On the Cyprus startup scene, risk financing and support are hard to come by. To plug the gap, the Ministry of Finance and the European Investment Fund (EIF) launched the Cyprus Equity Fund (CEF).
In a recent interview with GOLD magazine, Demetrios Zoppos and Yiannis Eftychiou, co-founders of 33East, the VC firm selected to steer the CEF’s funds, delve into the nuances of their investment philosophy and their efforts to stitch the elements of the island’s ecosystem together.
Demetrios Zoppos, one elbow resting on the conference table, takes on a resolute expression, like a seasoned tennis player poised to return an incoming volley. Seated beside him is Yiannis Eftychiou, projecting a more relaxed demeanour as he reclines in his chair, fingers interlocked. The two founders of venture capital firm 33East have joined me at GOLD’s office in Nicosia – shuttling between Cyprus and the UK has left them somewhat office-less – to discuss their mission to scale the local startup scene.
Is money enough to beget scale? Well, in 2022, Cyprus’ Finance Ministry, in collaboration with the European Investment Fund (EIF), announced a call for bids from fund managers to steer the Cyprus Equity Fund (CEF), tasked to take bets on Cyprus-based startups. The CEF, endowed with €27 million, drew its resources from Cyprus’ Recovery and Resilience Facility (RRP) and residual funds from the JEREMIE programme. The selected fund manager would be obligated to raise an additional €10.5 million before making use of the allocated capital. Of the 10 applicants, Zoppos and Eftychiou’s 33East won the bid.
Let’s backtrack for a moment. In 2017, Greece, alongside the EIF, set up a fund-of-funds to pour some €260 million into stimulating a venture capital scene. It invested in startups through VC and PE funds. In 2021, some half a billion euros were invested in Greek startups, creating several unicorns, such as neobank Viva Wallet, certification services PeopleCert, online marketplace Skroutz and proptech Blueground. Looking at other startup ecosystems – in Sweden, Estonia, Israel, the UK, the US and beyond – shows that a healthy VC scene was key in spinning them in the right direction. The Greek example also highlights another important aspect of risk financing: the amount of money needed to build and sustain momentum far exceeds the CEF’s modest war chest.
Back in the IMH conference room, Eftychiou says, “Venture financing is the most established model for building something big quickly” and a 2021 study by the European Commission backs his claim: VC-backed firms grew faster in terms of employment, sales and productivity than their non-VC-backed counterparts. “That’s why we want more VC firms in Cyprus. And if we are successful, it means more will join us,” he adds.
So, who are the two men that are eager to develop the island’s startup ecosystem?
In 2009, the year that began with Barack Obama being sworn in as the first African American US President and Apple rolling out the iPhone 3GS, and ended with Sony announcing the death of the floppy disk, Zoppos, alongside Greg Marsh, with whom he had already worked in a startup he had co-founded, found himself in a garage in London fine-tuning an idea to create a new category of holiday accommodation in the upscale urban sector by converting luxury private homes for stays. The only other company to offer a similar product had launched 18 months earlier but Airbnb focused on distributing affordable stays rather than manufacturing an upscale hospitality experience. And so it was that onefinestay burst onto the scene, growing by 500% in its first year and 300% in the second. Zoppos and his team realised the need to expand internationally fast and added Paris, New York and other major destinations to the roster, marketing to young families who wanted to have the amenity of a home but the assurance of a hotel. In 2016, Accor Hotels acquired onefinestay for £117 million. His counterpart, Yiannis Eftychiou, carved out his niche in London’s investment circles. He started with the international consulting firm Bain & Company, where he worked as a management consultant, providing strategic counsel to executives and offering insights to enhance their companies’ operational efficiency. One of the first projects he worked on was setting up the European B2B sales for American tech giant Dell. He also worked with private equity investors looking to buy tech companies, giving him a taste of the investing mindset that goes with becoming a shareholder. A hiatus from his professional pursuits led him to enrol in the esteemed INSEAD Business School’s Asian Campus in Singapore, where he immersed himself in emerging markets. Upon his return to London and driven by a fervent desire to continue working with those same emerging markets, he seized an opportunity to work in the investment team at what was then known as the CDC Group, now rebranded as the British International Investment (BII) – the development finance institution of the UK Government. While at BII, he was involved in transactions with startups in Africa and South Asia, some as big as €100 million. Meanwhile, he was instrumental in creating BII’s venture strategy, co-investing at nascent stages with venture funds and later participating directly in Series B and C rounds. Upon learning that the CEF was in search of a fund manager, Eftychiou wasted no time – the thought of contributing to Cyprus had been long simmering in the recess of his mind. Encouraged by multiple acquaintances, he reached out to serial entrepreneur Demetrios Zoppos. Their first encounter unfolded in a London garden, where they set out their shared vision for the future. It became immediately evident that their aspirations resonated deeply.
