty surrounding the Vietnam War tightened liquidity, diminishing the appetite for new ventures. Moreover, pension fund managers were constrained by the Employee Retirement Income Security Act (ERISA), which imposed strict fiduciary rules on pension investments (Morgan, 2015). This regulatory bottleneck reduced potential capital inflows and curbed the establishment of new VC funds (Gompers & Lerner, 1999).

In Israel, the crisis manifested in the early 2000s amid the global dot-com collapse, which dealt a heavy blow to high-tech valuations. Although Israeli VC funds had limited exposure to dot-com startups specifically, the ensuing downturn in technology stocks led to larger capital constraints across the entire ecosystem (Avnimelech et al., 2004). As exit opportunities dried up and risk capital dwindled, many new funds either shut down or merged, while start-ups faced an acute capital shortfall (Avnimelech & Teubal, 2006). This confluence of global and local factors highlights how rapidly VC markets can shift from exuberant growth to severe contraction.

Despite the different catalysts—regulatory friction in the U.S. versus global tech headwinds in Israel—both crisis scenarios demonstrate a consistent pattern: weakened investor sentiment, reduced fundraising, and widespread market consolidation. However, these challenges frequently lay the groundwork for institutional reforms and policy recalibrations, which pave the way for a more resilient VC ecosystem in the subsequent consolidation phase.

The consolidation phase in the United States and Israel represents a critical maturation of their venture capital (VC) industries, characterised by stable capital flows, geographic clustering, and the institutional restructuring necessary for long-term resilience (Avnimelech et al., 2004). In the U.S., this phase unfolded in the late 1970s and early 1980s, when the successful IPOs of Genentech and Apple in 1980 signalled a shift away from government-dominated contracts toward dynamic civilian markets (Gompers, 1994; Avnimelech et al., 2004). Consequently, venture capital became a cornerstone of the national innovation ecosystem, with Silicon Valley emerging as a geographic hub attracting nearly 40% of overall VC investment (Florida, 2016).

In Israel, the consolidation phase began in 2004, following the market upheavals of the early 2000s (Avnimelech & Teubal, 2006). After rebounding from crisis-related capital shortages, the Israeli VC market exceeded its pre-downturn fundraising levels and experienced a surge in both startup activity and exits, including IPOs and strategic acquisitions by multinational firms. Alongside these quantitative gains, qualitative shifts emerged, including the proliferation of non-VC agents—such as private equity firms—and the formation of new strategic alliances (Avnimelech & Teubal, 2006).

In both countries, legislative reforms and institutional innovations were integral to consolidation, ensuring that the post-crisis landscape remained robust and better positioned to handle future market shocks (Avnimelech et al., 2004). By deepening ties between government policies, research institutions, and private investment, each ecosystem laid the groundwork for sustained global competitiveness in high-tech sectors.

Examining the classifications applied by Avnimelech et al. (2004) to the background conditions phase in the USA and Israel, it is evident that this phase in both countries was characterised by critical phenomena. These phenomena compelled the state to undertake R&D activities, leading to a large inflow of capital into young, innovative enterprises. By contrast, in Poland, the VC sector's initial development was not driven by military-industrial needs, as in the USA and Israel, but rather by the collapse of the communist system and subsequent systemic transformation and privatisation of enterprises, which triggered an inflow of capital. As Krawczyk (2008) notes, VC capital was perceived as a structural instrument to enhance the Polish economy's competitiveness and subsidise the underdeveloped technology/IT sector, which lagged due to decades of centralised economic planning. Across all analysed countries, a common feature is the focus on investments in IT and high-tech sectors. Thus, the background conditions phase in Poland is best traced to the start of systemic transformation in 1989, following the collapse of communism. Consistent with Israel's experience, the first funds in Poland (e.g., Polish-American Enterprise Fund, Social and Economic Investment Company, and Caresbac) emerged at the inception of the VC market. Notably, these early funds relied on foreign (primarily American) capital and operated with an aid-oriented mandate, a parallel to Israel's trajectory (Krawczyk, 2008).

