Monday, July 29, 2013

Polish Startups Must Look Beyond Home

Poland has the ingredients to build a strong startup economy, but do its entrepreneurs lack ambition?

By Ben Rooney

WARSAW—With its population of about 38 million people, you could describe Poland as the smallest large European state. Spain ranks just above it with 46 million citizens, and Romania is on the rung below, with 21 million.
This may explain why Poland's startup community has yet to make an impact on the European scene. According to Tomasz Czechowicz, Managing Partner of MCI Management SA, one of Poland's leading venture capital and private equity companies, the problem is that the population is just about big enough to support a reasonable-sized local company, and this dulls ambition.
"Most of the products we see are focused on being a national champion," he said. "Not on being regional champions, not on European champions, not on global champions. Too many products are addressing the Polish market only."
Smaller countries have no choice but to think globally from the start. Tiny Estonia—with a population of around 1.3 million—has produced a raft of global startups, such as design software company GrabCAD Inc and retail software provider Erply Ltd. Larger countries can support sizable local companies and then take them international, as Berlin-based Rocket Internet GmbH has proved with companies like its fashion retailer Zalando GmbH, with its €1.15 billion ($1.47 billion) revenue in 2012. It is the countries in the middle—too small to be big, too big to be small—that are caught.
Poland has the ingredients to build a strong startup economy. According to Radosław Czyrko, managing partner of Xevin Investments Sp. z o.o., a Warsaw-based venture capital firm specializing in seed and early stage funding, "We are a very entrepreneurial country. I saw a report that said 27% of adult people want to open their own company in the next three years."
Poland has also traditionally possessed engineering talent, said Arek Skuza, CEO of iTraff Technology Sp. z o.o., a Poznań-based startup working on photo recognition for mobile devices. "Having Polish engineers gives us a label in the U.S. that we can build things, that we have great skills."
The lack of computers under the Communists helped. "Students had to write their programs out on paper," Mr. Skuza said. "That meant people had to learn well because there was no way of testing it."
The country also has money, much of it from the European Union. In 2011 Poland attracted €14.4 billion in EU funds—some 4.08% of GDP—and over the next seven years Poland will be the biggest beneficiary among all member states. As a result, said Kasia Godlewska, founder of Absolvent Sp. z o.o., a job service, getting seed money isn't hard. "There is a lot of money, most of it comes from Europe."
The problem, according to a number of entrepreneurs, comes in later funding rounds. Michał Brański, co-founder of Grupa o2 Sp. z o.o., an online media site, and himself an angel investor, agreed. "One of the stronger pain points in the Polish startup scene is getting to Round A. Getting seed funding is easy, but most of the angels and seed investors fund only a short runway, they give funds to develop the technology, but they lie to themselves that the business will develop by themselves. It is not true. That is why most Polish startups struggle after a half year."
But Mr. Czechowicz, of MCI Management, refuted this suggestion. "There are about 20 early-stage funds that can do Round A funding," he said. "[There are] about three to five funds that can do Round B. That is about one billion Zlotys [$295.6 million] for the growth financing and venture capital financing at the moment."
Instead, he laid the blame firmly at the feet of a lack of ambition among Polish entrepreneurs. "With a national champion you can get an exit of only about €10-20 million. With this kind of valuation you can only do one or two rounds maximum." To raise bigger rounds, companies need to address bigger markets to attract bigger valuations. He said startups should aim to be at least regional players, using Poland's links across central Europe.
Everyone agrees on the need for time. It is easy to forget, looking at the high-rise buildings that are growing across Warsaw's skyline, or the number of 4x4s that drive down the wide boulevards, that the country has barely had a single generation as a market economy.
Entrepreneurs rattle off a list of problems: highly bureaucratic, setting up a company takes too long, labor inflexibility, lack of experienced business mentors, a lack of business acumen, an education system that doesn't support entrepreneurialism.
But in the same breath, all agreed on how fast things were changing; whereas once it took months to start a company, now it was weeks, smarter investors who understand venture funding are appearing on the scene, and there are increasing number of venture-capital firms.
What worries some is the country's dependence on European funds. With funding secured for at least another seven years, that has bought the country time. Marcin Zaborowski, the director of Poland's Institute of International Affairs, said this should be used to support innovation.
"In the new [financial] perspective, a greater emphasis should be put on innovativeness. The government should pay much attention to this matter," he told the Polish Press Agency earlier this year.

This is a repost of an article by Ben Rooney, the Tech editor of the Wall Street Journal European edition. 

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