Start-ups from the Eastern countries are the opportunity for Polish VC funds

As public money flows into venture capital funds in Poland, the supply of available financing is larger than the pool of projects fit for investment. One solution to this problem would be to engage start-ups from Eastern countries.
Start-ups from the Eastern countries are the opportunity for Polish VC funds

Polish VC funds go east (Shutterstock)

The lively public debate on innovations in Poland has triggered a spate of financial initiatives aimed at entrepreneurs who develop innovative ideas. The effect is the increased supply of venture capital ready for investment in start-ups – accompanied by a range of non-financial incentives to create further innovative enterprises.

The ARP Venture fund alone (established in November 2014 under the umbrella of the State Treasury company Industrial Development Agency, ARP) intends to invest PLN 300mn in innovative projects. This money should reach companies working on modern solutions – in order to assist them in developing their product, organising its production and launching it on the market.

Another initiative, addressed directly at VC funds, is the programme sponsored by the National Centre for Research and Development called „Bridge Alfa”. It’s designed to fund VC investment for the total amount of PLN 180mn. As yet, only the first tranche of financing has been disbursed, to be followed by more. There are also other VC funds active on the market; since 2007 they have been receiving financing from the National Capital Fund (KFK). In total, KFK had approximately PLN 1bn at their disposal, earmarked for financing VC fund operations. Thus, the overall sum allocated to Polish start-ups over a period of 8 years is almost PLN 1.5bn.

Other programs, whose details are yet unknown, are under development. It’s known that a new fund would be formed within BGK (the Polish state-owned bank, whose main task is to provide financial services to the public sector), and the money will be provided by the Polish State and the European Investment Fund. The support of venture capital funds may be also launched by PARP (Polish Agency for Enterprise Development) – within the EU budget for 2014‐2020 and the InnovFin SME Venture Capital program. Public funds are only a part of the resources available because many VCs are financed by capital collected from investors; therefore, the real comparison of the supply of funds with the number of transactions, would show even bigger disproportions. Moreover, more and more large companies establish corporate VC, e.g. TVN Venture; such companies as PZU or PGE also plan to invest their funds.

However, it has turned out that the Polish market for VC transactions is not big – last year the total amount of investments was EUR 22mn, and a year before – only EUR 15.6mn (data of European Private Equity & Venture Capital Association, EVCA). Compared to the available funds it is immediately obvious that good projects meeting the requirements for co-financing will be in short supply in the coming years.

Agnieszka Skala, PhD, from Warsaw University of Technology and the Start-up Poland Foundation are carrying out research on the Polish start-up market to obtain a clear picture of its potential. The research will examine the entire population of Polish companies meeting the criteria of innovative activity representing a start-up nature. The pilot study conducted on a sample of 38 enterprises shows, among other things, that Polish start-ups most willingly finance their activity based on own funds according to almost 61 percent of respondents. 36 percent are financed by public VC funds, whereas 24 percent apply for European Union grants. Further positions down the list are accelerators and „business angels”.

Therefore, the key issue is finding an answer why entrepreneurs starting their business rarely look for external financing – is it because they do not want to (e.g. are afraid of losing control over the company) or is it because the financing is unavailable?

How can the available funds be used? For the time being, as there is not enough Polish start-ups, entrepreneurs from other markets should be allowed to use them. Start-ups from the East – Ukraine and Belarus –  may be the right opportunity.

The first such programme aimed at attracting foreign researchers, as well as Poles who have been educated abroad, was launched by the Foundation for Polish Science and called “Homing Plus”. It was targeted at individuals conducting researches in the sectors of IT, biology or technology. Twice a year several persons were granted a scholarship of PLN200‐300 thousand. The overall amount of PLN 37.44mn was used to finance 117 projects under the „Homing Plus” programme. Perhaps it will soon be possible to commercialise some developed solutions under such projects, owing it to the available resources of Polish VCs.

Start-ups beyond the Polish eastern border may be offered the support even at a level of EUR 4050 per month, and the opportunity to manage their own research project over a period of one to two years under the „Polonez” programme, organised by the National Centre of Science. Such opportunity may be offered to 90 persons. The image of Poland as the place where business and researches can be developed, is also promoted by the Start Up Hub Poland Foundation. Recently, the Foundation established a venture capital fund thanks to the financing by the NCBiR Bridge Alfa program. The aim is to invest in scientific projects from the Polish eastern neighbouring countries and people who will decide to commercialise solutions they invent in Poland.

Contrary to expectations, inventors from these countries are not exactly flocking to Poland. A major hurdle is that Poland is not perceived as a place where projects may be developed and on top of that no visa facilitations are offered.

However, cultural similarities, among others, speak for cooperation with these start-ups. As researchers indicate many common features can be identified in the Polish, Belarusian and Ukrainian culture in terms of conducting business. These include, inter alia, individualism, a high Uncertainty Avoidance Index, a high level of distance towards authorities, or particularism manifested as focusing more on interpersonal relations than on rules. This mechanism acts in both directions.

Anyway, practice shows that even cultural differences do not need to be an obstacle, the best example is the use of Russian immigrants in building the technological sector in Israel in the 1990s. Among approximately 710 thousand people of Jewish origin who settled there at that time, the majority found a job in the technological sector within several years. Research shows that the supply of well-qualified employees only briefly depressed wages in the sector. The same may happen in Poland.

Other countries have been using the potential of immigration for a long time. The majority of acceleration programmes for start-ups in the United States of Great Britain is open to persons from other countries. Various countries also introduce institutional solutions, e.g. France prepared a special visa for entrepreneurs willing to develop their ideas there. Its holders may also receive a grant of USD14‐28 thousand for each member of the project team, a workplace and an advisor to help them in organisational issues. A similar programme was launched in Chile in 2010.

The author is a PhD student at the Warsaw School of Economics, dealing with the subject of National Innovation Systems (NSI).

Polish VC funds go east (Shutterstock)

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