A comparable development path is evident in Hungary. Molnár (2021) observes that in the immediate post-communist era (post-1989), global investment funds prioritised privatisation-related investments. For instance, the Hungarian-American Enterprise Fund, akin to Poland's early entrants, was among the first foreign funds. By the mid-1990s, regional funds became increasingly active, shifting focus to domestic company development. Molnár (2021) highlights the emergence of “classic venture capital” in Hungary by the late 1990s and early 2000s, marked by pioneering investments in private technology and media firms.

In contrast, Klonowski (2006) describes the early development of the Czech venture capital market as relatively underdeveloped compared to that of its regional peers. Despite establishing the Czech Venture Capital Association in 1991, membership declined as financial institutions withdrew due to challenging investment conditions and participation in competing regional associations. A key factor in this sluggish growth was the shortcomings of the 1990s voucher privatisation program, which failed to inject new human capital into privatized enterprises and enforce budgetary discipline, resulting in cross-ownership complexities and ineffective corporate governance (Romaine, 2003, cited in Klonowski, 2006). Moreover, Czech entrepreneurial firms faced persistent barriers in credit and equity markets, constraining VC sector growth (Klonowski, 2006). Nonetheless, VC investment surged in the late 1990s, peaking in 2000, driven by pension funds and financial institutions, with capital sources shifting from non-European to domestic investors by the early 2000s (Klonowski, 2006).

Comparative analysis reveals that while background conditions varied across countries, they were universally present. Notably, divergent operational and structural frameworks for VC funds distinguish the cases: the USA lacked formal VC funds during this phase, whereas Israel saw nascent formal VC funds. In Central and Eastern Europe (CEE), funds emerged rapidly post-1989, capitalising on market potential. For example, Poland's earliest funds were aid-oriented, with private investment funds emerging only by 1994 (Krawczyk, 2008). However, Krawczyk's (2008) classification of Polish VC funds reveals heterogeneity: many operated within the broader private equity sector, targeting mid-cap firms rather than startups. Similar patterns are evident in Hungary and the Czech Republic. As Klonowski (2005) emphasises, while these funds were not explicitly VC-oriented, their investments indirectly stimulated sectoral growth.

Thus, unlike the USA and Israel, where formal VC funds definitively marked the end of the background conditions phase, CEE countries present a nuanced case. Initial foreign aid-based funds and subsequent private equity-oriented funds complicate the phase's endpoint. Consequently, the emergence of formal VC funds cannot serve as the sole indicator for concluding this phase in CEE contexts.

Looking at the significant developments during this phase in Israel and the USA, Avnimelech et al. (2004) highlight the importance of strategic investments in technology sectors, human capital, and government support. In the USA, many key solutions – such as founding the first professional VC funds – appeared early and then spread elsewhere, while Israel's governmental efforts offer a closer parallel to some CEE countries.

In Poland, EU accession in 2004 gave access to structural funds aimed at bolstering young enterprises (Sabal et al., 2018). These resources, supervised chiefly by the Polish Agency for Enterprise Development (PARP) or by the Polish Development Bank (BGK) through programs like JEREMIE (Murray et al., 2012), coincided with broader public interventions for VC. Mirroring Israel's early initiatives (Technology Incubator, Magnet, Inbal), Poland introduced organisations such as PARP, the National Capital Fund (KFK), and the National Centre for Research and Development (NCBR). Despite limited success – Inbal in Israel (Avnimelech, 2009) and KFK in Poland (Bielicki, 2020) – both efforts taught policymakers the value of a fund-of-funds (FOF) model and the need for strong investment teams (Bielicki, 2020).