“What is our motivation?” Demetrios Zoppos says, repeating my question. “Well, it is to help build a country in which young people have a future, where there’s a vibrant economy, people can do interesting things and the country can export interesting technology.”
33East will have two compartments. The first will deploy €2.5 million, writing €100,000 tickets for startups with some residual technology risk. These will essentially be pre-revenue ventures with interesting ideas that are looking for their first commercial money. It will cover 10-15 startups over a three-to-four-year period. The remaining €35 million will go into the second compartment. It will inject up to €500,000 in pre-revenue startups that have already raised some money from friends and family, or through a grant, and up to €1 million in startups with some commercial traction. The firm will reserve €17 million to prop up its portfolio when needed. According to Zoppos, the plan to concentrate 33East’s firepower on pre-seed and seed startups has been crafted to cater to the unique demands of the Cyprus startup landscape. Indeed, he believes that it was this investment thesis that provided them with an edge among the bids to manage the CEF.
Having met with over 100 entrepreneurs so far, the duo have discovered that the island’s startup world can be divided into two categories: technologies resulting from research conducted at universities and Centres of Excellence – robotics, healthtech and renewables, to name a few – and software products produced on the up-and-coming fintech, video games and enterprise software scenes. In both cases, exporting to bigger markets to test the waters is a one-way street.
“Doesn’t Cyprus’ small market size make it ideal for validating ideas?” I ask.
Zoppos shakes his head. “There are pros and cons,” he says. “While there’s room to test ideas in industries like shipping, where Cyprus is a global player, local companies and consumers might always represent the main market. Also, due to the market’s small size, many of the larger corporates are highly vertically integrated. They will want to absorb the startup, which is not what founders seek at the initial stages of growth. In contrast, big European and North American businesses are far more specialised and willing to outsource part of their operations to third parties.”
“Of course, these are generalities,” he clarifies. “But the trend suggests that we shouldn’t expect to find the sort of success we are looking for to be a function of working with corporates in Cyprus.”
The success pursued by the duo hinges on fostering the evolution of the country’s startup scene into a virtuous cycle of growth, where diverse actors and factors intertwine, influencing and inspiring one another to beget a positive feedback loop, generating momentum that catalyses growth, much like the perpetual motion of a flywheel that keeps the engine humming with purpose. To achieve that, they contend that leveraging the Cypriot diaspora of successful entrepreneurs will be key. The role of expatriate entrepreneurial networks in the economic development of emerging markets has been heavily studied and the consensus is that diasporans enrich the supportive environment by becoming mentors, advisors and founders. They bring into the mix a formidable set of skills, including a deep understanding of the intricacies involved in scaling an idea fast and the resilience to wear failure as a badge of honour, that must permeate the local scene. “That’s how other ecosystems have succeeded,” Zoppos says. Indeed, Zoppos and Eftychiou are both elements of the flywheel.
The two aim to complete 33East’s fundraising obligation within 2024, though emphasising their commitment to attracting the right investor base. In their book, alongside actors familiar with taking long-term bets on quantifying the unquantifiable, local institutional investors with limited exposure to venture capital should join. That includes pension funds and large corporates. In 2023, UK Chancellor Jeremy Hunt announced the Mansion House Compact, which will see nine large investment outfits allocate a much larger part of pension savings to capital-hungry startups. The idea is that pensioners will get diversified portfolios and capital appreciation while the local technology ecosystem will benefit from long-term, patient capital. In the US, pension funds have been flinging cash at VC funds for quite some time, becoming one of their major sources of capital. “If Cypriot institutions don’t support the Cypriot ecosystem, who will?” Eftychiou wonders.
“So,” I ask, “how far away are we from creating and starting our ecosystem’s flywheel spinning?”
“I think, we are a decade away,” the cautiously optimistic Zoppos says. “There are also plenty of tailwinds for Cyprus. We have a very highly skilled workforce and strong clusters but they are not yet connected in a coherent ecosystem.”
His partner smiles self-assuredly. “We will try to bring all these elements together,” he says.
(Original photo by TASPHO)
(This interview first appeared in the February edition of GOLD magazine. Click here to view it.)