Hungary's development also accelerated after joining the EU in 2004, with VC investment rising severalfold thanks to JEREMIE funds (Karsai, 2012). These public-private partnerships focused on startups, echoing Israel's Yozma in their incentive mechanisms. SZTA (Széchenyi Capital Fund Management), established in 2011, operated under a FOF structure and accounted for more than half of VC investments in 2014–2015 (Molnár, 2021). Such programs, like those in Poland and Israel, addressed capital gaps caused by an underdeveloped private VC ecosystem.

In the Czech Republic, the pre-emergence phase is less clear. Despite EU membership in 2004, almost no structural funds were allocated to VC. From 2007 to 2013, just one seed-stage and 11 startup-stage transactions were noted (Ptacek et al., 2015), while the legislative and tax climate remained unfriendly to VC (Rajchlová et al., 2011). Two attempts at creating a public VC fund—one in 1995 and another in 2005—were abandoned or dissolved, and a subsequent Seed Fund launched under the OP Enterprise and Innovation program halted in 2014 (Rajchlová & Svatošová, 2016). Although CzechInvest was active, Dealroom data show it had a broad remit beyond VC, leaving insufficient information to gauge its market impact fully.

The emergence phase, as described by Avnimelech et al. (2004), is characterised by high VC growth and increased start-up activity, along with greater market competitiveness and improved availability of capital. In the case of the United States, the most important developments included the establishment of the NASDAQ, the first VC organisations structured as LPs, and government support through the SBIC program. In Israel, key milestones were the emergence of IPO opportunities for Israeli start-ups on the NASDAQ and, most importantly, the launch of the Yozma program in 1993. The Yozma program had a profound impact on the venture capital market in Israel. From 1990 to 2000, investments grew from USD 5 million to USD 3.3 billion. Its success went beyond initial support, as subsequent funds managed by VC firms affiliated with Yozma held a total capital of more than USD 5.5 billion, accounting for more than half of the investment in the sector. Moreover, the strategic approach of the Yozma program fostered a culture of innovation and collaboration, driving a collective evolution of the VC and startup market and a competitive advantage in the global marketplace (Avnimelech et al., 2004).

Once again, parallels can be observed between Poland and Israel in particular. Matching the events in Poland with the classification by Avnimelech et al. (2004), the start of Poland's emergence phase can be traced to the creation of the Polish Development Fund (PFR), which, through its subsidiary PFR Ventures, began operating in the VC sector in 2017. Initially, five programmes were launched under PFR Ventures: Starter, Biznest, KOFFI, Open Innovation, and PFR-NCBR CVC. These programmes differed in their objectives, investment principles, and forms of cooperation with private investors. PFR Ventures derives its funds from programs implemented by the European Union (with Bank Gospodarstwa Krajowego serving as the depositary). Other sources include the Swiss Contribution program and capital from the Polish Development Fund. Notably, most of the initial funding for these programmes originated in the Smart Growth Operational Program (POIR) run by the European Union.

Below, a comparison will be made between the programs used in this phase by Poland and Israel, although the SBIC program in the United States will not be analysed. As Avnimelech et al. (2004) note, while many investments were made under SBIC, its overall impact on the development of the VC market was less substantial than that of Yozma.

As the first edition of the POIR program has ended, it provides an interesting case study for comparison. Although its total impact cannot be fully evaluated for several more years because of the investment horizon, preliminary data suggest that this type of public-private partnership was necessary in Poland, as shown in Figure 1, which depicts the amount of invested capital over time.

Figure 1.

VC investments in Poland 2007–2023 (mln EUR)

^*the average annual exchange rates from the National Bank of Poland were used for currency conversions.

Source: own elaboration based on Invest Europe for 2007–2018, PFR Ventures for 2019–2023.

Examining the invested capital in Poland over the past 15 years, we see that it remained very low until the launch of PFR Ventures. During the first full year of PFR Ventures' operation, the total invested capital surpassed the cumulative amount of the previous decade. Notably, some transactions executed during PFR Ventures' operation, which contribute to the total annual value, are single mega-rounds (transactions exceeding 10% of the value of all investments in a given year), highlighted in a different colour on the figure. However, even excluding these mega-rounds, the amount of invested capital in Poland's VC sector increased significantly.

Furthermore, data on the number of active VC funds in Poland reveal substantial growth since PFR Ventures was launched in 2017. For comparison, according to Statista (2024), 43 active VC funds operated in 2016, before PFR Ventures' establishment. By 2022, the number of active funds had exceeded 240. This more than 560% increase in active funds over six years demonstrates the dynamic development of the VC sector in Poland during its emergence phase. Interestingly, a parallel with Israel emerges here as well. As Avnimelech & Teubal (2004) reported, the number of VC funds in Israel rose from 2 in 1991 to over 100 in the 2000s.

The growing success of the first five PFR Ventures programmes is evidenced by the launch of a new edition of the PFR Starter, Biznest, Open Innovations, KOFFI, and CVC programmes at the beginning of 2024, supported by the European Funds for a Modern Economy (FENG). PFR Starter and PFR Biznest will facilitate investments through VC funds in small and medium-sized companies at the early stages of development. Notably, in this edition of PFR Starter, investors can benefit from a new profit-sharing asymmetry feature, allowing independent private investors a 2.5x profit multiplier relative to their share in the fund's capitalisation. The objective of PFR Biznest is to activate private investors (business angels) and promote knowledge transfer from individuals with extensive market experience, similar to the previous edition. The new edition of PFR Open Innovation aims to invest through VC funds in small and medium-sized enterprises with an R&D component at both early and later stages. Similarly, to PFR Starter, a key change in PFR KOFFI is the introduction of profit-sharing asymmetry favouring private investors (with a maximum multiplier of 1.5x) and reducing the private contribution requirement to 40%. PFR KOFFI will invest through financial intermediaries in small and medium-sized enterprises at the growth, development, and expansion stages, particularly those looking to expand operations, implement new projects, or enter new markets. PFR CVC, in turn, provides capital to innovative companies through CVC funds co-investing with corporate investors. As illustrated, the general concept of these programmes remains very similar to the first edition (POIR). This time, the public fund's contribution will amount to PLN 2 billion, with an additional PLN 1 billion sourced from private investors to further bolster the VC sector in Poland (PFR Ventures, 2023).

Notably, Zasępa (2015) had already recommended the incorporation of profit asymmetry within the KFK program. However, this solution has only now been implemented at scale with the second edition of PFR Ventures programmes. Moreover, this approach shares similarities with strategies employed in Israel's Yozma programme, as shown in Table 1. This underscores the parallels in the developmental trajectories of these two countries or the incorporation by Polish policymakers of effective practices from more advanced markets.

The emergence phase in Hungary shares several characteristics with that in Poland. Its onset can also be attributed to a similar period, as both countries' investment volumes rose around the same time. According to Dealroom (2024), the capital invested in the Hungarian VC sector amounted to USD 50 million in 2017, increasing to over USD 110 million in 2018, including a USD 38 million mega-round. As in Poland, the highest investment volumes were seen in 2021 (USD 133 million) and 2022 (USD 206 million).

Examining government interventions during this period, we observe similarities between Hungary's approach and the solutions implemented in Poland and Israel. As Molnár (2021) highlights, in 2020, three out of 26 venture capital fund management companies in Hungary were state-owned—Széchenyi Venture Capital Fund Management (SZTA), Hiventures (formerly CVCFM), and Hungarian Development Bank (MFB) Invest, which, though not an equity fund manager, held investments in multiple funds.

Although SZTA was discussed in the previous phase, it is also worth examining the other two government-backed programmes. Both Hiventures and MFB were active before Hungary entered the emergence phase, yet they merit attention when compared to PFR and Yozma.

MFB operates across a broad financial spectrum, not limited to venture capital. Within the VC sector, its role encompasses three key activities. First, MFB helps distribute EU financial instruments. Second, it owns multiple sub-funds with specific investment objectives, which are managed by external fund managers. Third, MFB owns Hiventures, a state-backed VC investment fund focused on deploying public capital. Over the years, Hiventures has managed numerous government programmes catering to various technology sectors within the VC market.

As Molnár (2021) notes, Hiventures currently serves as a leading direct state investor in the sector, following the earlier indirect JEREMIE program. What distinguishes Hiventures from similar initiatives in other countries is its role during the COVID-19 pandemic, when it managed government relief programmes designed to “rescue” startups by offering highly favourable investment terms.

The rate of government intervention in supporting the VC sector in Hungary is significant. Across all public measures, strong similarities appear among Poland, Israel, and Hungary. However, it is notable that, like in Poland, Hungary's Emergence phase shares few parallels with the United States, where a strong free market was the primary driver of startup financing.

The surge in investments in the Czech Republic occurred around the same time as in Poland and Hungary, with investment levels doubling from 2018 to 2019. The highest capital inflows were recorded in 2021 (USD 581 million) and 2022 (USD 646 million). At first glance, these figures might suggest that the Czech VC market is the largest among the four countries analysed, but this is not the case. The record-breaking volumes stem largely from funding rounds secured by one of the country's biggest startups, Rohlik. In 2021, Rohlik raised over USD 309 million across two rounds, followed by another USD 231 million in 2022 (Dealroom, 2024).

Publicly funded initiatives in the Czech Republic have also evolved over time. One key example is the EUR 50 million Czech ESIF Fund of Funds (CZFoF), launched on January 24, 2017, and managed by the EIF. Its goal is to strengthen entrepreneurship and innovation by expanding equity funding for enterprises across early development stages, from accelerators to venture capital. Another significant initiative is the National Development Investment (NRI), a Czech National Development Bank (NRB) subsidiary, which implements equity and quasi-equity financial instruments using public resources. NRI operates through both direct investments and a fund-of-funds model, focusing on venture capital, private equity, and urban development (EIF, 2023; PFR, 2021).

A more telling way to compare the size of startup ecosystems is to examine the total number of pre-seed and seed funding rounds. According to Dealroom (2024), from 2017 to 2023, Poland led with 1,843 rounds, followed by the Czech Republic with 1,251, and Hungary with 961. Despite lacking the advanced public investment programs in Poland and Hungary, the Czech startup ecosystem remains robust, capturing the second-highest number of early-stage funding rounds among the three CEE countries. Moreover, data from the Czech Republic show that business angel investments and their contributions are more prominent than in the other countries studied.

Comparing these three countries with Israel and the USA, it becomes clear that Israel, Poland, and Hungary share the most similarities, as public initiatives have substantially strengthened their local startup ecosystems. In contrast, despite not having similarly comprehensive government-backed programs, the Czech VC market still developed by relying primarily on private investors during the emergence phase. This renders the Czech model more akin to the USA, where a free-market approach largely fuelled VC investment growth. However, it is also worth noting that, during its emergence phase, the USA VC market had a less developed legal and organisational framework for venture funds than the Czech Republic, where such structures were already in place.

The crisis phase is the fourth phase in the VC market development cycle outlined by Avnimelech et al. (2004). In the USA, this phase resulted from unfavourable legislation, which led to minimal capital inflows into the VC sector. In Israel, by contrast, the crisis was initially driven by macroeconomic events such as the collapse of the stock market bubble. A broader high-tech sector crisis caused a significant drop in exits of Israeli start-ups and restricted new investments. As Avnimelech & Teubal (2006) observe, the crisis phase can be triggered by a domestic crisis tied to the industry's evolution or by a global investment crisis emanating from the cyclical downturn in global capital and technology markets. Additionally, Avnimelech & Teubal (2006) highlight overshooting as one of the causes of Israel's crisis.

In the case of Poland, it is challenging to predict a potential investment collapse stemming from internal factors. The recent infusion of capital by PFR Ventures from the FENG program is expected to significantly boost investment in Poland's venture capital sector in the coming years. Although this capital presents a substantial opportunity to continue Poland's rapid VC growth, it also carries the risk of investment overshooting. As in Israel's case, if available capital in Poland continues to grow, less-experienced VCs may enter the market, potentially reducing investment quality and diminishing further growth. Hence, it is crucial for capital providers (such as PFR Ventures) in Poland to uphold standards when selecting management teams.

Turning to Hungary, one can observe a similarly strong influence of government programs on the domestic VC ecosystem. Like Poland, the sector there remains highly dependent on such support. However, upon examining some of the largest investments in recent years, it is apparent that not all deals are government-driven, as both domestic and international private investors are becoming increasingly active. Given this trend, it is difficult to foresee a crisis in the Hungarian VC market, barring external factors.

For the Czech Republic, predicting a potential VC market crisis at this point is also difficult. Nevertheless, the risk factors may differ from those in Poland and Hungary, given that private investors play a more significant role in Czech start-ups' funding. The Czech startup ecosystem will face significant risks if private investors withdraw or fail to raise sufficient capital. Because there is not yet a large and stable state support mechanism for investment, the Czech Republic remains more vulnerable to market fluctuations.

Looking further at the Polish case, it becomes clear that the global market situation poses a greater threat to Poland's VC market than domestic factors. As illustrated in Figure 2, only 40% of the capital in Poland's VC market originates from domestic investors. Similarly, 41% of VC capital in the Czech Republic is domestic. Hungary, at nearly 50%, boasts the strongest domestic capital rate among the CEE countries studied. Nonetheless, this underscores the influence of global risks—especially when compared to Israel, whose market, although highly developed, felt the impact of the 2008 global crisis. In contrast, the USA's VC market shows notable strength and resilience, with nearly 80% of its capital coming from domestic sources. Such a high proportion of foreign investors in Poland and other CEE markets could significantly curtail—and potentially halt—VC development should a global crisis prompt their withdrawal. In the short term, this risk is difficult to mitigate.

Figure 2.

Comparison of the origin of investors in VC markets in the US, Israel, Poland, Czech Republic, and Hungary between 2010 and 2022

Source: own elaboration based on data from Dealroom (2024)

Poland is expected to enter a consolidation phase earlier than the other Central and Eastern European countries examined. Thus, the following VC per capita analysis and broader long-term potential overview focus solely on Poland's VC market contrasted with the USA and Israel.

As Avnimelech et al. (2004) and Avnimelech & Teubal (2006) explain, the USA and Israel experienced consolidation and subsequent resilience for several years during this phase. Although the Polish VC market has expanded rapidly, it still has far to go before consolidating. This is apparent in data on VC investment amounts per capita. In Poland, the average investment per capita from 2007 to 2023 was USD 5.6, compared to USD 337 in the USA and USD 484 in Israel. Even in Poland's best year, 2021, per capita investment reached only USD 24.8, while in the same year, both the USA and Israel exceeded USD 1,100. Despite Poland's VC market growing faster than the other analysed CEE countries, it still lags significantly behind the USA and Israel, which have remained in a consolidation phase for many years.

Regarding Poland's long-term VC prospects, one key indicator to watch is the number of successful exits—particularly IPOs—since they have profoundly impacted market consolidation in both the USA and Israel. Furthermore, as seen in these countries, the expansion of domestic VC funds into foreign markets deserves attention during the consolidation phase.

Estimating when Poland will reach the consolidation phase remains complex. In the USA, consolidation began 50 years after the initial background phase, whereas in Israel, it took 34 years. Considering that Poland's VC market has existed for about 35 years (as of 2024), it may enter consolidation sooner than the USA. However, Israel's faster progression through these phases suggests that Poland's timeline could also vary greatly.